One person who has clearly come around the reality that there is no putting the genie back in the bottle when it comes to government spending to cushion the blow from acute crises, is Gary Cohn.
Cohn showed up on CNN Sunday for a chat with Fareed Zakaria, and he was not shy about discussing the deficit and the necessity of rethinking how Congress approaches the debate around borrowing, spending and taxation.
“There are people who are worried now, as you know, on Capitol Hill, about the debt”, Zakaria said.
“Initially, right now, we should not be worried about the debt”, Cohn responded, echoing Steve Mnuchin and everyone else who is any semblance of rational (indeed, even some folks in Washington who aren’t rational understand this). “We need to do whatever we can to recover our economy”.
Cohn then shifted tone, noting that “a year from now, hopefully when we get through this and this is behind us, we absolutely have to worry about the debt”.
That’s not as unequivocal as he makes it sound. The Fed is absorbing the entirety of the relief packages passed thus far and is expected to absorb the next one too.
But, the crucial bit from Cohn’s remarks is his exhortation for Congress to be realistic about the fact that COVID-19 will not be the last time lawmakers are called upon to spend trillions in a crisis. Here’s the key quote:
We now have the knowledge that at any given moment in time, our Congress is going to need to spend – you tell me – $3 trillion to $ 5 trillion to stimulate the economy because of a crisis. And we don’t know what that next crisis is. So our next Congress, they almost have to sit down and look at our spending, and our revenue side. They really need to look at our budget – how we spend money – and in addition to that, I think they need to look at our tax system and they have to think of ways we raise revenue. You know, if you think back to 1935 and the Depression, some major tax reform came out of that.
Cohn’s bottom line for Washington: “Congress has to think differently” going forward, and they have to acknowledge that we are going to have another crisis.
As Zakaria notes, there are some budget hawks beginning to circle inside the Beltway. The deficit was $737.9 billion in April alone. Spending was nearly a trillion.
Earlier this month, Treasury said it will borrow $2.99 trillion in the April-June quarter. The previous plan was to pay down $56 billion of net marketable debt during the period. In other words, the plan represents a net $3.06 trillion swing versus what was tipped in February.
But let’s be clear about something. If you forget about the primary dealer middleman (who is totally superfluous in this equation on some interpretations), the fact is, the Fed is buying the bonds the US is issuing to fund the stimulus. We are issuing debt and effectively buying it from ourselves.
That is indirect monetary financing. If you strip out the primary dealers (who benefit from their role as middlemen and arguably do not fulfill their implicit obligation in the arrangement vis-à-vis Main Street) you’d be left with direct financing.
If Americans have any sense about them at all, they will start to question the mechanics of this arrangement. Specifically, they will ask why, if this charade is as laughably transparent as it clearly is, we need the primary dealers in the middle of things. What is the purpose of that if it’s not facilitating robust economic outcomes for Main Street? Why not just have the Fed directly finance the deficit? Taking it one step further, if all we’re doing in that scenario is issuing debt and buying it from ourselves, why issue the debt in the first place?
As Cohn says, there will be another crisis. And when it comes, we will have to spend several trillion to combat it, just like we’re doing now.
If you want to persist in the notion that deficits matter and have to be “financed”, then you need to rethink the tax system. You can’t just keep cutting taxes for the rich and corporations and claim that “growth” will eventually pay for those tax cuts. That supply-side canard has (literally) never worked. Let me reiterate, because this is a highly pernicious myth: The idea that tax cuts for corporations and the wealthy will finance themselves over time via higher growth has never been borne out in reality. It is largely a fairy tale pushed by supply-side charlatans like Stephen Moore and Larry Kudlow, neither of whom are economists.
Of course, some of this thorny debate could be relegated to the dustbin of history (where it probably belongs) if people would free themselves from the imaginary constraints of deficits and make-believe “limits” on spending the dollars America itself issues.
If you think a system that is defined by deficit monetization is destined for hyperinflation, then there is a very good chance you are essentially oblivious to the fact that the Fed has been monetizing debt for the better part of the last decade.