Lower growth and fewer jobs – Analysis – Eurasia Review

By Daniel Lacalle *

The first thing any economist should do when reading a budget proposal is to analyze the basic macroeconomic assumptions and the results presented by the administration. When both are poor, the budget must be criticized. This is the case with the Biden budget plan.

Same growth, a lot more debt and fewer jobs.

According to the administration, the growth impact of this budget will be negligible, as their own estimates – and optimistic ones – see no change in the slowing trend of US economic growth.

The CBO (Congressional Budget Office, in The budget and economic outlook: 2021 to 2031) estimates an average real GDP growth of 1.7% between 2020 and 2030, the same average they forecast for the period 2025-30. This is lower than the potential real GDP growth of the US economy, but driven by much higher debt… with lower employment.

The CBO also expects extremely weak employment growth, with an unemployment rate averaging 4.8% for the period 2020 to 2030, and 4.1% for 2025-30. This means not hitting the 2019 unemployment rate even by 2030 after spending $ 6 trillion.

Even more worrying is the massive deterioration in the financial situation of the United States. The Committee for a Responsible Federal Budget (CFRB) warns that “federal debt held by the public would rise from 100% of GDP by the end of fiscal 2020 and a record 110% of GDP in 2021 to 114% of GDP in 2021. ‘by 2024 and 117% of GDP by the end of 2031. In nominal dollars, debt would increase by $ 17.1 trillion through the end of fiscal 2031, from $ 22.0 trillion today. ‘hui to $ 39.1 trillion in 2031’ (President Biden’s full budget for fiscal year 2022).

This is a concern because history shows us that these estimates tend to err on the side of optimism and that debt is growing faster.

The $ 3.8 trillion in compensation in the budget is extremely optimistic. The Biden administration assumes the tax hikes will have no impact on investment and predicts an overly optimistic revenue collection trend. For example, tax revenue estimates assume growth above GDP and without any collapse over the entire period, which has not happened for decades. Even so, the administration’s estimates will only cover about three-quarters of the cost of new spending, as budget deficits would total $ 14.5 trillion over the next decade. Annual deficits are likely to average $ 1.4 trillion (4.7% of GDP) each year for a decade. There is not a single year in which expenses will be covered by income, even in these bullish estimates of economic growth.

According to the CFRB “rather than putting debt on a stable and then downward trajectory relative to the economy, the president’s budget would surpass the previous record and bring debt levels to 117% of GDP by 2031” .

Spending will increase to 24.5% of GDP over the next decade, according to the CFRB. The Biden administration’s baseline projection is 22.7 percent of GDP, well above the fifty-year averages of 20.6 and 17.3 percent of GDP. The problem is that most of it is spent on current spending with no real economic return and no increase in benefit programs that are likely to affect productivity, employment and investment. Even in the Biden administration’s forecast, annual spending would be 4% of GDP higher than revenue… And these revenue estimates are overly optimistic.

So how does the Biden administration expect to pay for rising deficits and debt? New Keynesian economists say deficits don’t matter and the Federal Reserve can monetize overspending. This raises two questions: if deficits don’t matter, why massively raise taxes? and why not cut taxes instead?

The most dangerous part of the budget is that all of this spending brings no real improvement over the average growth and employment trend while inflating the mandatory spending side of the budget, making it impossible for future administrations to balance the budget.

Mandatory spending increases by $ 1.2 trillion between 2021 and 2030, showing that no current or future income measure can eliminate the deficit or reduce the debt. No realistic estimate of economic growth or a better estimate of tax revenues can offset a $ 14.5 trillion increase in debt over ten years. As mandatory spending increases, the likelihood of improving fiscal challenges for the US economy decreases. A small recession over the next ten years and the debt will grow even faster, well above 120% of GDP. Projections from the CBO and the Biden administration show that tax revenue is growing every year across all categories, and we all know that’s just not possible looking at the history of the past five decades. Moreover, even with the estimates of the CBO or the Biden administration, there is a clear conclusion: the problem of the deficit of the United States is a problem of spending. No realistic measure of revenue will balance the budget.

The question is, what inflation will they generate to dissolve this debt? This is the biggest risk in this budget. The Biden administration is clearly aiming for a massive increase in consumer prices to ease the debt hit in real terms, which means lower real wage growth, lower wage purchasing power and, more importantly. , a destruction of the savings and purchasing power of the United States. dollar.

Many economists point out that the European Union shows that many countries have debt levels above 116% of GDP. True. They also show lower growth, lower employment rates and moderate productivity growth. There is also a lesson there. France, a country that has consistently raised taxes to supposedly fund high public spending, has not had a balanced budget since the late 1970s and the economy has stagnated for decades. Unemployment, even in times of growth, is much higher than in the United States.

When you copy the European Union, you should also know that you will get a lack of growth and job creation the European Union way.

Biden’s budget plan, in his own estimates, does not offer higher growth or better employment levels. Reality will probably show that the results will be even poorer.

* About the author: Daniel Lacalle, PhD, economist and fund manager, is the author of the bestselling books Liberty or equality (2020),Escape the trap of the central bank (2017), The energy world is flat (2015), and Life in the financial markets (2014). He is professor of global economics at IE Business School in Madrid.

Source: This article was published by the MISES Institute


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