The mission of Issues in Perspective is to provide thoughtful, historical and biblically-centered perspectives on current ethical and cultural issues.

The economic and financial realities facing the new administration of President-elect Joe Biden are formidable.  The national debt has skyrocketed under President Trump.  This enormous increase resulted from President Trump’s tax cut policies and the staggering increase in national government spending to deal with the COVID-19 pandemic (over $3 trillion, all financed by debt).  Furthermore, during the Trump presidency, the trade policies of the United States were radically upended.  Both of these policy changes will have a profound impact on the direction of US economic and financial policies for both the near- and long-term.  Let’s think about the impact of these changes:

• First, the national debt:  This is a bit technical, but it is very important to understand how the national debt relates to interest rates and to inflation. Christians, who are taught to think biblically about all things, need to process all these connections.  So, here goes:  The Congressional Budget Office’s 10-year forecast of U.S. government debt as a share of total output grew from a mere 6 percent in 2000 to 109 percent in 2020. Yet in that same decade, real (inflation-adjusted) interest rates on benchmark U.S. government bonds fell from 4.3 percent to negative 0.1 percent, as two top former Obama administration economists, Jason Furman and Lawrence H. Summers, point out in a new paper that’s attracting attention in pre-Biden Washington.  As Charles Lance demonstrates, “In fiscal 2020, the U.S. government borrowed a staggering 15 percent of gross domestic product, yet the 10-year government bond still pays less than one percent.  The strong likelihood is that low rates will continue well after the pandemic ends, Furman reported at a Dec. 1 virtual conference sponsored by the Brookings Institution. A blue-chip panel including former Federal Reserve chairman Ben S. Bernanke, and Olivier Blanchard and Kenneth Rogoff, former chief economists of the notoriously austerity-minded International Monetary Fund, nodded in agreement.   Far from burdening future generations, governments have a golden opportunity to fund long-standing needs by borrowing for investments in future prosperity — the list includes child care, early education, job training and clean water.”  In light of the past 20 years’ experience, the oft-cited metric of total public debt as a share of total output does not truly capture the burden of borrowing.  Rather, the focus should be on annual inflation-adjusted interest payments as a share of annual output; anything under 2 percent should be sustainable, according to the Furman-Summers analysis. At present, the figure is well below that.

The result of all this technical economic and financial data is that both Democratic and Republican leaders at the national level do not seem to worry much about the US government going more deeply into debt.  As with the four years of the Trump administration, we will see greater government spending via borrowing in the new administration.  Deficit “hawks” are now in a minority!  But there are two powerful caveats:  1. At some point inflation will increase and with that increase will go an increase in interest rates—the primary cost of borrowing.  When that occurs, the debt service obligations of the national government will not be sustainable.  2.  There is also the question of U.S. obligations to Social Security and Medicare recipients, “which are for all intents and purposes . . . just as binding as commitments to bondholders. . . . ”  Therefore, Congress must gradually modify these structural drivers of federal borrowing or face an intolerable financial crisis.  But, the chances that will occur are slim to none!

• Second, what have we learned about international trade from the last four years?  Douglas A. Irwin, economist at Dartmouth, offers several helpful observations about international trade:

1. Tariffs do no reduce the trade deficit.  “The trade deficit is driven by macroeconomic factors, particularly international capital flows.”  Over the last four years, with the expanding fiscal policy [of the Trump administration], spending of consumers remained high and imports continued to pour in.  “The result: The merchandise trade deficit was $864 billion in 2019, more than $100 billion higher than in 2016, when Trump took office.  As the administration placed high tariffs on China, imports were simply diverted to Vietnam and other foreign suppliers.”
2. Tariffs are paid by consumers, destroy jobs and hurt the economy.  Over the last four years, the president insisted that China would pay for the 15% to 25% import duties he imposed on $300 billion of Chinese exports.  In fact, the tariffs were passed on to American consumers, who “paid more either directly or indirectly for imported intermediate inputs that increase production costs and ended up raising consumer prices.”  Let’s examine the example of steel:  In the 1980s it took ten hours to produce a ton of steel; today it takes one hour.  Thus, economists at the Federal Reserve found that steel and aluminum tariffs reduced overall employment in manufacturing by 75,000 workers.  Higher steel prices penalized domestic producers of steel-intensive products (e.g., farm equipment and machinery).  Ford said that higher steel prices cost it about $1 billion during 2018-2019.  Finally, the Congressional Budget Office projected that “higher tariffs would reduce real gross domestic product by roughly 0.5% and raise consumer prices by 0.5% this year, reducing average real household income by $1,277.”
3. Tariff agreements are a key part of today’s globalized world.  The best example of this is Nafta, the trade agreement with the US, Mexico and Canada.  The agreement was not scrapped but rebranded as the US-Mexico-Canada agreement, which preserved zero tariffs on trade among the three nations, with some tightening of rules dealing with autos.  The administration realized that with Nafta there were enormous benefits to American consumers as well as increased American exports to Mexico.
4. China needed to be confronted, but trade with China is foundational to America’s future.  China has not followed the rules of international trade and it needed to be confronted.  But is a trade war the best way to do so?  When America slapped higher and higher tariffs on China, it retaliated by placing higher tariffs on American farm exports.  Hence, the administration paid out billions in direct payments to American farmers to offset the loss of trade with China.  As of this writing, China’s purchase of American goods, especially farm goods, is way behind the target set in “Phase 1” of the vaunted China agreement.  The structural barriers in China dealing with trade remain to be negotiated—and most are rather certain China will not agree to changes in its way of doing business.  The US needs its allies in Western nations to unite and confront China’s trade policies together.  Going alone, as has been the approach of the last four years,  has not reduced the trade deficit, has not increased manufacturing employment and has not really changed China’s trade policies.

The United States is facing a very different world than it has known since the end of World War II, when the US completely remade the economic and financial world through the World Bank, the International Monetary Fund and its support of the Common Market (now the European Union) in Europe and other emerging global trade agreements.  We face a new enemy economically and financially in China and we have learned much over the last four years.  How we deal with all these changes will require immense wisdom and discernment.  Regardless of our personal politics, as Christians, we should be praying for our leaders and for our nation.

See Charles Lance, “Economics is going through an intellectual revolution on public debt” in the Washington Post (7 December 2020) and Douglas A. Irwin in the Wall Street Journal (20 November 2020).