This year is drenched with politics, yet the nation seems oblivious that coming decades of American governance have been irrevocably shaped by what Nicholas Eberstadt of the American Enterprise Institute calls “the largest single ‘state surge’ in American history,” a “tidal wave of public resources”: debt.
In June alone, the federal government’s $864 billion budget deficit was larger than the deficit in all of fiscal 2017. And fiscal 2018. In eight years, the Reagan administration almost tripled the national debt, to $2.9 trillion, but that sum is less than Congress has increased the debt in the past nine months. Because both parties have a powerful permanent incentive to disburse more current government services than current revenue will fund, the pre-pandemic deficit in fiscal 2019 was already almost $1 trillion — at full employment, with 2.3 percent gross domestic product growth.
In 1946, after financing four years of global warfare, the national debt was 106 percent of GDP. After nine months of spending to counter covid-19’s impact on the economy — spending soon to be increased by additional trillions — the debt is about 100 percent of GDP, heading (according to the Congressional Budget Office) to almost 200 percent by 2050. And the Federal Reserve has, Eberstadt says, “crossed a Rubicon.”
Wading waist-deep into political policies, the Fed is adopting, Eberstadt says, “the role of managing and even micromanaging the American economy through credit allocation, potentially lending vast sums not only to financial institutions but also directly to firms it judges suitable for government support. The Fed already dominates the markets for U.S. Treasury debt and mortgage debt as a result of previous, lesser crises. It is by no means inconceivable that the current crisis will propel it to a comparably dominant position in domestic commercial credit.” If socialism is government allocation of economic resources (and hence of opportunity), then . . .
John Cochrane of Stanford’s Hoover Institution, who blogs as the Grumpy Economist, notes that in the 2008 financial crisis, the Federal Reserve launched “creditor bailouts, propping up asset prices to keep investors from losing money, buying unprecedented assets.” The risk of moral hazard — incentives for reckless behavior — is obvious.
Today, counter-covid-19 spending already is approximately five times larger than that triggered by the Great Recession of 2008. By 2020, Cochrane says, “once again a huge vat of debt had built up; once again, nobody kept any cash around for bad times, once again, the government stepped in and offered an enormous put option, just as, arguably everyone expected.” The Fed has propped up the prices of corporate and municipal bonds, and bailed out airlines, “or rather airline bondholders.”
“This time, however,” Cochrane writes, “I don’t even hear the promise to clean up the moral hazard. We are, apparently, permanently in a financial system in which people should load up on debt and risky assets in good times, and the government will buy them up should prices ever waver. Private gain, public loss.” Central banks buying trillions of assets are thereby “allocating credit.” Which is the essence of socialism. The Fed buying government and corporate debt creates something difficult to unwind — what Cochrane calls “an entirely government-run financial system”: an attribute of socialism.
“Modern monetary theory,” which Democrats praise and hope soon to practice, and which Republicans have been practicing without acknowledging, says: A nation with fiat money (not convertible into something — e.g., gold — valuable, but accepted by the public as a store of value) need never run short of money. It can borrow and create money as long as interest rates are, and are apt to remain, low. A theory that validates wishful thinking will not lack devotees.
Near-zero interest rates — the no-longer-new normal — create, Eberstadt says, “zombie companies” that “can only survive in a low-interest [rate] environment.” The result is rent-seeking and economic sclerosis, because “America cannot succeed unless a lot of its firms fail — including its largest ones. Bankruptcy and reallocation of resources to more productive ends are the mother’s milk of dynamic growth.”
The pandemic has propelled government toward promiscuously picking economic winners and losers. As has been said, governments are not good at picking winners, but losers are good at picking governments.