The president says reducing the deficit will lower inflation. Will it?
Fuel prices are rising, rent is too damn high, and elections are coming. As inflation and high costs of living spoil the country’s economic mood, President Joe Biden has revived a recent talking point to get across how seriously he takes the country’s economic situation: “I reduced the federal deficit.”
Cutting government spending isn’t really top of mind for most American voters, and balancing federal budgets is certainly not going to be enough to motivate Democratic voters to turn out in midterm elections. The federal budget deficit hardly registers in Gallup’s recent polling on the country’s most pressing problem, but inflation is at the top of the list.
With midterms coming up and a new inflation estimate scheduled to be released next week, the White House is now making deficit reduction a core part of its intense efforts this month to convince voters the economy is getting better — and reset public opinion on its biggest political challenge.
It marks a pivot: Biden campaigned on wanting to be a transformative president, pushed for massive spending packages throughout 2021, and played down concerns of inflation to boost those proposals. But the president now sounds more cautious about big government spending.
That pivot started at his state of the Union speech earlier this year. “My plan to fight inflation will lower your costs and lower the deficit,” he said in March. “By the end of this year, the deficit will be down to less than half what it was before I took office.”
Inflation has gotten steadily worse and stayed high since then, but the White House’s messaging on the problem really kicked into overdrive in recent days. Biden rolled out a three-pronged approach — one being deficit reduction — to wrangle inflation in a Wall Street journal op-ed. He’s also invoking the deficit in speeches, and addressed the country about it again on Friday. His administration’s officials popped up on television screens this week to talk about the plan, and the White House is planning more announcements, interviews, and trips for the rest of the month.
Biden’s claim that his policies are responsible for the drop in the spending gap are debatable. But even if they were completely true, it’s not totally clear that cutting back federal spending would, at this point, help bring down inflation, according to economists. Whether it convinces the average American is even more dubious. But the administration is going to try.
A refresher on the deficit, and Biden’s role in getting it down
The federal deficit is the amount of money the federal government spends in a year’s budget beyond what it has collected in revenue. That shortfall gets added to the country’s total debt. The United States has run up a budget deficit every year since at least the early 1970s, except for four years between 1998 and 2002.
It ran its largest deficits ever during the core pandemic years of 2020 and 2021 because of emergency coronavirus spending through the CARES Act and American Rescue Plan. Because that funding is winding down or all spent, and because tax revenues have increased as unemployment dropped and the nation’s overall economic recovery sped up over the last year, the deficit dropped in 2021. An even bigger drop is projected by the end of the 2022 fiscal year in September.
Over the last few months, Biden has taken credit for this drop in the deficit in his State of the Union address, in speeches throughout April and last month, when he sought to “remind you again: I reduced the federal deficit” despite “all the talk about the deficit from my Republican friends.”
Focusing on the deficit is traditionally much more of a priority for Republicans than Democrats. You tend to hear about it from congressional Republicans who want to cut back on social welfare spending or attack Democrats for spending at all. Many words have been written about just how much deficits matter, but economists who spoke to Vox said that they matter more in times of high inflation.
It’s true that deficits are decreasing: The $2.8 trillion deficit in 2021 was lower than the record $3.1 trillion deficit from 2020, when Donald Trump was president. And the projected 2022 deficit of $1 trillion will be an even steeper fall — something for which the president is taking credit. But that’s largely a product of the big spending programs from 2020 and 2021 tapping out, according to many economic experts. Biden’s signature spending package, the American Rescue Plan, worsened the deficit to a degree — shrinking a projected $870 billion deficit reduction to the $360 billion decline that actually happened from 2021 to 2022.
“I’ve heard the president and his administration say over and over again, things like ‘we have reduced the deficit because of our actions.’ That is only true in a very backward sense,” Marc Goldwein, a senior vice president at the Committee for a Responsible Federal Budget, a fiscally conservative group, told Vox. “The deficit is coming down year over year overall despite their actions.”
It’s also true that American unemployment has been dropping quickly over the last two years — meaning more people are paying taxes that help offset government spending. On that front, the White House credits its recovery efforts.
The effects of deficits on inflation are debatable
Even if Biden gets full credit for bringing down the deficit, casting it as a tool to fight the country’s current level of inflation is a new approach for him. “Bringing down the deficit is one way to ease inflationary pressures,” he said in early May. “We reduce federal borrowing and we help combat inflation.”
Economists don’t all agree on just how much taxing and spending can do to combat inflation.
“Not all government spending is clearly inflationary,” Goldwein said. “But when you’re in a period of high inflation, you can probably expect the first-order effect of any given increase in spending or any given cut in taxes is probably going to be inflationary.”
Big deficits can certainly worsen the problem if that’s the result of a massive injection of money into the economy when the economy is overheated, but the primary responsibility for controlling inflation falls on the Federal Reserve, which controls interest rates and money supply — and the White House is emphasizing that point in its economic plan: “My predecessor demeaned the Fed, and past presidents have sought to influence its decisions inappropriately during periods of elevated inflation. I won’t do this,” Biden wrote in an op-ed for the Wall Street Journal this week.
Biden acknowledges he has more control over how much revenue the government can collect in taxes and how much it chooses to spend. “Because government is such a large purchaser, and because it’s such a big part of our economy, if you lower the amount of deficit — so you either increase taxes or you lower spending — you’re going to pull some money out of the economy, and that can reduce inflationary pressures,” a senior administration official, who spoke on condition of anonymity, told Vox about the White House’s thinking on the deficit-inflation link.
But there’s a difference between simply not worsening inflation by growing deficits and taking active steps to reduce the deficit. By not increasing spending on policies that put more money in people’s hands, the government can try to hamper demand for goods and services. There’s still plenty of money out in savings accounts and the coffers of state and local governments that will make this a challenge — and supply chain and logistics concerns that can’t just be solved by cutting spending and raising taxes — but the White House is suggesting a handful of reforms in a renewed economic message it is rolling out this month.
The president isn’t expecting any more big immediate spending, but knowing that the government can fight inflation on the margins through long-term investments and tempering expectations about future economic growth, Biden’s plan has a shot at making things feel better.
Biden’s new economic sprint
In his Wall Street Journal op-ed, Biden laid out an inflation-fighting plan to ease the country into “stable, steady growth” that includes deficit reduction as just one of three planks; letting the Fed do its work and making things more affordable are the other two. He expanded on this message during an address Friday focused on the May jobs report that shows hiring still rising and unemployment remaining near a pre-pandemic low.
He wants Congress to reform the way the IRS collects taxes from regular Americans and how billionaires and corporations pay taxes, as a way to not just reduce the deficit even more, but fight inflation by punishing price-gouging and “corporate greed.” White House officials this week have also made television appearances and public statements to push this new message and announce infrastructure and climate investments to improve supply chains.
These new moves are happening as inflation remains near a record high, gas prices soar as summer travel picks up and energy markets remain chaotic after Russia’s invasion of Ukraine, and the outlook for Democrats in midterm elections worsens.
Many of Biden’s proposed fixes require congressional action — something Biden is eager to emphasize: “I’m doing everything I can on my own to help working families during this stretch of higher prices. And I’m going to continue to do that,” he said on Friday. “But Congress needs to act as well.”
As part of this larger strategy, the White House seems to be gearing this deficit message toward the most fiscally conservative members of his caucus in Congress: Sens. Joe Manchin of West Virginia and Kyrsten Sinema of Arizona have been frequent obstacles to Democrats’ ability to pass any new economic plans through the Senate, and both have signaled their concern over worsening inflation.
Whatever reforms and proposals could make it through the House and Senate would have to satiate those concerns, and so far, Biden’s plan is straddling that line by increasing revenue and investing in longer-term economic productivity and cheaper energy production, which some economists say can help alleviate longer-term inflationary pressures.
This deficit and inflation pivot is also a test of a traditional presidential power that has been waning in recent administrations: the bully pulpit, or the president’s influence to set agendas, dominate national conversations, and persuade other politicians to fall in line. Biden has reportedly been frustrated by his inability to break through to the general public and craft a cohesive message on the many challenges his administration is trying to tackle, from inflation and gas prices to gun violence and the pandemic.
On Friday, he tried to explain his focus on affordability and reducing the deficit in terms Americans might understand, “I understand that families who are struggling probably don’t care why the prices are up. They just want them to go down. … But it’s important that we understand the root of the problem so we can take steps to solve it.” he said. “The reason this matters to families is because reducing the deficit is another way to ease inflation.”
Presidents have seen this power of persuasion eroded as party polarization increases, Congress gets harder to unify, and messaging power is diffused among media, political organizations, and activist groups. For Biden, part of the problem comes from his tendency to misspeak or have his comments corrected or cleaned up by staff afterward. But the senior administration official who spoke to Vox argued it’s worth Biden making this outreach: “The president is trying to help people understand the role that this democratically elected government can play in people’s lives to help improve economic outcomes, and then by that, help to improve people’s outcomes.”
We will see in a few months whether this posturing convinces any voters. But by at least speaking about it and laying out a plan, the White House can counter Republican attacks about wasteful government spending and irresponsible government borrowing and message to average Americans that it is being responsible with its spending just like Americans who are concerned about affordability.
Still, for the strategy to succeed, it will have to break through to average Americans who may not know what the deficit is, but do know that the price of gas and food is rising. Whether that happens on television or in person (the White House is hinting at future trips and speeches), the message has to get out there. And as part of a larger plan, it may address the general confusion and malaise so many Americans are feeling.
More than $1 billion was lost to crypto scams in the last 15 months, according to the FTC.
The crypto crash isn’t the only way the decentralized currency can lose its holders a lot of real money. According to a new report from the Federal Trade Commission (FTC), cryptocurrency is increasingly used as part of scams, either as an integral part of the scam itself or just the way scammers want to be paid.
The FTC says 46,000 people reported losing more than $1 billion worth of crypto in scams between January 2021 and March 2022, noting that this number is only the people who reported their losses to the FTC. It’s likely that the actual number of people scammed and crypto lost is much higher, as most victims don’t report their losses to the FTC.
Even though that $1 billion figure might not be reflective of the true amount of money lost, it does indicate just how much crypto scams have increased: Reported losses were nearly 60 times higher in 2021 than they were in 2018. And in the first quarter of 2022 alone, losses were already about half of what they were in all of 2021. A quarter of the money lost in reported scams is now in crypto.
Crypto already has a not-great reputation as a playground for illegal purchases, hacker ransoms, and money laundering. Its increasing role in old-fashioned scams won’t help enthusiasts make the case that virtual currency should play a larger role in legitimate financial markets and banks. While President Biden signed an executive order last March to come up with cryptocurrency regulations, it’s not known what those regulations will be, when they’ll be put in place, or if they’ll do anything to prevent scams.
Russia is making gains in the Donbas through a grinding and indiscriminate war.
One hundred days into the war in Ukraine, Russia has turned its siege tactics on Sievierodonetsk, the last major city in Luhansk still outside its control.
Ukraine is still gripping the city, as Russia seeks to take it by leveling it to nothing. Almost 90 percent of Sievierodonetsk’s buildings, and all of its critical infrastructure, have been destroyed, said Ukrainian President Volodymyr Zelenskyy. A few thousand people remain in the city, without access to food, water, electricity, medicine.
“Their tactic is to turn the city into a desert and then take the territory,” said Serhiy Haidai, head of Luhansk’s regional war administration.
Sievierodonetsk represents the current phase of Russia’s war in Ukraine — a grinding, brutal, and unforgiving offensive in the Luhansk and Donestk oblasts (or administrative regions) where Russia seeks to take towns and territory, inch by inch, often relying on indiscriminate shelling and bombing that leaves the region a wasteland. There is no clear end to this campaign.
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Aris Messinis/AFP via Getty Images
Weeks after Russia refocused its war in Ukraine toward the Donbas, the Kremlin’s forces are steadily advancing and controlling territory. “If you look at the map, what the Russians are doing in the south and east, they’re consistently making gains across the board,” said Nick Reynolds, research analyst for Land Warfare at RUSI. On Thursday, Zelenskyy said Russia now occupies one-fifth of Ukrainian territory.
These are still revised war aims for Moscow, which initially sought a lightning-quick takeover of Ukraine, and the collapse of the government in Kyiv. Ukraine’s resistance and Russia’s incompetence prevented that outcome, so Russia shifted its campaign to the south and east, where it could regroup and capitalize on the territorial gains the Kremlin achieved since the start of the full-scale invasion.
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Russia has learned some lessons from its early failures, and is now concentrating on taking territory, bit by bit, rather than attempting multiple prongs of attack. The Kremlin has deployed its overwhelming fire and artillery power, which has led to mounting Ukrainian casualties.
Zelenskyy has said Ukraine is losing 60 to 100 soldiers each day in the east. “They move little by little, but definitely it brings us a lot of losses in our soldiers, and many wounded and many are killed,” said Volodymyr Omelyan, a former Minister of Infrastructure of Ukraine, who is now a member of the Territorial Defense Forces, currently stationed in southern Ukraine, between Kherson and Mykolaiv. “It’s not that type of story in the beginning of March, when we were simply killing Russians without losses from our side.”
Momentum may tilt toward Russia, but it is not overwhelmingly decisive. This is an unsparing strategy for Russia, which is still facing heavy losses. Ukraine is holding in Donetsk, though Russia is trying to push through. Ukraine has attempted counteroffensives, including around Kherson, in the south, though experts say Ukraine has only had limited success so far. But if that changes, it may stretch Russia if it is forced to respond.
The war is also transforming, as more advanced Western weapons, like the US’s advanced rocket systems, make their way to the Ukrainians on the front lines. All of these arms take time to deliver. There are lags in distribution, in integrating weaponry into battalions, in training soldiers on those weapons. Simon Schlegel, a senior analyst for Ukraine at the International Crisis Group, said we may see more attempts by Ukrainians to use heavier and more sophisticated weapons for counterattacks later this summer. The test will be if that can translate into more Ukrainian victories.
Still, 100 days since Russia launched its full-scale invasion, the situation on the ground in Ukraine is still very fluid. Russia is inching toward its (downgraded) war aim of controlling the Donbas, which would give Russian President Vladimir Putin a potential victory to sell at home. But whether that will be enough for Putin is still a real question. It is unlikely, too, that Ukraine could settle for slicing off its territory, and abandoning the Ukrainians now under Russian control. All of this risks a sustained conflict, as the economic and humanitarian toll mounts.
Russia is gaining territory in the Donbas. Can it hold it?
Incremental progress has been the hallmark of Russia’s offensive in the east, and, over time, those gains have added up. To achieve those, Russia has completely decimated cities. What Russia did in Mariupol, it is doing across the Donbas.
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AP
“If you look at what they’re doing now in the Donbas and why they’re taking territory, it’s because they’re going back to the way Russia traditionally fights wars, which is through indiscriminate fires, overwhelming fires, little regard for civilian populations, committing war crimes,” said Dmitri Alperovitch, co-founder and chairman of Silverado Policy Accelerator.
Russia has repeatedly denied allegations of war crimes. When confronted with individual incidents — like an airstrike on a chemical plant in Sievierodonetsk Tuesday that sent huge plumes of nitric acid into the air — pro-Moscow separatist authorities said the explosion occurred on Ukrainian-controlled land.
Omelyan said, from his position in the south, in areas Russia had bombarded or occupied, everything was destroyed. “Right now, it’s kind of the Sahara or a desert, without any glimpse of survivors, almost all buildings are bombed, the bridges are exploded, and the roads are badly damaged.”
Russian heavy artillery is also taking its toll on Ukrainian troops, who are now suffering serious casualties and losses. That has forced Ukrainians to give up some of its positions in the east, and it may bruise the morale of the Ukrainian forces, as some of the euphoria around Ukraine’s early victories fades.
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Bernat Armangue/AP
Russia’s strategy also comes with real costs. A Pentagon official told the New York Times that Russia’s “plodding and incremental” pace has worn down the military, and Russia’s overall fighting capacity has diminished by about 20 percent. As in Mariupol, Russia is still expending a lot of firepower and soldiers to take just one city. Russia’s singular focus on making these gains has also left some areas vulnerable, with Ukraine able to challenge control of places like Kharkiv, and to attempt counteroffensives around Kherson.
And it is one thing for Russia to take territory. It is another thing to hold it. “Every new town that they control, they have to then also build a fence there, they have to leave soldiers there to prevent an insurgency and to counter attack,” Schlegel said. “And so every new place that they control also binds forces. Therefore, we cannot be sure whether they can hold this pace after Sievierdonestk.”
Ukrainian civilians in Russian-controlled territory may also mount sustained resistance. In the Russian-held Melitopol, an explosion appeared to target the Russian-installed leader, which the Kremlin blamed on “Ukrainian saboteurs.” The former mayor of Melitopol, Ivan Fedorov, said “the ground will burn” in Melitopol until the Russians leave.
So far, insurgency in Russian-controlled areas has been limited, but it is also very difficult to know what is happening in those areas. Russia’s campaign of devastation has forced tens of thousands of people to flee, and many of those left behind in Russian-controlled areas are often those too vulnerable to evacuate. It may take time, experts said, to rebuild some of these population centers to the point that an insurgency is possible.
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Francisco Seco/AP
If an insurgency does happen, it will become extraordinarily costly for Russian troops and Ukrainian civilians alike. The Kremlin has a well-worn playbook on trying to coerce occupied populations into compliance through forced disappearances, torture, and mass killings. There is strong evidence that Russian forces committed war crimes in Ukraine, as in Bucha. Such atrocities may be happening across the Donbas, too, just obscured because it is happening in places where Russia controls the information flow.
“Russians are either going to keep crawling forward slowly, or they’re going to hold and stabilize, and basically dig in defensively and start purging the local population they control,” said Reynolds. “That’s the trajectory we’re on.”
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Natacha Pisarenko/AP
Asking “how does it end?” for a war that’s not ending
Russia has made progress in the east because it narrowed its campaign. It also outmatches Ukraine militarily with advanced weaponry and heavy artillery.
Yes, Russia has suffered really embarrassing losses. Ukraine has found ways to undermine Russia’s might, and Russia has found ways to undermine itself. According to Andrea Kendall-Taylor and Michael Kofman, Russia has lost approximately “25 percent of its active tank force, over 30 aircraft and more than 10,000 troops.” But Russia still has more of everything, both when it comes to advanced weaponry and equipment, even if they’re coming out of storage.
Ukraine has mounted a stunning and scrappy defense, fending off a full takeover of its territory. But as the war becomes entrenched in the east, Kyiv has lacked effective counteroffensives — that is, not just holding Russia off, but taking back what they’ve lost, either to pre-February 24 invasion boundaries, or beyond that. The question is whether US and Western weapons, especially more advanced systems, might help sway that.
The US has provided billions in security assistance to Ukraine since the start of the war, from the anti-aircraft Javelins to long-range weapons systems like Howitzers. This week, President Joe Biden announced another $700 million in military aid to Ukraine, including four High Mobility Artillery Rocket Systems, known as HIMARS, which allows forces to launch multiple, precision-guided rockets. Ukraine has been asking for these for a while, and they are the most advanced weapons delivered to date, though the US has limited its range to avoid Ukraine firing into Russian territory. The UK is also requesting to send similar systems.
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Maxym Marusenko/NurPhoto via Getty Images
In general, throughout the war, weapons deliveries from the West have tended to come in waves, and it takes time to deliver arms and artillery, to discreetly transport them amid a Russian offensive, to train Ukrainians on how they’re used, who then need to go back and train the soldiers on the front. (The Pentagon has said it will take about three weeks to train Ukrainian forces on HIMARS.)
It’s also a lot harder to rapidly ramp up Ukrainian capabilities in the middle of an active war, where it’s very difficult to track where things are going and who is getting what and making sure it’s all working effectively. Even in the best of cases, it can take time for these weapons to start having an influence on the battlefield. “I was very happy recently to hear the voice of American music,” Omelyan said of the sound of M777 howitzers, which started to make their way to the front lines in May.
Still, the costs of war are mounting. The humanitarian toll in Ukraine is devastating; more than 6 million people have fled Ukraine, and another 7 million are displaced internally, according to the United Nations. The United Nations has recorded more than 4,000 civilians killed since February 24, but the real figure is almost certainly much higher. The mass graves in Mariupol are just one chilling detail of the destruction Russia has wrought.
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AFP via Getty Images
Ukraine is also effectively under economic blockade because of the Russian naval presence in the Black Sea. Its economy has basically been slashed in half in 2022, and the government requires economic assistance to stay afloat. “The big question is going to be will the economic aid keep coming,” Alperovitch said. “In some way it’s much easier to bring military aid, rocket systems, artillery, and the like. But writing checks for billions of dollars every month to sustain Ukraine because its economy is crippled by the blockade is a much harder sell to the population that is suffering from its own economic challenges.”
Russia has floated the idea of easing the blockade, and letting Ukrainian grain shipments go through the Black Sea, in exchange for relief from Western sanctions. Ukrainian officials have been skeptical of such a bargain, and it will likely be very difficult for Western governments to make such a deal if Russia is actively still waging war in Ukraine. But that could change as the war drags on, and the economic fallout of the conflict becomes more painful for in the US, Europe, and the rest of the world.
In many ways, this gets to the larger dilemma of finding a solution to end Russia’s war in Ukraine, especially as Moscow becomes more entrenched in the east: how to broker an end to the conflict that somehow avoids giving Putin what he wants. And if Putin gets what he wants, it will likely come at the expense of what Ukraine wants.
Putin had to revise his initial war aim, but the gains Russia has made in the Donbas mean he could define what this “special military operation” has accomplished as a version of a victory. He can tell Russians that he has secured Crimea by effectively creating this land corridor that extends through eastern Ukraine, give or take a few towns or villages. He can say that he has “liberated” the Donbas. He can say that he destroyed Ukraine’s industry and infrastructure to the point that it can never rebuild its military. All of this was likely not worth the costs to Russia, but it is an available out for Putin, if he wants it.
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Bernat Armangue/AP
But what of Ukraine? Zelenskyy and Biden (quoting Zelenskky, in a New York Times op-ed) have said this war will end with a diplomatic settlement. Western support is an effort to help tip the outcome in favor of Ukraine. In public, Ukrainian officials have broadly opposed ceding any territory to Russia, and of abandoning Ukrainians in Russian-occupied areas. They believe the public is behind them. “Any politician that would try to bring such a deal with the Russians or whoever has no political future, I believe, and it’s very, very dangerous,” said Sergiy Kyslytsya, the Ukrainian ambassador to the United Nations, at a Washington Post event this week.
“The Ukrainians aren’t going to come to peace on those terms. For the Russians, just because they want to stop and draw new boundaries, they will face sustained conflict,” Reynolds said.
This increases the prospect of a sustained conflict, especially as, right now, neither Russia nor Ukraine has an incentive to give up the fight. “I’m sure that this will end with Ukrainian victory,” Maryan Zablotskyy, a Ukrainian member of parliament, told Vox. “The simple reason is that Russia is on the wrong side, we are on the right side, and have the support from the West. The bigger question is probably: At which cost?”