Reckless Deficit Spending: The difference between now and then is that in 1945 World War II had ended but today’s Democrats are just getting warmed up.

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A TRILLION HERE AND A TRILLION THERE AND PRETTY SOON YOU’RE TALKING REAL TROUBLE: Joe Biden’s Reckless Deficit Spending Could Mean Economic Disaster.

Dennis Robertson, the late Cambridge economist, said of bad economic ideas that it was like going to the greyhound races. If you stood still long enough, the dogs would come around one more time.

Mr. Robertson might very well have been speaking about the idea that budget deficits do not matter. This idea never seems to die, despite the many occasions on which it has led different countries into very troubled economic waters.

Today, that idea once again seems to be in vogue in the United States, this time in its present guise of Modern Monetary Theory (MMT). With interest rates still at very low levels, the MMT proponents assure us that governments can spend and borrow with abandon, without having to fear adverse economic consequences.

This week’s latest Congressional Budget Office (CBO) report reminds us that the Biden Administration seems to have drunk the MMT Kool-Aid. According to the CBO, the US budget deficit for the current fiscal year will amount to a staggering $3 trillion or around 13 ½ percent of GDP. That in turn will drive the US public debt to GDP ratio to over 100 percent or to a level similar to that prevailing in the immediate aftermath of the Second World War.

One way of gauging the recklessness of the Biden budget stimulus is to compare it to the size of the gap between the current level of US output and the level of output that could be attained were the economy to be operating at full employment. According to the CBO, the current size of the so-called output gap is around 3 percent. Yet the budget stimulus that the economy will receive in 2021 will be over four times that size. Little wonder then that former Treasury Secretary Larry Summers is worried about the prospect of economic overheating and is characterizing these budget policies as the most irresponsible such policies in the last forty years.

 

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h/t SG

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