Page 10 - ISQ UK_October 2021
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                                          Federal Surplus or Deficit
                                 as Percent of Gross Domestic Product

                                        Percent of GDP, Annual, Not Seasonally Adjusted

             2%                                                                          July 2021     500
             0%                                                                                        0

            -2%                                                                                        -500
          Deficit as % of GDP  -6%                                                                     -1,500 Deficit in Billion of $

           -10%                                                                                        -2,500

           -12%                                                                                        -3,000

           -14%                                                                                        -3,500

           -16%                                                                                        -4,000

                                        Deficit in Billion of $   Deficit as % of GDP

             Source: Congressional Budget Office, as of 7/31/2021 (based on current legislation – does not include infrastructure plan)

        tial. A full recovery is not going to happen until the pandemic is   usually resolve themselves over time, but pandemic-related pres-
        fully behind us, and it won’t be over until it’s over everywhere.  sures have been more severe and have lasted longer than initially
                                                            expected. The danger is that long-lasting supply chain disrup-
        DEFICITS AND DEBT: SHOULD WE BE WORRIED?            tions could boost long-term inflation expectations, which could
        The government is not like a household. Our children and grand-  become self-fulfilling. While that  is unlikely to be the  case, we
        children do not have to pay off the national debt. Does that mean   won’t know for sure until much later.
        we  shouldn’t  be  concerned  about  the  debt?  The  key  issue  is
        whether we can meet interest payments on the debt and whether   MODERN MONETARY THEORY – A NEW ERA?
        we can roll over existing debt as it matures. So far, the U.S. gov-  Over the last few decades, Democrats, when in power, adopted
        ernment can easily borrow and making payments on the debt   pay-go rules. Tax cuts or increased spending had to be matched
        shouldn’t be a problem if interest rates rise moderately. Of course,   by additional revenue sources or spending cuts in other areas.
        there may come a point when government borrowing begins to   Exceptions were made for recessions and war, but otherwise
        crowd out private borrowing, reducing business investment and   spending and tax changes had to be deficit neutral. For example,
        constraining consumer spending, but there’s no sign that we’re   this is how the Affordable Care Act (Obamacare), which passed in
        anywhere close to that.                             2010, was paid for.

        What about inflation? Federal debt and deficits do not cause infla-  When the Democrats gained control of the House in 2019, they
        tion. We ran deficits of around 5% of GDP in the 1980s and inflation   did not reinstate pay-go rules. Many on the far left have embraced
        trended lower. Japan has a debt-to-GDP ratio of 265% and has   Modern Monetary Theory (MMT), which essentially says that
        been battling deflation for years. That said, fiscal stimulus, espe-  deficits don’t matter and the government can spend whatever
        cially direct payments to individuals, has boosted demand, while   it wants (up to a point). Proponents of MMT argue that the pan-
        the pandemic has disrupted supply chains. Supply chain issues   demic experience of large deficits and low interest rates proves

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