What Comes Next?

Eakinomics: What Comes Next? Yesterday all eyes were trained on Congress, and today all the ink will be spilled on the massive legislation it jammed over the finish line. Some will praise the stimulus, others will pan its size or effectiveness, and not a few will take note of the enormous range of good, bad, and ugly miscellaneous provisions that went along for the ride. The legislation has been advertised as “must pass” and, because of its economic benefits, “free.” But, alas, nothing in life is really free, and this will come with costs as well. There will be more debt – roughly $1 trillion more. Even though the Congressional Budget Office has lowered its outlook for interest rates (and freely admits it cannot be sure that they will stay low), the carrying cost of the debt will claim more budget resources in the future, crowding out other budgetary priorities. And, as the economy returns to full employment, it will crowd out activities in the private sector, hurting productivity and real wage growth. I have always said that the United States should spend what is needed to spur the recovery; one suspects not everything that got voted on yesterday fits that description. But the federal government entered the pandemic with an unsustainable budget outlook. It will exit the pandemic with a record high level of debt (relative to gross domestic product) and a continued unsustainable budget outlook. A very minimal condition for a sovereign nation is that it be able to stabilize its debt (relative to gross domestic product); the United States has failed to ever do that in the 21st century. A cost of yesterday’s legislation is to make that impossible political task even harder.