How the 21st Century Cures Act Paved the Way for the COVID-19 Vaccine

(Langdana, cont’d) So Alexandria Ocasio Cortez (AOC) and Bernie Sanders have run with this MMT theory. Their reasoning: Just print money! Print it for green jobs and for free college tuition. And now print it for the Biden stimulus plan. According to them, we printed money like crazy last time to bail out all the institutions that were “stuck” holding the rotten mortgagebacked securities, and the sky did not fall on our heads. The role of money should simply be to ‘get printed’ and pay for the massive government spending. So, doing this is not a problem. Print away!

The previously accepted ratio of 5% is gone. In a world where the U.S. is the “safest cave” and where there are NO other alternatives for scared global capital to be “parked” until the storms wear off, we can pull this off. There is no “ratio.” The upper limit? Gone!

Is there any risk to this? Yes, plenty! I call this kind of monetization, “Circumstantial Macroeconomics.” Just because it worked last time, we are assuming that we can pull it off every time. Imagine this: Some guy rakes all his fall leaves and stacks them in his back yard right by his neighbor’s fence. Then this genius lights a fire to burn off the dry leaves. Very dangerous! The neighbor is holding her breath, one hand on her phone, the other holding her water hose. But the wind is in the “right” direction, and the flames do not hurt her house. Now, lo and behold, this guy then tries this again every year, hoping that the wind will always blow in the “right” direction! “Circumstantial” behavior indeed! The question is, will the wind always be in the “safe” direction?

The bottom line is, do budget deficits matter or not? This cannot be a simple yes or no answer. Given the “perfect storm” of the confluence of all the macro factors since the subprime mortgage crisis and then since COVID-19, we have this phenomenon called MMT. As discussed, it is 100% “circumstantial macro.” If things change, that is, if confidence returns, if companies and households stop sitting on their savings and go on a splurge, and if capital investment takes off, then the inflation genie will be out of the bottle — once again. The early warning sign will be a quick rise in long-term interest rates, thanks to the Fisher effect4. Keep your eye on the yield curve! RF

Prof. Farrokh Langdana is the Director of the Executive MBA Program at Rutgers Business School and Author of five books on macroeconomic policy analysis. Langdana@ business.Rutgers.edu.

[4] From the Fisher Effect, r = i – (expected inflation), where i = nominal interest rate. If expected inflation is < 0, then real rates r are > 0.

(Joffe, cont’d) and this price escalation is likely traceable to Federal Reserve accommodation of loose fiscal policy.

Further, the budgetary process established in 1921 has now broken down. In most years, the federal government operates on continuing resolutions, which largely amounts to keeping spending on autopilot irrespective of whether that spending produces worthwhile policy outcomes.

Taxpayer money could be used more effectively if we had a functioning budgetary process in which elected officials are obligated to determine at regular intervals which expenditures are necessary and at what level. If annual spending reviews are no longer feasible, the federal government could follow the lead of several states by adopting biennial budgeting. Whether reviews occur every one or two years, they are most effective when appropriators are working under some sort of budgetary ceiling, compelling them to make hard trade-offs.

We normally think of that expenditure ceiling as total revenues, with the result being a balanced (operating) budget as we have in almost all states. Unfortunately, balancing the federal budget now seems beyond the realm of political feasibility, especially over the next two decades when the large Baby Boom generation makes peak use of federal entitlements.

But an annually balanced budget is not the only possible form of spending discipline. We could target a less ambitious goal such as stabilizing the nation’s Debtto-GDP ratio, which is now near its all-time peak. Under this approach, the Congressional Budget Office would calculate a federal spending cap based on its forecast of GDP growth and federal revenues. Congress would not be able to appropriate more than the total of anticipated revenues plus the product of the national debt and anticipated GDP growth. This approach would require that all programs, including entitlements, be subject to appropriation limits. Bringing Medicare and Social Security into the budgetary discussion might open the window to reforming these programs—a task that has eluded Congress for too long.

In 2021—as in 1921—federal budgetary processes are broken, and excessive debt burdens are being hoisted onto future generations. The large national debt inhibits the ability of future leaders to address major emergencies without increasing inflation, which destroys the savings of hardworking Americans. Republicans should respond to this moment by offering budgetary process reforms that restrain both wasteful spending and the growth of the national debt. RF

Marc Joffe is a senior policy analyst at Reason Foundation.

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