President Biden’s Risky Bet on the Economy

The topic of the hour is inflation and debt and President Biden has now doubled down on a likely bad bet. The Federal Reserve is determined, as it should be, to bring inflation back down to the 2% level from its current level of 6.5% in December 2022.  How long will this take and will it require a hard landing – a painful recession – to accomplish?  Consider:

  • The most recent Labor Department report for January 2023 shows a surge in new employment of 517,000 and a fifty-year low of 3.4% in unemployment. Such strong economic data will likely require more aggressive action by the Fed.
  • The $1.9 trillion American Rescue Plan, passed right after Biden became President in January 2021, is what tripped off inflation in the first place and what led to the $2.7 trillion deficit in FY 2021.

  • In his 2023 State of the Union speech, Biden claimed that he reduced the deficit by $1.7 trillion in FY 2022 but it was still a whopping $1.4 trillion.
  • The deficit in the first four months of FY 2023 increased from $259 billion in the same period last year to $522 billion this year. And President Biden claims to be fiscally responsible!
  • The House Republicans want to establish a serious plan for deficit reduction in return for agreeing to raise the current debt limit which is $31.4 trillion. For example, they want to return to “regular order” whereby standing committees in each chamber determine budget levels for each government agency.  President Biden insists on a “clean” debt ceiling increase with no strings attached.  Which side is more fiscally responsible?

  • It is apparent, from the attached chart on federal government finances, that spending got most out of whack beginning in 2009 from the financial crisis and then again beginning in 2020 from the pandemic. Of course, it is understood that crises require a government response.  But now that inflation has been tripped off, fiscal restraint is badly needed to help the Fed get it back down.

Conclusion.  The U.S. is currently faced with two fiscal crises, inflation and massive debt, at the same time.   By apparently refusing to work with the Republican House toward serious deficit reduction, President Biden is risking making debt and inflation much worse and more prolonged.  The success of his Presidency is riding in the balance.  If he is wrong, and the economy dips into a major recession, the American people are going to suffer a lot more pain than they have already and he will rightly be blamed for this.

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