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Massive stimulus spending put the United States and much of the world on a fiscal cliff




Debt fatigue in the wake of the coronavirus pandemic is a global phenomenon. Public debt has risen sharply and in many countries, including the United States, public debt is expected to continue to grow faster than gross domestic product (GDP). Because the United States has responded to these two huge economic shocks of this century with sharp increases in public debt, it will emerge from the pandemic as one of the most indebted countries in the world.

With debt and debt growing to unsustainable levels before the pandemic, the United States has already suffered from debt fatigue for 50 years. Under current law, even between recessions, it will get worse. We need fiscal policy reform, including well-designed fiscal rules, to end our unsustainable debt growth. Without this reform, much more than giving a big mark to future generations of Americans. The current population will bear the burden of debt fatigue in the form of higher taxes, the hidden cost of inflation, or rising borrowing costs probably all three.

As we make clear in our new book, we were on a fiscal cliff because lawmakers around the world responded to economic shocks with massive fiscal stimulus policies. This has caused central banks around the world to follow the lead of the US Federal Reserve by pursuing unconventional monetary policies such as near zero interest rates and debt financing by printing money.

Although headline inflation has yet to appear, rising asset prices have been a key side effect of policies designed to strengthen the financial system and stabilize economies. Irrational exuberance and risk appetite are evident across a wide range of asset classes. Potentially speculative bubbles include stocks, real estate, commodities, and esoteric assets such as bitcoin. Investors have invested unprecedented amounts of money in mutual and exchange-traded funds that track global stocks. Stocks in Europe and Asia, as well as the United States, have reached all-time highs. Even in Japan, where stocks have been depressed for decades, the Nikkei Index rose above 3,000 for the first time in 30 years.

Despite the massive stimulus packages launched in the United States in response to the financial crisis and the coronavirus pandemic, the United States continues to see reduced economic growth and inflation well below the target levels of our central bank, the United States. Fed. Despite a new policy framework that allows the Fed to provide substantial monetary stimulus, it has not been able to meet target levels of inflation and unemployment. Analysts expect the post-recovery US economy to continue to experience a slowdown in productivity variation and long-term economic growth.

The underperformance of the US economy increasingly resembles that of Japan over the past three decades in which Japan has experienced a significant slowdown in economic growth. The Japanese government ran large deficits during this long period, leaving it with the highest debt levels in the world. The Bank of Japan continued unconventional monetary policies, buying massive amounts of public and private bonds and pushing inflation-adjusted interest rates well below zero. But these policies have failed to revive the Japanese economy, and the Bank of Japan appears to have hit a wall in what seems possible with its unconventional monetary policy.

The United States is not the only one catching the disease from Japan. It has also become evident in Europe and other developed countries. These countries have experienced deflationary pressures, including low interest rates and zombie loans. Zombie loans are the provision of cheap credit to weak companies by poorly capitalized banks. Zombification occurs when unsustainable businesses stay afloat and thus cling to better-used resources elsewhere in the economy.

Part of the substantial controversy surrounding the zombification of the US economy may be the result of the confusion between zombification and secular stagnation. The term secular stagnation refers to the school of thought that private markets cannot support economic activity at the level of full employment. Economic scholars of John Maynard Keynes argue that only counter-cyclical fiscal and monetary incentives can support full employment. In contrast, much of the recent literature on disease and zombification in Japan argues that huge expansionary fiscal and monetary responses to 21st century economic shocks are driving widespread productivity change and economic downturns. economic growth. In other words, the now rapidly spreading disease of Japan and the growing zombification of the US economy are the result of failed macroeconomic policies, not private market failure. The cure, we fear, as in Japan, will be difficult to find.

John D. Merrifield is Professor of Economics at the University of Texas at San Antonio.

Barry W. Poulson is Emeritus Professor of Economics at the University of Colorado.

They are co-editors of A Fiscal Cliff: New Perspectives on the US Federal Debt Crisis (Cato Institute, 2020).

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