Politics & Government
Growing federal debt could crowd out spending in a recession
Wesleyan Economics professor says increased tariffs will lead to 'higher prices' for consumers
By Scott Benjamin
Should voters be concerned that neither former President Donald Trump or Vice President Kamala Harris apparently has a plan to address a federal debt that way exceeds the sum to buy all the bubble gum you can chew any day of the week?
During his campaign for the 2016 Republican presidential nomination, former Ohio Gov. John Kasich posted a scoreboard at his rallies with the figures for a federal debt. Jim Tankersley, then with the Washington Post, reported in December 2015 that the scoreboard read “$18.439 trillion.
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Could it be that the figure has nearly doubled in nine years?
Former George W. Bush White House Political Director Karl Rove wrote recently in The Wall Street Journal that the national debt is “now $35.7 trillion. That’s larger than our entire economic output for a year. For the first time in history, the U.S. is spending more on the debt’s interest payments than on defense. . . Yet neither candidate seems interested enough to offer voters a plan to do something about it.”
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In an e-mail interview with Patch.com, Balazs Zelity, an assistant professor of Economics at Wesleyan University in Middletown, stated that, “There does not seem to be an urgent need to reduce the federal debt, as there is no sign that financial markets have second thoughts about financing the U.S. government at the current level of indebtedness.”
He added, “This does not mean, however, that it wouldn’t be desirable to at least stop the federal debt from rising further as a percent of GDP. Projections suggest that both candidates’ policies would deteriorate government deficits, which means it is likely that the federal debt would continue its increase. This is somewhat puzzling as deficit spending is more sensible in sharp economic downturns. If the government uses up its fiscal firepower in non-recessionary times, then there is a danger that there will not be sufficient fiscal space to address the next recession.”
From Franklin Roosevelt through Barack Obama presidents usually tried to avoid imposing tariffs.
Former U.S. Sen. Pat Toomey (R-PA) wrote in a recent Wall Street Journal column, “No country has tariffed its way to prosperity.”
Nobel Prize-winning economist Paul Krugman wrote recently in his New York Times column that during the 2024 campaign Trump has said, “To me, the most beautiful word in the dictionary is ‘tariff.’”
Krugman stated that Trump “wants a 60 percent tariff on imports from China.”
In 2023 former Trump Administration U.S. Trade Representative Robert Lighthizer wrote a book – “No Trade Is Free” – indicating that Trump’s tariffs toward China were successful.
In a recent Wall Street Journal letter to the editor, Lighthizer stated, “I would like to point out that during this great period of economic growth, when America created the largest economy in the world from the end of the Civil War until 1900, the average tariffs in this country were almost always above 40% on dutiable goods. . . We became wealthier. In short, tariffs were a great success, exactly as Mr. Trump claims.”
Zelity, who received his doctorate degree from Brown University, expressed reservations about tariffs.
“Universal tariffs on all imports will have at least two important effects,” he stated. “First, they will raise the prices of goods both by making imports more expensive and by forcing consumers to rely on less productive domestic producers. Second, tariffs will reduce the quality and variety of goods available to US consumers by shielding domestic producers from global competition.”
“There may of course be some US firms benefiting from increased protection, but US households will be the ones paying for this through higher prices,” Zelity added.
Wall Street Journal columnist Joseph Sternberg wrote recently that “the nerdiest sleeper issue” of the presidential election is the performance of the Federal Reserve Board.
He stated, “The next president will inherit a Federal Reserve staffed by economists—and their intellectual helpmates in academia—who still don’t fully understand what has happened over the past few years, let alone over the past few decades. The central bank’s very structure, meanwhile, increasingly arouses suspicion among politicians and voters.”
“Inflation didn’t appear when it was expected and then did when it wasn’t,” Sternberg wrote. “Monetary policies affected the economy in ways the Fed’s models didn’t see coming and still don’t understand. The relationship (if there ever was one) between economic growth, unemployment and inflation has broken down in ways that boggle the Fed’s economic models.”
Added Sternberg, “The good news is that recent policy mistakes have catalyzed an intellectual ferment about Fed reform, particularly but not exclusively on the political right. This includes proposals to overhaul its institutional structure, or to limit its scope to set policy independent of congressional approval, and also a nascent discussion about the best means by which Congress could exercise oversight.”
Zelity stated, “It is always easy to identify policy mistakes in hindsight. While the Fed’s policy decisions may not have always been the best in hindsight, they were in most cases the best decision given the available information at the time.”
He added, “Overall, most economists believe that having an independent central bank is a relatively reliable way to ensure low and stable inflation. When politicians can influence central bank decisions, what usually results in higher inflation. This is because politicians have a motivation to boost economic growth rates to unsustainable levels, particularly in the run-up to elections, the cost of which will be higher inflation later down the road.”
On another fiscal topic, Bloomberg Chief Washington Correspondent Saleha Monsin wrote in her recent book, “Paper Soldiers,” that Steve Mnuchin, who was Treasury Secretary to Trump, said at the Davos Economic Forum in 2019 that, “A weak dollar is good for the U.S. as it relates to trade and opportunities.”
The U.S. has advocated a strong dollar policy for decades.
Wrote Zelity, “A weaker dollar would make American exports cheaper abroad, but it would also make imported goods more expensive in the US. In a sense, one can think of a weaker dollar as a wage restraint policy: it makes American labor cheaper on the global market. This means that, yes, American exports will be more competitive, but also that American consumers will face higher prices when importing foreign goods.”
He stated, “On net, the country would likely be better off, but the distributional impacts are unclear. It may be that the benefits would primarily accrue to the owners of export-oriented firms, while workers lose out. A further problem is that any policy that would significantly and sustainably weaken the dollar would endanger the centrality of the U.S. dollar in the global economy. This could have far-reaching ramifications such as a loss of geopolitical clout and permanently weaker financial markets as foreigners liquidate their U.S. dollar holdings.”
Resources:
E-mail interview with Balazs Zelity, Patch.com, on Tuesday, October 29, 2024.
“Paper Soldiers,” Saleha Mohsin, Penguin Random House, 2024.
“No Trade Is Free,” Robert Lighthizer, Broadside Books, 2023.
https://www.wsj.com/opinion/the-policy-elephant-in-the-2024-election-27e0b2de
https://www.wsj.com/opinion/lighthizer-trump-trade-tariffs-us-economic-history-1902e158
