Biden’s stimulus could mean end of low interest rates

The Federal Reserve is confident that it can manage inflation. If it can’t, borrowing costs will rise sharply throughout the developed world.

Joe Biden hopes his presidency will be the third standout era of progressive reform after the New Deal and the Great Society. Picture: AFP

In the history of progressive reform in the US, two eras stand out: Franklin Roosevelt’s New Deal in the 1930s and Lyndon Johnson’s Great Society in the 60s.

Joe Biden hopes his presidency will be the third. And in terms of the proposed cost, he’s well on the way there. With a $US1.9 trillion ($2.4 trillion) COVID stimulus bill behind it, which mailed out the third round of stimulus cheques within 12 months to US households, the Biden administration is eyeing at least another $US3 trillion in “infrastructure” spending.

Three hours in Los Angeles airport is a stark reminder of how poor US public infrastructure has become, even in the richest state.

But how much of the spending finds its way into actual infrastructure improvements remains to be seen. A political class mesmerised by large nominal amounts of money forgets it’s more difficult to build projects ­efficiently and well than to hand out cheques. If Biden can convince congress to pass the bulk of his plans, he will have ratcheted up spending by about $US5 trillion, more than any other administration in history.

President Barack Obama’s stimulus after the financial crisis in 2009 was a mere $US830bn.

At about $US15,000 per capita, Biden’s proposed spending would be about twice the level of Roosevelt’s New Deal on a similarly inflation-adjusted, per capita basis.

The sheer scale of the US fiscal machine is daunting. From October to March, the US budget deficit was $US1.7 trillion, more than double the same period last year. That’s bigger than the entire ­annual Australian GDP, in just six months.

Neither side of US politics can credibly feign concern about public debt, which has been rising ­inexorably for decades under Republican and Democratic administrations. Under Donald Trump, federal public debt increased by $US6 trillion to $US21 trillion, or the equivalent of 100 per cent of US GDP. Even including our state debt, the figure is about 60 per cent in Australia. And if Biden gets his way, debt could rise by as much again, putting the US government on track to be the world’s fourth most indebted developed nation within a few years — behind Japan, Italy and Greece.

To be fair, the Biden plan includes some tax increases to help pay for about half of the spendathon, including a lift in the federal corporate tax rate from 21 per cent to 28 per cent and a clampdown on multinational tax avoidance.

But this is as much about reversing a key plank of Donald Trump’s 2017 tax policy — and pleasing a Democrat base that wants to see the centrepiece of Trump’s tax ­reform reversed — than any commitment to balancing the books.

On that front, change on the immigration front has been the biggest first setback for Biden. ­Reversing “tough” Trump-era rules has contributed to a humanitarian crisis on the southern border with Mexico. More than 172,000 people from Central America, including many unaccompanied children, tried to enter the US last month alone — up from 72,000 in October last year.

Trump’s other legacy, the result of having the serendipity to appoint three US Supreme Court justices, will be harder to reverse.

Democrats have introduced a bill to congress that would increase the number of justices, to remove the prevailing conservative majority. If they succeed, the highest court in the US ultimately may become more like the House of Lords in Britain, where each new administration adds more members to ensure a sympathetic majority.

The administration has appointed a commission to investigate the idea but Biden is unlikely to support radical change of the court. There is plenty of footage of him from the 80s and 90s condemning Roosevelt’s attempt to “pack the court”. Even justice Ruth Bader Ginsberg, who was the court’s leading progressive, warned against increasing the number of judges from nine.

Biden’s tax and spending plans will provide a lesson for governments everywhere. If there were ever a test of what happens when a heavily indebted nation increases spending largely financed by creating money, this must be it.

The US, already wallowing in $US3 trillion of two rounds of debt-financed stimulus under Trump, didn’t need another round of stimulus. Its economy was already roaring back to life as restrictions were lifted.

It was, according to the International Monetary Fund, on track to be the only developed nation with a bigger economy in 2022 than it was forecast to have in 2019, before the pandemic.

The Federal Reserve, whose money-creation programs have seen its holdings of public debt swell from 1.8 per cent in 2007 to 8.8 per cent by the middle of last year, is confident that it can ­manage inflation. If it can’t, borrowing costs will rise sharply throughout the developed world, putting government budgets into difficult positions.

More and more economists, on both sides of politics, fear the Biden stimulus could produce the bond that breaks the camel’s back, so to speak.

Economist Larry Summers, who was Treasury secretary under Bill Clinton, has warned that Biden’s spending is about three times as large as output shortfall, whereas the Obama stimulus was half as large.

Inflation over the year to March was 2.6 per cent, the highest annual rate since 2009, including a full 0.6 per cent in March, which was the quickest monthly increase since 2012.

Biden’s likeable demeanour and reputation as a pragmatist belie his ambitious and highly ­political administration. Only about a third, generously, of the $US2.7 trillion “infrastructure” bill relates to roads, rail, ­airports and ports. Most of the money pertains to renewable ­energy, electric cars, broadband internet, funding for “research and development” and support for childcare centres and nursing homes.

This is certainly an administration that wants to “get things done”. Biden signed 17 executive orders in his first two days, more than any other president. Trump and Obama combined signed just three.

Whether this frenzy of activity ultimately elevates Biden into the pantheon of great progressives ­remains to be seen.

A much more slender majority in congress and a more divided nation — politically, socially and economically — will make it a more difficult task.