Spendthrift Biden is risking economic disaster

It now looks likely that the US president’s excessive stimulus will pitch the world into another crisis

Call it the inevitable swing of the political pendulum if you like. After more than 40 years of what Joe Biden has labelled “trickle down” economics, in which growth is seen to be driven predominantly by market forces, America is returning to the “bottom up”, big government approach of Franklin D Roosevelt – but with cradle-to-grave welfarism on top.

In doing so, the US president is taking huge economic and political risks – ones all too likely to crystallise in a nasty pile-up within his four-year term of office. If these risks were confined to the US, you wouldn’t overly worry; it would be their problem, not ours. But the US is still far and away the dominant influence in the global economy. Any difficulties America encounters fast become our own.

And not just that. Biden’s agenda sets the tone for what’s happening around the globe, albeit on a less grand scale. Even in Brexit Britain, all pretence at fiscal conservatism is being eclipsed by the returning zeitgeist of big state interventionism. Those who thought leaving the EU might provide an opportunity for the UK to differentiate itself via a low-tax, small government, lightly regulated economic model can forget it. The direction of travel is plainly the opposite.

The scale of Biden’s spending plans are quite breathtaking. On top of the near $2 trillion coronavirus recovery stimulus comes a further $1.8trillion of social safety net spending and

$2.3 trillion in planned physical infrastructure renewal and environmental investment.

Combined with previous pandemicrelated packages, we are talking about additional spending totalling more than a quarter of annual US GDP. Nothing like it has been seen in peacetime before. Higher taxes on companies and the better off will cover only a small part of Biden’s “going big” plans. The rest has to be borrowed; if there is little or no payback in terms of added growth, it will set US federal debt on a path to oblivion – more than 200 per cent of GDP by the middle of the century, according to the latest long-term projections by the US Congressional Budget Office.

In the meantime, there are more immediate concerns to worry about – chief among them that of returning inflation. Not since the Second World War has the US seen budget deficits as large as the ones now being recorded. Admittedly, these are partially justified by the demands of the pandemicrelated economic contraction. Yet once Biden’s social and environmental spending plans are added on top, it all begins to look excessive in the extreme – especially when combined with continued extraordinarily accommodative interest rate policy from the US Federal Reserve. An overheating economy, where demand outstrips supply, starts to look not just possible, but odds-on likely.

But don’t take my word for it. Some of the biggest Left-leaning brains in economics, all of whom are natural Biden supporters, have been warning of the same for some months now.

“The amount of water being poured in vastly exceeds the size of the bathtub,” says Larry Summers, a former Democrat Treasury Secretary. “When we’re talking about fiscal stimulus totalling 14 per cent of GDP in its first round, when we’re also talking about extraordinary monetary measures, structural effects of Covid – notably a large savings overhang – it seems to me that we are way overdoing the requisite response,” he recently told the Financial Times.

Biden’s aides like to make comparisons with the elevated levels of US military spending that took place under Roosevelt during the Second World War. Far from causing the economy to overheat, this created its own supply, resulting in both full employment and rising real wages.

But the pandemic is nothing like the war, or indeed the Great Depression that preceded it. Covid is but an artificially induced, temporary interruption in economic activity that is most unlikely to inflict lasting damage. Employment is already picking up sharply again, with real GDP in the US expected to regain pre-pandemic levels by the end of this quarter. The US economy simply doesn’t need the “going big” actions Biden is applying to it.

To those who say better too much than too little, consider the following two scenarios. One is that excessive demand results in rising interest rates, a strengthening dollar, a widening current account deficit and growing protectionism. This would in turn greatly magnify dollar debts around the world, tipping many countries – and companies – into crisis. Equally possible is that the perception of excessive money printing and debt accumulation leads to a reluctance to hold dollars, a weakening currency, and consequent fiscal crisis in the US.

In both scenarios, the US would be forced to slam on the brakes, bringing the Biden boom to an abrupt end and plunging the economy into a fully blown recession.

Biden claims that the US is “ready for take-off ”. Given the amount of fuel applied, he’s no doubt right. How long the rocket remains airborne before burning itself out and returning to Earth as a spent stick is a different question altogether.