It is folly to make pensions safe by making them unaffordable

Misguided policies threaten the security in retirement of almost everyone working in the UK private sector

Martin Wolf 

The safe and generous pensions that regulation sought to protect are disappearing from the UK © Getty Images


Nobody knows how the economic world will look half a century from now. 

One can make more or less informed guesses. 

But ultimately they will just be guesses. 

Data we have from the past provide a rough guide. 

But the notion that we can draw reliable probability distributions over long periods ahead is nonsense. 

Yet we still have to make decisions that relate to longtime horizons. 

Climate change is an example. 

Another is pensions.

The destructive outcome of being precisely wrong rather than roughly right was the subject of my column two weeks ago. 

I noted that the desire to make private-sector defined benefit pensions plans safe had rendered them unaffordable. 

The perfectly safe and generous pensions that regulation sought to protect are disappearing from the UK. 

This leaves almost everybody who now works in the private sector relying on a paltry state pension, inadequate and insecure defined–contribution pensions and whatever other assets they may own. 

According to the UK’s Pension Protection Fund, only 1m people today accrue new benefits in the defined-benefit schemes it covers. 

That is just 11 per cent of all scheme members. 

The rest are retired or deferred. 

The best has been the calamitous enemy of the good.


How did this sorry tale happen? 

The answer is: inappropriate institutions; foolish goals; and bad economics. 

All of these are related to the issue of uncertainty, as is explained in Radical Uncertainty by John Kay and Mervyn King.

The most important way for humans to cope with uncertainty is through institutions. 

But companies were always the wrong institutions for providing pensions. 

They are not secure enough to fulfil such a long-term contract. 

Moreover, there are conflicts of interest between shareholders and current and future pensioners. 

That reality has justified the ever more onerous regulation.

The problem with goals is that the cost of providing a given income up to 70 years into the future is unknowable. 

But the more certain achieving a specific target is made, the costlier it will be.

The problem with the economics is that it does not allow people to make needed judgments in a sensible way. 

A sobering and significant illustration comes from the mess that is currently being made of the Universities Superannuation Scheme, which has 460,000 members and £79bn. 

This is a giant scheme. 

Moreover, universities are ideal institutions to run a pension system.


Yet, between March 2018 and March 2020, or just two years, the “technical provisions” deficit in the USS has jumped from £3.6bn to £16.1bn. 

As a result, say the trustees, “the overall contribution rate would need to rise to 42.1 per cent of payroll”. 

The latter currently stands at 30.7 per cent of payroll and was already due to rise to 34.7 per cent under the 2018 valuation. 

So, the required contribution rate must jump from high to unaffordable. (See charts.)

Why? 

The explanation is changes in assumed discount rates, due to the fall in real interest rates on UK government gilts into highly negative territory during the pandemic. 

Why on earth should this exceptional event determine discount rates far into the future? 

Fundamentally, any precise calculation of the deficit for such a scheme is worthless. 

A silly question has to get a silly answer.

Woon Wong, of Cardiff Business School, argues compellingly that, on sensible assumptions, the scheme is in comfortable surplus. 

He estimates that the rate of return on investment needed to equate the present value of liabilities to the value of assets is a mere 0.7 per cent, in real terms. 

Given the time horizons of this scheme, even a huge bear market would not threaten its ability to meet its obligations. 

The only assumption under which the USS scheme could fail is a permanent end of economic growth. 

In such a world, even government debt now thought “safe” would cease to be so. 

The safety regulators and trustees desire is a mirage.


If the aim of regulation is to ensure that a scheme can meet its obligations in any imaginable state of the world, then all such schemes are going to disappear, making real people far worse off than they need to be. 

In the case of the USS, the right option is to make conservative, but not insanely pessimistic, assumptions and conclude that it is healthy.

Nevertheless we do have to assume that most private-sector, defined-benefit schemes will die, for both good and bad reasons. 

What should replace them? 

A sensible answer would include greater flexibility than in the old defined-benefit schemes. 

Yet we also need true risk-sharing within and across generations, which is absent from today’s defined-contribution schemes. 

I will return to the topic of what this new approach should look like.  

The Variant Threat Is Real

Rather than translating their own COVID-19 vaccination successes into a renewed global push to end the pandemic, rich countries are becoming complacent while the rest of the world grows increasingly desperate. But the emergence of dangerous new variants threatens everyone.

Carl Bildt


STOCKHOLM – It has now been 18 months since the SARS-CoV-2 virus was first sequenced in China. 

Within a month, the World Health Organization had issued its highest possible global alert, declaring the COVID-19 outbreak a Public Health Emergency of International Concern. 

Weeks later, the WHO declared a pandemic. 

Yet we are nowhere near the end of the crisis. 

On the contrary, we have entered a dangerous new phase in its evolution.

While complacency sets in among richer, more vaccinated countries, a cloud of despair has descended on lower-income countries that lack the means to fight new variants of the virus. 

And, after reporting declining numbers of new infections for seven consecutive weeks, the WHO is now recording an increase in confirmed cases practically everywhere. 

In its weekly epidemiological update on July 6, for example, it found that there had been a 30% increase in COVID-19 incidence in Europe, even though the European Union had delivered enough vaccine doses to immunize 70% of all adults.

The reason for this global resurgence is well known. 

The Delta variant, now identified in 111 countries, is significantly more contagious than previous strains of SARS-CoV-2, and it is spreading very fast. 

The rise of new variants serves as a reminder that we are dealing with a living organism that can and will evolve in response to the measures (and half-measures) that we deploy to fight it.

While the Alpha and Beta variants were somewhat less problematic, the Delta variant has proved ruthless, and it is anyone’s guess what future mutations will bring. 

The only certainty is that with the virus raging around the world, new variants are inevitable.

With a growing share of the population receiving vaccines in Europe and North America, lockdowns, mask mandates, and other measures are being eased, leading to unfortunate but predictable results. 

Dutch Prime Minister Mark Rutte recently had to apologize for his country’s rapidly rising infection rate, and he is unlikely to be the last leader who finds himself or herself in that position.

Worse, rich countries remain reluctant to step up and help. 

After multiple G7 and G20 meetings, the international community still has not closed the $16 billion funding gap for the Access to COVID-19 Tools Accelerator (ACT-A), the international coordinating mechanism for equitable access to vaccines. 

That sum is miniscule compared to the trillions of dollars being spent to support national economies.

While rich countries become complacent, many others are growing desperate, owing to a lack of vaccines, respirators, oxygen, and testing and sequencing supplies. 

With the rise of the Delta variant, they are essentially flying blind. 

On July 6, the WHO’s technical lead on COVID-19 warned that there are more than 20 countries “with exponential growth in cases … in all regions of the world.” 

And because many of these countries have low vaccination rates, a higher death toll is sure to follow.

All told, nearly one-quarter of the global population has been vaccinated. 

That might sound impressive; but the distribution has been grossly and immorally skewed toward richer countries. 

Moreover, the WHO estimates that 70% of the world will need to be vaccinated to end the pandemic. 

That means there is still a long way to go.

Yes, vaccine production is increasing fast, and pharmaceutical industry leaders are talking about producing 11 billion doses (the number needed for a 70% global immunization rate) this year. 

But that supply would come on top of the 3-4 billion annual vaccine doses that the world already needs to fight other diseases. 

And make no mistake, producing the COVID-19 vaccines is a complicated process. 

The Pfizer/BioNTech vaccine requires 280 inputs from suppliers in 19 countries. Boosting its production has required an unprecedented 200 new technology-transfer agreements.

While new efforts are underway at the WHO and the World Trade Organization to facilitate more of these kinds of arrangements, trade restrictions and vaccine nationalism remain a serious problem. 

The WTO recently noted that while the number of trade restrictions affecting vaccines has fallen from 109 at the beginning of the pandemic, there are still 53 provisions slowing down the hoped-for production increase.

In the meantime, more oxygen is urgently needed to avoid a repeat of the tragedy we witnessed in India. 

Multilateral institutions and NGOs have brokered important agreements with key global suppliers, but more must be done to keep up with the rising need across Africa and in parts of Asia.

Testing and sequencing supplies are also critically important, both for managing outbreaks and for detecting and quickly understanding new variants. 

In addition to the four current “variants of concern,” the WHO is monitoring four other “variants of interest,” one of which – the Lambda variant – has now been found in 29 countries.

The variant problem attests to the global nature of this crisis. 

Though the virus was first identified in China, the four variants of concern were identified far afield, in South Africa, Brazil, the United Kingdom, and India. 

Lambda was first uncovered in Peru. 

Because the next variant could come from anywhere, this is no time to ease our response. 

If we are going to avoid successive waves of new variants, we must redouble global vaccination efforts.

This is a test of political leadership. 

All governments must take seriously the dictum that no one is safe until everyone is. 

National successes in beating back the pandemic could easily be unraveled by national failures to fight it elsewhere. 

Let’s not learn that the hard way.


Carl Bildt was Sweden’s foreign minister from 2006 to 2014 and Prime Minister from 1991 to 1994, when he negotiated Sweden’s EU accession. A renowned international diplomat, he served as EU Special Envoy to the Former Yugoslavia, High Representative for Bosnia and Herzegovina, UN Special Envoy to the Balkans, and Co-Chairman of the Dayton Peace Conference. He is Co-Chair of the European Council on Foreign Relations.  

‘Strange’ bond reaction to US inflation data puzzles investors

US government debt has broken with tradition and pushed higher despite inflation surge

Tommy Stubbington in London and Colby Smith in New York 

Investors have homed in on recent signalling from the Federal Reserve about its evolving sensitivity to elevated inflation as one explanation for the seemingly unstoppable rally in government bonds © FT montage, Stefani Reynolds/Bloomberg


A relentless rally in US Treasuries has accompanied the biggest burst of inflation in more than a decade, snapping typically reliable patterns and leaving investors scrambling for an explanation for what is going on in the world’s largest bond market.

Inflation is typically bad news for bond prices, eroding the value of the fixed payments the debt offers and making it more likely that central banks will respond with interest rate rises.

But recent months have turned that relationship on its head, at least for longer-dated debt. US Treasuries prices have run up big gains — with other bonds around the world following in their wake — pulling the 10-year yield to its lowest in more than three months this week just under 1.3 per cent, down from 1.75 per cent at the end of March.

“There’s a lot of head scratching going on,” said Mike Riddell, a portfolio manager at Allianz Global Investors. 

“On the face of it this move looks pretty counterintuitive.”

Investors have homed in on recent signalling from the Federal Reserve about its evolving sensitivity to elevated inflation as one explanation for the seemingly unstoppable rally in government bonds. 

Wall Street was put on high alert in June following the release of the Fed’s “dot plot” of policymakers’ interest rate projections. 

That suggested the possibility of a much swifter tightening of monetary policy than initially indicated when the Fed last year embraced an average 2 per cent inflation target that would include periods of overshooting. 

Jay Powell, the Fed chair, has discouraged market participants from reading too much into these individual forecasts and urged patience about the eventual removal of policy support. 

But he has also acknowledged the risk that the Fed may need to respond to higher-than-anticipated price pressures. 


“We are experiencing a big uptick in inflation — bigger than many expected and bigger certainly than I expected — and we are trying to understand whether it is something that will pass through fairly quickly or whether if in fact we need to act,” he said at a congressional hearing on Thursday.

“One way or the other, we are not going to be going into a period of high inflation for a long period of time, because of course we have tools to address that. 

But we don’t want to use them in a way that is unnecessary or that interrupts the rebound of the economy.”

Taken together with the recent admission that Fed officials are beginning discussions on the scaling back $120bn monthly purchases of Treasuries and agency mortgage-backed securities, this shift in stance has convinced many investors that the Fed will be less tolerant of runaway inflation expectations than previously thought.

“The Fed has effectively removed some of the more extreme scenarios the market was worrying about,” said James Athey, a bond fund manager at Abrdn. 

“The more that rate hike expectations are baked in, the less inflation is expected to run out of control.”

Rising coronavirus cases linked to the more transmissible Delta variant have also renewed fears that the economic boom tied to the reopening of large swaths of the global economy will fall short of the extremely optimistic forecasts put forward by economists earlier in the year. 

But with equity markets buoyant around record highs, investors are reluctant to conclude that the bond market — a magnet in times of stress — is signalling a newly grim outlook for the global economy.

Instead, many continue to point to investor positioning — a familiar culprit for the Treasury market’s gyrations since June’s Fed meeting. 

In the first quarter of the year as investors prepared for the reopening of the US economy and the return of inflation, they bet heavily on higher long-term yields, while also wagering that the Fed would keep short-term yields pinned down. 

Many of the subsequent moves can be explained by investors ditching those so-called steepener trades — often reluctantly — as markets moved against them and losses mounted.

“None of the grand narratives to explain this rally works for the whole of the last few months,” said Riddell. 

“That’s why I think it makes sense to talk about positioning.”

Despite a series of setbacks, some are sticking with the steepener trade, arguing that the apparent contradiction between soaring inflation and plunging bond yields is unlikely to last. 

At some point, the Fed will be forced to back away from its view that the current bout of inflation will prove mostly transitory, jolting the bond market as investors prepare for a more rapid wind-down of stimulus, according to Mark Dowding, chief investment officer of BlueBay Asset Management.

“Bonds should be naturally allergic in their reaction to inflation,” Dowding said. 

“We suspect that we may look back at the current period in markets some time later in the year and view some of the trends we are witnessing as relatively strange.”

New York City parties like there’s no more Covid

Crowds and maskless socialising feel like denial to one visitor

Renée Kaplan

Frantically normal: hula hoopers at a block party in Brooklyn, New York, which cancelled most Covid restrictions in late June © Andrew Lichtenstein/Corbis/Getty


On July 4, an Independence Day party was in full swing on the rolling greens of the Apawamis Country Club golf course just north of New York City. 

Hundreds of club members and their guests of every age — families with young children and teenagers, elderly grandparents, recent retirees — had all come out in a packed celebration.

People were hugging and kissing and crowding into jumbled lines at the cocktail tents. 

Everyone was maskless, joyful and, in the eyes of this outsider just arrived from London after two years of pandemic-imposed exile, wildly uninhibited. 

It all felt way too normal. 

Since Governor Andrew Cuomo announced the near total cancellation of pandemic restrictions in late June as New York State hit the benchmark of 70 per cent of adults vaccinated, New York City has come back — intensely. 

In June alone, the leisure and hospitality industry added 18,000 jobs and hotel occupancy rates reached a post-pandemic high. 

Restaurant reservations are impossible to get again, in part due to labour shortages causing reduced service, but also because New Yorkers have returned en masse.

“We are having the best summer we have ever had,” says Bonny McKensie, managing partner of Bibi Wine Bar in the East Village. 

“You hear a couple of people talking about the Delta variant now, but two weeks ago people were not even saying the word Covid.” 

New signs have replaced the old ones: “Please wear a mask if you are not vaccinated.” 

In some coffee shops and restaurants, even staff have quit masking, with these restrictions now up to businesses — and individuals — giving an ad hoc, carefree feel to any measures that might actually still be observed. 

Puru Das, the co-founder of Delhi-based design firm DeMuro Das, returned to New York for the first time since the start of the pandemic for the opening of a new showroom. 

“I found it so optimistic, especially coming from India,” Das says. 

“The world will get over this and New York is ahead. 

There was a brief moment of weird dissonance — why aren’t these people wearing masks? — but it’s also summer and the weather’s lovely. 

It felt amazing.” 

Brian DeMuro, his business partner, agrees: “I didn’t question it. 

I dived right in.”

The streets of the East Village and the Lower East Side that abound with bars and twentysomethings looking for fun, felt like a throbbing street party. 

The scent of cannabis floated everywhere in the hot summer air (it was legalised in New York in April), adding to the atmosphere of licence.

None of this would feel that unusual but for the fact that the city had just experienced 16 months of intense abnormality, with lives upended by an unprecedented global health crisis. 

One in nine people in New York City was infected and the city registered more than 33,000 deaths. 

That experience was compounded by an intense social justice movement last summer and overlaid with a fraught presidential election. 

In comparison, New York now feels frantically normal. 

“Big social groups tend to do this. 

They tend to do quick manic turnrounds,” says Orna Guralnik, a psychologist and psychoanalyst practising in New York, and therapist for the Showtime docuseries Couples Therapy. 

“Germany after the war. 

They had this manic rebuilding. 

Collectives tend to do that.” 

Embracing friends and loved ones — and strangers! — again, and relaxing into the deeply normal and sorely-missed pleasures of socialising felt marvellous. 

“It has the quality of a superficial recovery that people are clinging to,” agrees Guralnik. 

“But it’s like a slinky. 

One part of the psyche is stretched forward into this manic recovery and the rest of the psyche is trying to catch up.”

With much of the rest of the world still living under some form of restrictions or, in the case of countries such as the Netherlands and Israel, reimposing them in the face of rising infection rates, New York — however pleasurable — also feels like it is a little bit in denial.

In a few months’ time, when the financial support schemes end for good, when offices reopen but some jobs and industries do not come back, when the autumn brings another rise in infections, it seems likely that the psyche will catch up — and take a hit. 

But until then, the party is on. 

Fat and happy

Banks on Wall Street report bumper second-quarter profits

Bankers are confident the good times will last. Investors are less sure


Bank bosses were full of good cheer as they reported their second-quarter earnings on July 13th and 14th. 

“The consumer...their house value is up, their stocks are up, their incomes are up, their savings are up...they’re raring to go,” said Jamie Dimon, the boss of JPMorgan Chase, when analysts asked about the risk that economic growth might slow in the coming months. 

David Solomon, the chief executive of Goldman Sachs, sounded upbeat when asked if an executive order from the White House seeking to increase competition among businesses might cool feverish dealmaking activity: “I’m encouraged by the fact that our backlog levels remain extremely high...

A lot of that feels like it will be sustained.” 

Jane Fraser, the boss of Citigroup, expressed a similar sentiment, telling analysts “we have a fabulous pipeline.”

For an entire year now America’s banks have enjoyed a profits bonanza. 

Investment banks, which issue equity and debt for companies and make markets in stocks and bonds, have reaped bumper profits as trading activity has boomed. 

Retail banks took an early hit as they wrote down loan values for expected losses in early 2020. 

But they have since been able to gradually revise loan values back up, first as stimulus helped customers stay afloat and then as the economy began to reopen.

Banks’ earnings in the second quarter of this year fit the recent trend well. 

Total profits at five big firms—Bank of America, Citigroup, Goldman, JPMorgan and Wells Fargo—came to a meaty $39bn, five times their level in the second quarter of last year, and around 40% higher than average quarterly profits in 2018 and 2019 (see chart). 

JPMorgan released a handsome $3bn of loan-loss provisions as profits, and Bank of America added back $2.2bn. 

After a hectic first quarter, trading activity slowed at Citi, Goldman and JPMorgan. 

But frenetic dealmaking meant that investment-banking revenues grew robustly; fees at JPMorgan, for instance, rose by 25% on the year. 

(Morgan Stanley, another big bank, was due to report on July 15th after The Economist went to press.)


Early in the pandemic, bank bosses had downplayed their windfalls. 

Retail bankers emphasised the uncertainty around loan repayment. 

Most bosses were aware that any boon from bumper trading earnings was likely to be undone by loan losses as millions of workers were laid off. 

They also warned that their investment-banking revenues were certain to “normalise” soon, as unusually high trading, issuance and deal activity slowed down.

This quarter, however, bosses threw caution to the winds. 

The health of the American consumer is apparent in their credit-card habits, said Brian Moynihan, the boss of Bank of America. 

Repayments remain unusually high—customers are not accruing debt—even as they report mammoth growth in spending, up by 40% year-on-year and 22% on the first half of 2019. 

As for investment banking, Mr Solomon pointed to the pandemic-led acceleration in companies’ digital strategies as a potentially lasting driver of their lucrative mergers and acquisitions business.

Whether that rosy confidence is well-placed or not remains to be seen. 

High prices and supply bottlenecks could slow the economic recovery. 

Many banks said their own costs, especially wages, were creeping up. 

Several stimulus schemes, including generous unemployment benefits and moratoriums on evictions and foreclosures, are due to unwind in the second half of 2021; without them, Americans’ finances may start to look less solid.

Nor has the pandemic been all about tailwinds for banks’ profits. 

Lower interest rates, slashed to zero by the Federal Reserve to support the economy, are dragging down the income they make on interest. 

Bank of America’s net interest income, for example, fell from $10.8bn in the second quarter of 2020 to $10.2bn in the same period this year.

If moves in share prices are anything to go by, then investors are less bullish about banks’ futures than executives appear to be. 

Although profits at both JPMorgan and Goldman beat expectations, their share prices still closed nearly 2% lower on the day they reported results (they have since regained some of those losses). 

For the past year bankers have mostly been pleasantly surprised by the strength of their businesses. 

That may soon change. 

How Central Banks Murdered The Markets

BY JOHN RUBINO 


From Pento Portfolio Strategies:

The Japanese Government Bond market is nearly $10 trillion in size. 

It is the 2nd biggest bond market in the world. 

However, it comes as a shock that this humongous market barely trades any longer.

The government of Japan has systematically supplanted and killed the entire private market for its bonds. 

Meaning, there are almost no private investors who will touch it any more. 

The Bank of Japan has bought so much debt that it forced interest rates below zero percent back in 2016; and the result is the free market has subsequently died.

Investors are now refusing to buy JGBs, which are guaranteed to lose principal in nominal terms—and deeply negative results after adjusting for inflation. 

But at the same time, are not in any hurry to sell their existing holdings because they understand the government will be propping up bond prices.

In this same vein, the 5-year Greek yield recently turned negative. 

This is prima facie evidence that centrals banks have committed murder-one when it comes to markets. 

Back in February of 2012, at the height of the European debt crisis, the Greek 5-year Bond Yield skyrocketed to 63%. 

The free-market deemed the nation to be insolvent and that it could never pay back its debt without returning to the Drachma; and then turning it into confetti. 

Hence, bond yields surged—makes perfect sense, correct? 

Also in 2012, the Greek National debt to GDP ratio was 160%. 

Today, that ratio has soared to an all-time record high of 210%; and yet, these bonds display a negative cash flow going out 5 years in duration. 

Only one thing has changed: central banks deemed it mandatory to step in and replace the entire demand for government debt in order to force interest rates towards zero percent. 

It is the only way these countries would have any semblance of solvency.

Sadly, the U.S. is headed in this exact same direction as Greece and Japan. 

And, that is why we can be certain central banks’ monetary tightening cycles can’t last for very long and will end in disaster–as per usual. 

In fact, Mr. Powell will probably torpedo markets before he is able to end his current historic and massive QE program.

If you want to know how fragile markets really are, just look at the 2.5% selloff during the week surrounding Powell’s June FOMC press conference. 

The fed hasn’t started to end QE yet. 

In fact, it hasn’t even set a date to start the taper. 

All the fed’s money printers have done is admit that they have begun to discuss when to think about a time for the start of tapering $120b per month in asset purchases.

Now let’s talk about the gold market because it is related to what this commentary is all about.

We issued a warning on gold back in Sept of 2020 because of what we termed “the vaccine dead zone” was approaching, which would cause real interest rates to soar. 

That is exactly what occurred. 

Gold dropped by 20% from August ’20, thru April ‘21. 

Now the Fed has admitted that it has begun to talk about ending QE. 

But this is not the start of another bear market in gold. 

Instead, it is most likely the end of the bear market and the incipient beginnings of a massive bull market. 

Why? because of what I pointed out at the start of this commentary. 

The fed can’t remove very much liquidity from the system before chaos reigns on Wall Street.

The simple truth is, asset values and debt levels have grown to become such enormous monstrosities that they prohibit the tightening of monetary policy much at all before the entire fragile and artificial edifice collapses.

Right now, my 20-point Inflation/Deflation and Economic Cycle model indicates there is still some room to run on this bull market. 

This is what prevents us from panicking out of stocks prematurely, as some are prone to do. 

However, the time for a massive reconciliation of asset prices is growing close.

Wall Street’s favorite mantra post the Financial Crisis was: either the economy improves enough to boost earnings and the market, or the Fed will keep printing money in order to support stocks and engender a perpetual bull market. 

Now, as a result of the Fed’s “success” with creating runaway inflation, the exact opposite calculation is now true: either the economy soon slows down significantly enough on its own, which will depress EPS & inflation, or the Fed will tighten monetary policy until inflation is tamed, which will cause asset bubbles to collapse.

Central banks have destroyed price discovery across the board. 

As these maniac money printers begin to exit their market manipulations, the free market will demand much lower asset prices. 

The challenge for investors is to actively manage your portfolio in order to maintain—or perhaps even increase–your standard of living, in spite of the carnage that is set to occur on Wall Street and Main Street.


Michael Pento is the President and Founder of Pento Portfolio Strategies, produces the weekly podcast called, “The Mid-week Reality Check” and Author of the book “The Coming Bond Market Collapse."

Beware America’s Soaring Public Debt

In the near term, strong economic growth could shield US President Joe Biden from the consequences of his reckless spending. But if his administration’s growth forecasts prove excessively optimistic – or even if they turn out to be accurate – he may come to regret it.

Michael J. Boskin


STANFORD – America needs to rein in its soaring national debt. 

But US President Joe Biden seems eager to do just the opposite. 

The risks are too big to be ignored.

In the aftermath of the 2008 financial crisis, President Barack Obama ran the largest budget deficits of any president since World War II (adjusting for the automatic revenue and outlay effects of the business cycle). His successor, Donald Trump, surpassed him.

Biden plans to top them both. Though America’s gross federal debt now stands at 107% of GDP – a post-WWII record – the Biden administration’s 2022 budget has the country running by far the largest-ever peacetime deficits.

To be sure, I support policies to mitigate the short-run economic pain caused by a crisis like the COVID-19 pandemic and help spur recovery, as long as the long-run cost is reasonable. 

But Biden’s spending plans don’t meet that condition. 

Instead, they would create huge deficits that persist long after the economy is back to full employment.

For the five fiscal years from 2022 to 2026, the Biden administration would run deficits of 5.9% of GDP, on average. 

That level was reached only once between 1947 and 2008 – in 1983, when the unemployment rate averaged above 10%. 

But the administration’s projections put unemployment at 4.1% in 2022 and 3.8% from 2023 and onwards.

Biden claims his proposals will add only modestly to the public debt (which is set to grow anyway, owing primarily to ever-rising expenditure on Social Security and Medicare). 

But there are good reasons to believe otherwise.

For starters, the Biden administration hopes to offset higher spending by increasing corporate and capital-gains taxes. 

But these tax hikes are unlikely to pass an evenly divided US Senate as proposed. 

Moreover, such taxes are particularly harmful to growth, so if some version of them is enacted, the Biden administration will likely find that its revenue projections were overly optimistic.

Biden’s spending proposals also include several expensive entitlements, such as improved home care for the elderly and people with disabilities, universal free preschool, and two years of free community college for young adults. 

History suggests that such programs are likely to become permanent, with costs that grow far in excess of projections.

Meanwhile, even as China and Russia build up their militaries, Biden has placed a lower priority on defense spending, with an increase that does not keep up with inflation. 

Under his administration’s budget, defense spending will fall to its lowest share of GDP since before WWII.

Some argue that the US has nothing to worry about. 

Deficits supposedly don’t much matter when an economy borrows in its own currency; the US Federal Reserve just needs to buy up the debt from the Treasury. 

And with government-borrowing rates lower than the projected growth rate, the debt can be rolled over forever. Deficit finance becomes a “free lunch.”

These claims merit considerable skepticism. 

The reasons why are highlighted in recent technical papers by me, my Hoover Institution colleague, John Cochrane, Greg Mankiw and Laurence Ball (of Harvard University and Johns Hopkins University, respectively), and Boston University’s Larry Kotlikoff, along with his co-authors.

Historically, huge debt buildups have usually been followed by serious problems: sluggish growth, an uptick in inflation, a financial crisis, or all of them. 

We cannot be certain which problems will occur or what debt-to-GDP ratio will signal trouble for which countries. 

And the US does have the advantage of issuing the world’s leading reserve currency. But inflation risks are rising – a trend that more deficit-financed spending will only accelerate.

Higher debt also increases the temptation to stoke inflation, particularly if foreigners hold a large share of it. 

The grossly simplistic assumption that debtors are rich and creditors are poor is likely to reinforce this temptation, especially in a political climate where many politicians and voters support tax and other policies that target the wealthy.

Yet another problem is that more public debt will eventually push interest rates higher, crowding out investment and harming the economy’s potential growth. 

The Congressional Budget Office (CBO) expects ten-year Treasuries to rise sooner and faster than the Biden budget does.

While large changes in interest rates are unlikely in the near term, the fact is that financial markets and government and private forecasters have often failed to anticipate them – for example, during the inflation of the 1970s and the disinflation of the early 1980s. 

After 2008, all grossly underestimated how long the Fed would keep its target interest rate at zero.

Sooner or later, there will be another crisis. 

If the US government continues to expand its debt now, lack of fiscal capacity could hamstring its policy responses when the economy really needs the support. 

In the meantime, the advanced-economy debt deluge is making it harder for poor countries with limited debt capacity to respond adequately to the COVID-19 crisis, worsening the human tragedy.

Despite all of this, the argument that the US can finance its debts for free is pervasive, and it is encouraging elected officials to disregard fiscal discipline. 

This raises the risk that the Biden administration will not only spend too much; it will effectively throw money away, by funding projects with low – even negative – returns, much as the Obama administration did with its 2009 “stimulus.”

The content of Biden’s spending proposals is not encouraging on this score. 

Consider the $2 trillion American Jobs Plan. 

It is billed as an “infrastructure bill,” yet only a small percentage of the spending it includes would go toward traditional infrastructure. 

And even here, the CBO estimates a rate of return half that of the private-sector investment that will be crowded out.

In the near term, strong economic growth could shield the Biden administration from the consequences of its reckless spending. 

But if its mediocre long-run growth forecasts prove accurate – or worse, turn out to be optimistic – all of us, including Mr. Biden, may come to regret it.


Michael J. Boskin is Professor of Economics at Stanford University and Senior Fellow at the Hoover Institution. He was Chairman of George H.W. Bush’s Council of Economic Advisers from 1989 to 1993, and headed the so-called Boskin Commission, a congressional advisory body that highlighted errors in official US inflation estimates.