Thanks to Sen. Joe Manchin, the push to pass President Joe Biden’s massive tax and spending bill has been stalled.
Manchin has correctly warned that this reckless tax and spending bill, which the Congressional Budget Office found would cost nearly $5 trillion if extended for 10 years, would increase inflation and add more debt.
But concerns still abound. According to former Treasury Secretary Larry Summers, this is a testing time for the U.S. economy, with the risk of recession rising. Summers believes that the Federal Reserve’s delayed response to fighting inflation will tip the economy into a recession. He says the Federal Reserve is setting the stage for as many as four interest rate increases in 2022, with more after that.
In Summers’s view, the odds of a soft landing, wherein higher interest rates do not sharply reduce economic growth, are only 20% to 25%. He further believes there is a better than 50% chance of returning to stagnation, a prolonged period of slow economic growth. Summers notes that it is very hard for the Fed to rein in inflation without damaging the economy and that all previous efforts have ended in recession.
We should hope, therefore, that Democrats are not able to impose their promised tax increases in the near future. The combined effect of higher taxes and higher interest rates would have a major negative impact on the economy, reducing economic growth and perhaps pushing us into a recession. With Wall Street forecasters already reducing economic growth forecasts due to the omicron variant, enacting one of the largest peacetime tax increases in our history would be one of the worst economic mistakes the Senate ever made.
Bruce Thompson was a U.S. Senate aide, the assistant secretary of the treasury for legislative affairs, and the director of government relations for Merrill Lynch for 22 years.
