Washington Merry-Go-Round

IMMEDIATE RELEASE 17 December 2021
WASHINGTON MERRY-GO-ROUND
Today’s Events in Historical Perspective
America’s Longest-Running Column Founded 1932
All you’ve got
By Douglas Cohn and Eleanor Clift
          WASHINGTON — A man walks into a bank and says, “I want to borrow some money.” The banker replies, “We are lending money at 1.5 percent per year for 10 years. How much do you want?” Stunned, the man immediately responds: “All you’ve got!” This is an Everyman, a commonsense man who instantly recognizes nearly free money when it is offered.
          But Senator Manchin, the West Virginia Democrat threatening to withhold his support for President Biden’s Build Back Better legislation is no Everyman. Ask him how much money he would borrow at 1.5 percent interest, and he will illogically and irrationally question the offer.
          At 1.5 percent, an historically low rate, the government could lend that out for low-interest student loans and make a handsome profit. Roads, bridges, dams, and buildings can be built, and healthcare improved that will generate far more money than the low-interest money will cost.
          Whereas President Bill Clinton’s advisor, James Carville, famously said, “It’s the economy, stupid,” today he should say, “It’s the interest, stupid.” It’s, a concept Manchin does not grasp as he works to whittle down the BBB bill to $1.75 trillion, an arbitrary number he has determined is his bottom line. He even wants to “zero out” an extension of the childcare tax credit, a provision that just expired and is credited with cutting child poverty in half.
          He says the bill will contribute to inflation, an argument disputed by among others, former Treasury Secretary Larry Summers, who says BBB will ease inflation by helping families with childcare and prescription drug costs.
          Federal Reserve Chairman Powell is betting on Biden’s economic view of inflation that has spiked in recent weeks is a result of pent-up demand created by the Pandemic and does not represent a structural change. Powell served notice that interest rates will gradually rise in 2022, a modest alteration that Wall Street reacted to favorably.
          The concept Manchin can’t grasp is that debt is made up of principal and interest. If you take out a million-dollar mortgage that carries 3 percent interest, it’s nearly the same as a $500,000 mortgage at 6 percent interest.
          That’s why the housing market has taken off, and it’s why this is the perfect time for the government to borrow money at such a low rate.
          What feeds inflation is when demand exceeds supply. When there is more demand for oil than there is oil available, the cost of gasoline goes up at the pump. But when Biden’s BBB bill would put a significant amount of money into the economy, the questions he and his advisors ask themselves are these: Does this infusion of money increase supply? Does it increase demand? Or is there equilibrium?
          The answer is that BBB will create jobs, and jobs create products, and products create supply and – Voila! – we have equilibrium.
          Will refrigerators still be scarce?  Will cars be scarce? Those products are caught up in the current supply chain backup. The cost of used cars has skyrocketed 30 percent, impacting working families, and creating hardship and uncertainty, but that will sort out over the next few months.
          Manchin on the other hand is stuck in yesterday’s slogans. He doesn’t like the price tag on BBB and says he doesn’t want to pass that debt on to his grandchildren. Biden and the Democrats have offset much of the cost with tax hikes on millionaires and billionaires, and where they’ve fallen short, the cost of borrowing is so low that the debt being passed on will become insignificant.
          This is Keynesian economics. World War II ended the Depression when we made the decision as a government and as a people to do whatever it took to win the war. And what followed? The greatest boom period in U.S. history, a boom that turned that wartime debt into an ever-shrinking percentage of the GDP and tax revenues.
          Here is a simple Everyman explanation. He takes out a mortgage to buy a house at 1.5 percent interest, and the payment takes up 40 percent of his take-home pay. But even if he receives nothing more than minimal annual raises, that steady mortgage payment will represent an ever-decreasing percentage of his take-home pay. That is what happened to the World War II debt, and what surely will happen to the BBB debt.
          At the end of the day, if the federal government is debating how much money to borrow at 1.5 percent from the Chinese, the public, and other governments and institutions, the answer is obvious, “All you’ve got.”
 
          Douglas Cohn’s latest books are The President’s First Year: The Only School for Presidents Is the Presidency and World War 4: Nine Scenarios (endorsed by seven flag officers).
          Twitter:  @douglas_cohn
          © 2021 U.S. News Syndicate, Inc.
          Distributed by U.S. News Syndicate, Inc.
END WASHINGTON MERRY-GO-ROUND