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Commentary: Debate over federal debt limit is a ruse to distract us

Shutting down the government would be a huge blow to the economy.

(Patrick Semansky | AP photo) This May 22, 2020, photo shows the Federal Reserve building in Washington.

The upcoming debate regarding the debt limit is a ruse, a hypocrisy exacted on the American people.

The debt limit caps the amount of money the government can borrow. Failure to raise the limit would be calamitous, adversely impacting the U.S. economy and global financial markets, delaying Social Security, Medicare and Medicaid payments and possibly suspending student loans. Subsidized breakfast and lunch programs for low-income students would cease, as would food-stamp programs.

Delays could reduce government spending by some $200 billion, laying off federal workers and military personnel, causing what Mark Zandi, of Moody Analytics calls a “devasting blow to the economy.” Defaulting on the debt would collapse markets. Interest rates would soar, making borrowing more difficult for business and consumers alike.

The debate over the debt limit represents a hypocrisy foisted on the American people. In response to the 2008 financial crisis and the Great Recession, the Federal Reserve’s assets increased from $900 billion to over $4 trillion dollars. The increase largely resulted from purchasing U.S. Treasury bonds and mortgaged-backed securities, a use of unconventional monetary policy called “Quantitative Easing.” Quantitative easing enabled the financial sector to sell its toxic assets to the Fed, socializing the risk to the financial sector.

The resulting increase in the prices of Treasury bonds and mortgaged-backed securities made other assets including stocks, corporate bonds and real estate appear undervalued, raising their prices. The primary beneficiaries of the Fed’s purchases were those households in the upper 20% of income earners, households that own 87% of all financial assets.

Last year in response to the pandemic, the Fed once again purchased Treasury bonds and mortgaged-backed securities, increasing the Fed’s assets from $4.2 trillion in February of 2020 to $8.4 trillion today. While the purchases helped both working families and the rich, the primary beneficiaries were the rich.

Republicans have criticized the efforts to increase the debt ceiling. Yet they have said little to nothing about quantitative easing, which benefitted the rich, doing little to benefit low and middle-income wage earners.

Their recent objection to raising the debt ceiling targets President Biden’s proposed $2 trillion investment in social infrastructure. But there is something disingenuous here. The 2018 Trump and Republican tax cut, benefiting primarily the rich, significantly increased government debt. The irony is this country bought the snake oil yet again, recalling the Reagan and Bush tax cuts that ballooned deficits, increased inequality and did little to stimulate the economy.

What if the Fed provided dollars directly to the Treasury to help finance government expenditures? This would help fund efforts to mitigate climate change, increase educational opportunities for pre-school and community college education, help families with children enabling parents to return to work and expand Medicare and Medicaid benefits.

Some would argue that the Fed providing dollars would be inflationary. In response, we advocate creating money to employ land, labor and capital that would otherwise go unemployed. Further, investing in the social infrastructure would provide employment today while benefiting society in the future.

The issue is this: Do we increase wealth by the Fed raising asset prices, largely benefiting the rich? Or do we increase wealth by investing in social infrastructure for the rest of the economy? Both policies require creating money. For Republicans, it’s acceptable to create money to purchase government debt to inflate asset values. It’s unacceptable to create money to employ people and tackle climate change.

As the adage goes, “Socialism for the rich, capitalism for everyone else.” Republicans should be more forthright in recognizing the distributional impacts of different policies.

John Watkins | Westminster College

John P. Watkins is a professor of economics at Westminster College.

James “Cid” Seidelman | Westminster College

James “Cid” Seidelman is distinguished service professor of economics and former provost at Westminster College.

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