THE MODERN MONETARY THEORY — which holds, in part, that huge deficits are okay with interest rates this low — will become a major theme in the next Biden Administration priority: a massive infrastructure bill.
ONCE THE COVID AID BILL PASSES, probably in early March, the focus will shift quickly to spending on expansion of rural broadband, roads and bridges, a half-million charging stations for electric cars, etc. President Biden, meeting yesterday with key members of Congress, said the U.S. has to start moving on these objectives, or China “will eat our lunch.”
HOW TO PAY FOR IT? Progressives want to spend at least $2 trillion in this next bill, perhaps combined with significant tax increases — but new taxes are a non-starter for Republicans and a handful of moderate Democrats. So there’s another option, according to this morning’s New York Times — simply don’t pay for it, just add it to the national debt.
PROPONENTS OF THIS OPTION cite recent pronouncements from Fed Chairman Jerome Powell, who has said, in effect, that this is the time to go all-out on spending because debt servicing costs can be accommodated by his dovish policy of ultra-low interest rates.
THE LURE OF UNLIMITED PORK may be irresistible for some members of Congress, but we suspect that reality will sink in when fiscal hawks object. We think all Republicans and some Democrats may oppose spending another $2 trillion (or more) without any chance of paying for it. Could a gasoline tax hike pay for some of an infrastructure bill? No way.
THE MODERN MONETARY THEORY CROWD points out that the deficit in this fiscal year may be less than expected (under $3 trillion!!) but that figure could rise once the Covid bill passes, with a price tax perhaps exceeding $1.5 trillion.
BOTTOM LINE: The idea of not paying for a huge infrastructure bill will become a major issue this spring, although progressives will still push for higher taxes for “fairness” reasons.
WE THINK THERE WILL BE AN INFRASTRUCTURE BILL that passes late this year, but the price tag might be more like $1 trillion, not $2 trillion or more. Why? Even using the budget reconciliation process will be tricky because not all Democrats may go along. Would West Virginia Sen. Joe Manchin, a supporter of fossil fuels, agree to a massive new green initiative?
FOR THE FINANCIAL MARKETS, the big economic theme will persist: calls for major new spending will keep upward pressure on interest rates.
FOR THE STOCK MARKET, interest rates might have to rise significantly to cause a sell-off; we’re not there yet. In the meantime, if dramatically higher taxes look less likely, that could be a plus for corporate earnings. As for GDP growth, forecasts will continue to be revised upward as the stimulus soars.
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