Once per calendar quarter, the state of Michigan conducts a Consensus Revenue Estimating Conference that provides updates on both the national and state economies and the state’s fiscal outlook. The May conference each year is especially significant because it sets the official revenue targets for the next fiscal year’s state budget.
Another chart broke down the components of personal income. Over the previous four quarters, personal income was nearly $3,000 higher than pre-pandemic forecasts had expected. However, employee compensation actually declined by about half that amount. The entire increase is the result of the 53 percent increase in federal transfer payments that have floated U.S. households over the past year.
Second, there is another $12 trillion in dollar-denominated assets issued by entities outside the United States, according to the Bank for International Settlements. Combine this with the dollar assets exported from the United States, and there exists roughly $32 trillion in relatively liquid and safe dollar assets abroad, as seen in the figure below.
There is no other currency system that comes close to providing so many safe and liquid assets to the world. On one hand, this outcome is not surprising, given the dollar’s dominant role in the global economy. On the other hand, the implication of this fact is astonishing: There is no alternative source of safe and liquid assets available on such a large scale. This means that if investors wanted to break up with the global dollar system, there would be nowhere else to go to meet all their relationship needs.
There are eerie parallels today. In 1973, the U.S. was coming off a two-year experiment in wage and price controls, which artificially depressed prices and muted signals that the economy was overheating. Then, too, the Fed pursued an easy-money policy, keeping interest rates low — though considerably higher than now, and without today’s purchases of bonds and mortgage securities.
By the end of 1972, before the inflationary jump, the U.S. economy seemed even stronger than it is now, growing at an annual rate of more than 8%. Unemployment was down to 3.4%, and inflation was a seemingly manageable 5.6%. The pre-pandemic 2020 U.S. economy was also very strong, growing at a 3% annual rate, with historically low unemployment of under 4% and inflation hovering around only 1%.
In 2021 we’re emerging from the pandemic shutdown, which cratered growth and slammed the economy — depressing price pressures, not unlike what the price-control program did 50 years ago. Today’s Fed policies are even more expansive. And Congress has just enacted a $1.9 trillion stimulus bill — on top of earlier relief bills costing another nearly $2 trillion, a lot of which remains unspent and will continue to fuel demand this year and beyond.
The numbers here are simply staggering. Consider the fact that in 2019, the last full budget year before the pandemic, the federal government spent a grand total of $4.4 trillion. Combined with the bill that already passed in March, this plan represents nearly $5 trillion in new spending.
Though the specifics of the proposal are in flux, it seems to bear some similarities to the $1.9 trillion American Rescue Plan (ARP) that Biden signed into law earlier this month. That bill was ostensibly a COVID-19 relief measure, but only a small percentage of the money was actually directed toward dealing with the pandemic. The upcoming $3 trillion package will be called an infrastructure bill, but the Times says only about $1 trillion would be directed toward such traditional infrastructure items as roads, bridges, ports, and improvements to the electric grid.
It is a miracle anyone ever listens to us. Honestly, sometimes they shouldn’t. Other than the theory of comparative advantage, I can’t think of any correct economic insights that defy common sense. Economists, or experts in any field, are meant to offer a framework to weigh costs and benefits, help us see risks, and understand how the economy and people respond to shocks and policy. This helps people make choices that are right for them. If someone is pushing something totally counterintuitive, whether in economics or public health, we should be skeptical.
The same goes for debt. I heard someone say MMT has become an accepted theory – that is simply not true. And there is nothing new here. If you look at the history of debt cycles and financial crisis, they often featured some convoluted justification for why taking on tons of leverage isn’t so risky after all because this time was different – we are so much more clever now. Guess what, you might use some big words that tell you otherwise, but debt is always risky. Sure, some of the time it works out and juices higher growth, but when it doesn’t, things get really nasty.
Ordinarily, insolvency means pension freezes and benefit reductions, but multiemployer pensions are run by labor unions, a key Democratic constituency. And so the House Covid bill plans to dole out an estimated $86 billion from 2022 to 2024 to 186 pensions, enabling these plans to pay full benefits through 2051. With no incentive to cut costs, there’s little reason to think the pensions will be solvent after 2051. Look forward to more spending down the road.
Bailout supporters argue they’re helping impoverished workers make ends meet, but that doesn’t add up. The average monthly benefit from a plan like Central States is a seemingly modest $1,400. But that average is skewed downward by large numbers of employees who retired after only a few years of service. The one-third of Central States retirees who receive more than $2,000 a month — plus Social Security benefits — make a bailout expensive. No one in this group is even close to being in poverty.
The larger worry is that Congressional Democrats’ willingness to bail out private-sector multiemployer pensions signals they would do the same for state and local employee plans. Public-employee pensions operate under the same loose funding rules as multiemployer pensions, and public plans in Illinois, Kentucky, New Jersey, Texas and other states are no better funded than the worst multiemployer plans.
In all the debate about the pending federal aid package for cities and states, you’d think something so obvious would have been said often, but it hasn’t been: America cannot bail itself out.
Bailing the nation as whole out is exactly the idea behind the $350 billion package of federal aid proposed in the American Rescue Plan now pending in Congress. It would provide $220 billion to state governments and $130 billion to local governments.
The allocation is based on population – so far, at least, in the pending bill. For example, Illinois has about 3.9% of the nation’s population, so it would get about $13.6 billion of state and local money, which is about 3.9% of the $350 billion.
The US is running up debt like never before, and one of the reasons Washington can get away with it is because interest rates are hovering around their lowest levels ever. This raises the question—should the Treasury lock in these rates for 50 years? How about a century?
Government borrowing is under renewed scrutiny as politicians consider their third mega-spending package to support the US economy, adding to more than $3 trillion already earmarked since the onset of the Covid-19 pandemic. Federal debt owned by the public is expected to ramp up from 81% of GDP this year to nearly 100% in 2030, the highest ratio since 1946, according to Congressional Budget Office (CBO) projections in December. That ratio could hit 180% by 2050, by far the highest debt burden the US has ever had.
Debt levels are high, but the government’s borrowing cost is low. In March, 10-year Treasury bond yields fell below 1% for the first time and they’ve only ticked up modestly since, rising to about 1.1%. That helps explain why the US has amassed so much debt and, yet, is spending less on interest expense than it did in the 1980s and 1990s. The worry is that the unprecedented mountain of debt could have to be refinanced at higher yields down the road.