Can Biden clean up the mess with more debt?
The pandemic has left us a terrible mess to clear up. What policies will get us out of the huge debt that we have incurred to pay for the health, wealth and job crises? 2020 was a year of terrible devastation, cushioned only by massive government spending. Aside from the favourite sport of blaming China for everything, each country will have to concentrate on the tough business of getting their economy back to a more even keel.
The latest OECD Economic Outlook published this week showed how bad the situation has become. World output was down 3.4 percent last year, but OECD sees growth of 5.5 percent in 2021 and 4 percent in 2022. However, poorly performing countries will continue to suffer low growth rates. China was the only major country that had positive growth in 2020 (2.3 percent), whereas the Eurozone was down 6.8 percent, with severe declines for France (-8.2 percent), Spain (-11 percent), and UK (-9.9 percent). Amongst the emerging markets, India was down 7.4 percent, Mexico was down 8.5 percent, South Africa had -7.2 percent and Argentina -10.5 percent.
The only bright hope for the US growing better in the next two years is due to significant fiscal stimulus, plus faster vaccination. But is this sustainable?
The latest IMF Fiscal Monitor showed that overall fiscal deficits are projected at -13.3 percent of GDP for advanced economies, -10.3 percent for emerging markets and middle-income economies, and -5.7 percent for low-income developing countries. Essentially, USD 14 trillion fiscal support was given in 2020, with global public debt rising to 98 percent of GDP, compared with 84 percent in 2019.
In short, almost every country threw money at the pandemic, with very little appreciation whether we are getting value for money. In a panic, doing that is understandable. After the panic, the pain and reckoning must begin in all seriousness.
Note that the US fiscal deficit rose from 6.4 percent of GDP in 2019 to 17.5 percent in 2020, an increase of 11.1 percent of GDP fiscal support to defend a decline of 5.6 percent percentage points in GDP growth (from +2.1 percent to -3.5 percent in 2020). In essence, US fiscal policy pumped two percent of GDP spending to defend one percent of GDP growth.
The IMF estimated that the cost to the US is a rise in gross debt to 128.7 percent of GDP, far higher than the world average of 97.8 percent. The comparable Chinese gross fiscal debt was 65.2 percent of GDP in 2020, just over half of US gross debt.
Is Biden's USD 1.9 trillion stimulus package this year too much for comfort? The Republicans certainly are alarmed at the sharp rise in welfare spending and debt, so they voted against the package. The nonpartisan Committee on Responsible Fiscal Budget estimates that the total cost, including interest and extensions, would amount to USD 4.1 trillion by 2031. In other words, all stimulus spending cost more than what is shown. From a political point of view, Biden had no choice. If he does not revive the economy and protect his support base, he will lose the mid-term elections in 2022, which would make his second half term a complete lame-duck.
So, from a global strategic perspective, the real issue is not further quarrels between the US and China. The key is whether Biden can turn around US long-term competitiveness damaged by four years of Trumpian fumbling, on top of Congressional focus on short-term issues rather than long-term infrastructure and structural weaknesses.
Take fiscal and monetary policies. Former US President Ronald Reagan famously said in 1981 that "government is not the solution to our problem, government is the problem". Instead, US general government expenditure rose by 78 percent in constant 2010 dollars from 1981 to 2019, whereas total public debt has increased dramatically from USD one trillion or 31 percent of GDP when Reagan was President to USD 27 trillion or 136 percent of GDP by the end of September 2020.
The Fed's stated monetary policy goals are to promote maximum employment, stable prices and moderate long-term interest rates. Whilst inflation has been kept low at below two percent per annum and unemployment remains low, long-term interest rates are at record low levels, whilst US inequality numbers have worsened since Reagan from a Gini coefficient of 0.38 in 1981 to 0.48 in 2015. In the meantime, the Fed's balance sheet, which was USD 865 billion or six percent of GDP in 2007 rose over eight times to USD 7.6 trillion or 36 percent of GDP by March 2021.
That's not long-term strategy, but fiscal and monetary over-dose.
Biden's Build Back Better programme will spend another USD two trillion during the next four years on building green infrastructure and create jobs. By comparison, the US spent USD 686 billion in 2019 on defence alone, and the Cost of War since 9/11 for America was USD 6.4 trillion and 801,000 deaths since 2001. All these are funded by more government debt, which the Congressional Budget Office projects will amount to 202 percent of GDP by 2051.
Any emerging market with these debt numbers would be called a banana republic.
The Biden Administration is betting that the largest US stimulus package since World War Two would restore American competitiveness and heal the nation. But much of this is not funded by domestic savings, such as taxing the rich, but by borrowing on the US dollar. The rest of the world will not fund the dollar forever, certainly not at near zero interest rates. And if interest rates rise, the fiscal costs would be substantially higher. So bet on the Fed pumping more to keep rates low.
Winston Churchill said once, "never waste a good crisis". But in today's complex affairs, even experienced journalists have difficulty figuring out whether Americans are getting value for such massive government spending. So far, the United States have not spent enough good money on her own people, and more on the war machine. If this opportunity is wasted, then America will be lurching from crises to crises.
The truth of US debt is that it is not debt, but the rest of the world's equity. America is the world's too-big-to-fail borrower. If Biden fails, we lose. Which is why the dollar note says "In God We Trust".
Andrew Sheng is an honorary adviser with the CIMB Asean Research Institute and a distinguished fellow with the Asia Global Institute at the University of Hong Kong. He writes on global issues for the Asia News Network (ANN), an alliance of 24 news media titles across the region, which includes The Daily Star.
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