Policy Flashcards
Donald Trump Built a National Debt So Big (Even Before the Pandemic) That It’ll Weigh Down the Economy for Years - ProPublica - 2021
Under President Donald Trump, the U.S. national debt surged by almost $7.8 trillion, reaching historic levels relative to the economy—near the World War II peak. Trump’s 2017 tax cuts and lack of significant spending cuts fueled this increase, even before the COVID-19 pandemic necessitated additional emergency spending. Economists argue that while pandemic stimulus was essential, federal finances had already become strained, making the debt situation critical. Despite Trump’s promises to reduce the debt, his administration saw primary deficit growth (deficit minus interest costs) rank as the third-largest in U.S. history, behind only George W. Bush and Abraham Lincoln, both of whom faced costly wars.
Key contributors to the debt increase included a reduction in corporate tax rates, which reduced federal revenue by $1.9 trillion over 11 years, and tariffs intended to offset debt but which provided limited fiscal relief. By 2020, the national debt hit 130% of GDP, with interest costs becoming one of the fastest-growing budget categories. Although low-interest rates temporarily mitigated these costs, reliance on short-term borrowing has increased future interest payment risks. Experts project that, without intervention, debt interest will drive annual deficit growth, further straining national finances and limiting budget allocations for future-focused investments like education and infrastructure.
The national debt contributes to inflation in a few key ways, though the relationship isn’t direct or automatic. Here’s how it can happen:
1. Government Spending & Demand: When the government increases debt to finance spending, it injects money into the economy, often leading to higher demand for goods and services. If the economy is already at or near full capacity (i.e., near its potential output), this extra demand can outpace supply, pushing prices up—thus leading to inflation. 2. Interest Rates & Borrowing Costs: As debt grows, the government may need to offer higher interest rates on bonds to attract buyers. Higher rates make borrowing more expensive, not just for the government but also for businesses and individuals, which can lead to a “crowding-out effect” where less private investment occurs. This can slow growth but also raise inflation expectations. 3. Federal Reserve & Money Supply: The Federal Reserve may buy government debt (Treasury securities) to keep interest rates low, effectively creating money. This increase in the money supply, if not matched by an increase in economic output, can lead to inflation. During crises like COVID-19, the Fed bought large amounts of Treasury securities to support economic stability, but doing so can contribute to inflation when it boosts overall liquidity. 4. Future Inflation Expectations: High debt can lead to expectations of inflation if people and businesses believe that the government might “inflate away” its debt—that is, allow inflation to rise to reduce the real value of debt over time. When these expectations rise, workers may demand higher wages, and businesses may increase prices, leading to a self-fulfilling cycle of inflation.
In short, rising national debt doesn’t always result in inflation, but under certain economic conditions—like high demand, limited supply, or significant monetary easing—it can contribute to it.
Trump’s economic plans would worsen inflation, experts say - AP News - October, 2024
Donald Trump claims he’ll end inflation if re-elected, but economists argue his policies would increase it instead. His proposed tariffs, deportations, and Federal Reserve interference would likely drive up consumer prices. Sixteen Nobel-winning economists and the Peterson Institute for International Economics predict these policies could push inflation to 6-9.3% by 2026, compared to an expected 1.9% without them.
Trump’s plans include a 60% tariff on Chinese goods and 10-20% on other imports, which economists say would raise costs for U.S. consumers. A 60% tariff alone could cost American households about $2,600 annually. Food tariffs, as Trump suggested, would especially increase grocery prices, with 60% of U.S. fresh fruit and 38% of vegetables being imported.
His mass deportation proposal targets millions of undocumented workers, but economists like those at the Brookings Institution find that recent immigration has helped the U.S. meet labor demand and avoid recession, thus keeping inflation low. Deporting workers would reverse this trend, possibly raising inflation by 3.5% by 2026.
Trump also wants influence over Fed rate decisions, a move that would likely weaken its inflation-fighting capacity. Historically, when presidents pressured the Fed, it led to higher inflation, as seen in the 1970s. The Peterson Institute warns that compromising Fed independence could increase inflation by 2% annually.
Biden’s Economy Ahead of Trump’s Second Term - Chat GPT
Biden’s administration has implemented several policies aimed at boosting long-term economic growth, though the benefits might take time to fully materialize. Here are some of the major initiatives:
1. Infrastructure Investment and Jobs Act (IIJA): This bipartisan infrastructure bill, passed in 2021, allocates over $1 trillion to upgrade roads, bridges, airports, ports, and railways. It also invests in public transit, broadband access, clean drinking water, and the power grid. These upgrades are intended to create jobs, stimulate local economies, and improve productivity over time, but the long-term benefits—such as reduced transportation costs and enhanced productivity—will take years to materialize. 2. CHIPS and Science Act: This act, passed in 2022, invests around $280 billion to expand domestic semiconductor manufacturing and advance technological innovation in the U.S. The bill seeks to reduce dependence on foreign chip manufacturers, especially critical given recent supply chain issues. This will help the U.S. compete in technology and secure critical supply chains, with benefits that will gradually unfold as manufacturing plants are built and production scales up. 3. Inflation Reduction Act (IRA): The IRA, passed in 2022, aims to address long-term inflation drivers by focusing on energy independence and healthcare costs. It includes significant investments in green energy, such as tax credits for electric vehicles and renewable energy projects, as well as subsidies for reducing prescription drug costs. These efforts can help lower the overall cost of living in the long term, and the shift to renewable energy is intended to create stable jobs and reduce dependence on volatile global oil prices. 4. Student Loan Forgiveness and Repayment Reform: Biden’s approach to student loan reform, including potential forgiveness and a new income-driven repayment plan, aims to relieve financial stress for millions of borrowers, enabling them to contribute more to the economy. While the forgiveness component has faced legal challenges, changes to repayment plans might gradually improve consumer spending as individuals gain disposable income over time. 5. American Rescue Plan Act (ARPA): Although a more immediate response to the COVID-19 pandemic, the ARPA included provisions for expanding the child tax credit and providing aid to local governments and small businesses. While much of the impact has been short-term, this aid could stabilize economic disparities in communities and lay groundwork for more sustained growth in local economies.
These policies are focused on long-term, structural improvements that address infrastructure, energy, manufacturing, and healthcare costs. Though the immediate economic benefits may not be apparent, these initiatives aim to strengthen foundational elements that can drive economic stability and competitiveness in the future.
The U.S. has actually fared relatively well in managing inflation compared to many other advanced economies. While inflation did rise sharply in the U.S. after the pandemic—driven by supply chain disruptions, labor shortages, high consumer demand, and rising energy prices—the Biden administration’s policies, along with the Federal Reserve’s aggressive interest rate hikes, have helped bring inflation down more quickly than in some other countries.
Here are a few factors contributing to why inflation in the U.S. has been comparatively better managed:
1. Timely Interest Rate Increases by the Federal Reserve: The Fed responded earlier and more aggressively to inflation than central banks in some other countries, implementing a series of rapid interest rate hikes starting in 2022. This made borrowing more expensive, which slowed consumer demand and helped ease price pressures. 2. Strategic Oil Reserve Releases: To counter rising oil prices (particularly after the Russia-Ukraine conflict), Biden authorized the release of oil from the Strategic Petroleum Reserve. This helped stabilize gas prices domestically, which, in turn, had a dampening effect on inflation by reducing transportation and production costs. 3. Lower Dependence on Imported Energy: The U.S. is less reliant on imported energy compared to many European countries, which experienced much higher inflation due to skyrocketing energy costs. By increasing investments in energy independence, the U.S. has been somewhat shielded from the most severe energy price impacts that other countries have faced. 4. Inflation Reduction Act (IRA): This act aims to address long-term inflation drivers by investing in energy, healthcare, and manufacturing. Although its impact on inflation is gradual, it may help keep costs in check over time, especially in the healthcare and energy sectors, which are major contributors to consumer expenses. 5. Fiscal Policy Control: While stimulus during COVID-19 contributed to the initial spike in inflation, the U.S. pulled back on direct fiscal support more quickly than some other countries. This reduced excess liquidity in the economy faster than in countries with more extended stimulus measures, helping to prevent runaway inflation. 6. Stronger Recovery and Labor Market: The U.S. economy and labor market rebounded quickly after the pandemic, creating a base for stronger economic resilience compared to other countries where recovery has been slower. While this did drive some inflation, it also made it easier to implement measures to bring inflation under control without causing a recession.
Because of these measures, U.S. inflation has fallen faster in recent months than inflation rates in the Eurozone and the U.K., where energy dependency and delayed central bank responses have kept inflation persistently high. While inflation remains a concern, the U.S. economy’s relative flexibility and quick policy responses have helped mitigate its worst effects.
There are several signs that the U.S. economy is showing resilience, with positive indicators suggesting stability and potential growth:
1. GDP Growth: The U.S. GDP has continued to grow, reflecting a strong economic recovery post-pandemic. For example, recent quarters have shown positive GDP growth, indicating that the economy is expanding rather than contracting. This growth has been supported by consumer spending, a healthy labor market, and strong business investments. 2. Stock Market Performance: The stock market has been volatile, but overall, major indices like the S&P 500 and NASDAQ have generally trended upward since their lows in 2022. Many sectors, especially technology and consumer discretionary, have rebounded well, which often indicates investor confidence in future economic growth. Companies have been adapting, and earnings reports have been relatively strong for major firms. 3. Labor Market Strength: The U.S. job market remains robust, with low unemployment rates and steady job creation across various industries. Wages have been growing as well, which supports consumer spending—a significant driver of economic growth. A strong labor market is generally a positive economic sign, as it keeps demand steady and consumer confidence high. 4. Inflation Cooling Down: Inflation has been gradually cooling, with year-over-year rates declining from the peak levels seen in 2022. The Federal Reserve’s rate hikes appear to be working, helping to bring inflation closer to its target range. Lower inflation relieves pressure on households and businesses, and this trend may allow the Fed to ease its aggressive rate-hiking strategy. 5. Potential Stabilization of Fed Rate Hikes: While the Fed raised rates aggressively over the past year to curb inflation, there have been recent indications that they may be nearing the end of this cycle. If inflation continues to decline, the Fed could pause rate hikes or even consider rate cuts in the future, which would lower borrowing costs for businesses and consumers and stimulate economic growth. 6. Resilience Amid Global Challenges: Despite global economic challenges, including high energy prices, geopolitical tensions, and slowdowns in other major economies, the U.S. economy has remained relatively resilient. Stronger-than-expected GDP, low unemployment, and stable consumer spending have put the U.S. in a better position compared to some other countries facing deeper recessions or higher inflation.
While uncertainties remain, these indicators collectively suggest that the U.S. economy is relatively strong and has managed to avoid the worst-case scenarios that were feared earlier. If inflation continues to cool and the Fed begins easing monetary policy, the economy could see further growth and stability in the coming months.
