What’s Going On Here?The US government’s plans for a nearly $2 trillion spending package were pronounced dead over the weekend. What Does This Mean?The US government’s spending plan – which invests in education, childcare, green infrastructure, and more – has been in limbo for a while, and disagreements throughout the year have already brought its price tag down from $6 trillion to $1.8 trillion. But just as it looked like it might finally get the green light, a key member of government said over the weekend that he definitely wouldn’t vote in favor of the package – a death blow given the majority party’s razor-thin margins. There are a couple of reasons why: he’s concerned about its impact on the country’s debt – which, at $29 trillion, is almost 50% bigger than its economy – and he’s worried that it’ll drive inflation even higher than the 39-year high it hit last month. Why Should I Care?The bigger picture: This wasn’t part of the plan.
The congressman isn’t wrong that the plan might impact inflation, but it might also be just what the economy needs. See, the US Federal Reserve announced last week that it’d be winding down its bond-buying program sooner than expected, at which point it will think about raising interest rates. Both measures would themselves help limit inflation by raising the cost of borrowing and discouraging spending, but they’d also risk hampering economic growth for the same reasons. And while that was arguably manageable when a near-$2 trillion plan would provide its own boost to economic growth, the plan’s collapse – just when Covid cases are surging again – could tip the scales in the wrong direction.
Zooming out: Politicians are not economists.
Goldman Sachs certainly thinks so: the investment bank slashed its US economic growth forecasts – which previously assumed more government spending was on the way – over the weekend. It’s now expecting the country’s economy to grow 2% and 3% in the first and second quarters of next year, down from 3% and 3.5% respectively. | 