The writer, the global chief strategist of Morgan Stanley Investment Management, is the author of “ Ten Rules of Successful Nations ”
New US President Joe Biden arrives at the White House on Wednesday with dazzling $ 1.9 billion in new stimulus plans, backed by a solidifying consensus in the US elite that deficits don’t matter .
Warnings that rising deficits will kick-start inflation and weaken the dollar have been proven wrong for decades, so deficit hawks are increasingly easy to laugh at as old crotchies growl. The new point of view, expressed by prominent figures from the IMF, academia and the media, is that with inflation long dead and interest rates at historically low levels, it would be reckless, if not irresponsible, to do not borrow to revive the economy. The amounts – billions, trillions – hardly matter, especially not for the United States, which still has the most coveted currency in the world.
Mr Biden captured this elite point of view perfectly when he said, announcing his spending plan: “With interest rates at historically low levels, we cannot afford inaction. ”
This view overlooks the corrosive effects that ever-growing deficits and debt have already had on the global economy. These effects, unlike roaring inflation or the falling dollar, are not speculative warnings of a future crisis. There is more and more evidence of Bank for International Settlements, the OECD and Wall Street that four consecutive decades of growing government intervention in the economy have led to slower productivity growth – shrinking the overall pie – and increasing wealth inequality.
This research does not question the use of the stimulus during a seizure; problems arise from the cumulative impact of a constant stimulus. This strongly suggests that the increasing scale of each new infusion matters as well. Average voters are rightly baffled by the claim that governments can borrow without limits or consequences.
We calculate that last year the United States and other developed countries committed a median sum equal to 33% of their gross domestic product to stimulus measures, breaking the 10% mark set back in 2008. These figures do not include the Biden plan, which will bring the total US fiscal stimulus to tackle the pandemic to more than $ 5 billion, more than the GDP of Germany or Japan. That’s a lot for an economy to absorb in less than a year, and Mr Biden is planning a more ambitious second spending proposal next month.
The incoming administration argues that low rates allow governments to borrow and spend in unlimited amounts for the foreseeable future. But this assertion turns the story upside down. Instead of a path to freedom, low fares are a trap. They encourage more borrowing and growing debt, which lowers productivity and slows growth. This makes the economy financially fragile, forcing central banks to keep their rates low. Given today’s very high debt levels, only a slight increase in interest rates would make the debt burden unsustainable.
This “debt trap” is, despite the layoffs of the elites, a real problem. Public debt in the United States and other developed countries averages about 110 percent of GDP, up from 20 percent in 1970, according to IMF data. During the Bretton Woods system, from 1945 to the early 1970s, many developed countries ran constant budget surpluses. Since then, they have recorded constant deficits, in good times and bad.
More and more, the money printed by central banks is used to finance public debts. Many elites consider this to be good, as it has yet to revive consumer price inflation. While governments can print all the money they want, they can’t dictate where it goes, and much of that has fueled another kind of inflation – asset price inflation. Since the 1970s, the size of financial markets has grown from roughly the same size as the global economy to four times the size. Most of these gains go to the rich, who are the primary owners of financial assets.
As the era of constant revival gained momentum, average wealth over the past three decades has increased by about 300% for American families of the top 1%, 200% for the next 9%, 100% for the next 40% and zero percent for the poorest 50%. One in 10 families in the poorest 50% has negative wealth (they owe more than they have).
When those on the left, like Senator Bernie Sanders, promise much more stimulus to come, they fail to make that connection between the stimulus and rising wealth inequality. Yet Wall Street traders do. They drive up asset prices when Mr. Sanders calls for more spending, or US Federal Reserve Chairman Jay Powell pledges continued monetary support. They see these wishes as more money in their pockets.
But recent studies show that the government’s easy money ended up supporting the least productive companies, including the heavily indebted “zombies” that would otherwise fail. The support also favors monopolies which have developed not because of their innovation, but by pressuring governments for favors and by pushing out smaller competitors. the The OECD warned, in a 2017 study linking declining productivity to easy money, that these trends will make it harder for companies to keep “their promises to current and future generations.”
BCA Research recently demonstrated that countries with high-spending governments tend to suffer from slower GDP per capita growth. Likewise, Ned Davis Research found that, since 1947, U.S. government spending above 22% of GDP has correlated with periods of slower economic growth. He warned that this share had exceeded 34% during the pandemic. My team also found a statistically significant link between periods of rising public debt and low GDP growth. These studies cannot show causation, but the consistent link between growing deficits and weaker growth is unlikely to be a coincidence.
Even those who advocate for unlimited new borrowing agree that the money would be better invested in roads, green energy and other projects that would boost productivity and future growth. Still, comforted by the belief that deficits don’t matter, Biden supporters back a plan jam-packed with cash transfers, including a check for $ 1,400 for most Americans,
Like many in the carefree camp, Mr Biden says more stimulus is urgently needed to limit the damage from job losses and bankruptcies. There was a case for this as the economy was in decline. But as vaccines roll out and return to normal, injecting more stimulus into a recovering patient will likely do more harm than good.
The average person understands that there is no free lunch. The road to prosperity cannot be as simple as printing and spending. If he relies on low rates to fund further massive increases in public spending, Biden will double down on policies that have amplified the problems he aims to tackle: weak growth, financial instability and growing inequality. Decades of constant revival have left capitalism weaker, less dynamic and less fair, fueling angry populism. Deficits count for the damage they already inflict.