Washington Insider-- Monday

Administration Economic Activism

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

USITC Sides With Mosaic In Phosphate Fertilizer Case

The U.S. International Trade Commission (USITC) Thursday voted that imports of phosphate fertilizers from Morocco and Russia are causing material injury to the U.S. phosphate industry, the result of a complaint brought by the U.S. fertilizer company Mosaic.

The vote was four-to-one in the decision which followed a determination by the U.S. Department of Commerce (DOC) that the imports were subsidized by the governments of Morocco and Russia. Chair Jason Kearns, Vice Chair Randolph Stayin, and Commissioners Rhonda Schmidtlein and Amy Karpel voted in the affirmative while Commissioner David Johanson voted in the negative.

DOC will now issue countervailing duty orders on imports of phosphate fertilizers from Morocco and Russia. The USITC will issue a final report Phosphate Fertilizers from Morocco and Russia that will contain the views of the Commission and information developed during the investigations.

The report is to be made available by April 13. USITC will provide their determination to DOC March 30.

Morocco's OCP issued a statement countering the ITC ruling, saying there is “no basis” for the imposition of a 19.97% countervailing duty on exports of phosphate fertilizer from Morocco.

“Despite this decision, OCP recognizes the supply challenges that American farmers face and is determined to serve them in the future, and will explore the most appropriate options to do so,” OCP said.

Still Skepticism Over Climate Change Efforts Ahead For US Ag Policy

Farmers and ranchers have expressed skepticism about a forthcoming push for climate change proposals, and their views were echoed in a Senate Ag Committee hearing Thursday on the climate situation. Senate Ag Committee Ranking Member John Boozman, R-Ark., noted his concerns that carbon credits will not benefit farmers significantly or broadly enough.

“This may be a potential income stream for some producers, which is a good thing. But for others it could be cost prohibitive,” he said. Boozman stressed anxiety that Democrats would use the budget reconciliation process to pass a climate bill backed by President Joe Biden and Ag Committee Chair Debbie Stabenow, D-Mich., with minimal or no Republican support.

Boozman highlighted how chicken, beef, dairy and rice industries have increased production with a significantly reduced environmental impact over recent decades. He noted how “exciting new opportunities to compensate farmers and foresters for these environmental gains hold promise,” but he cautioned there are complex barriers that must be eliminated in this uncertain marketplace.

“There are costs associated with verification, validation, technical services, new technologies and equipment, and often times costs associated with reduced yields. These costs add up and can become prohibitive. For this new opportunity to be viable for producers and forest owners, the benefits must outweigh the risks and costs they take on,” he said.

The American Farm Bureau Federation said it would not support a partisan climate bill.

Washington Insider: Administration Economic Activism

The Hill is reporting this week that President Biden's $1.9 trillion COVID relief act this week is being heralded as a “bridge for low-to-middle income households to” cope financially until vaccines enable the U.S. economy to function normally.

The program is popular because of its benefits: large direct payments and funding for the “rollout” of vaccines and enhancements for school safety — as well as $350 billion of support for state and local assistance.

Many of the provisions will lapse after specified periods, but advocates are pushing for permanent increases for child-tax-credits—supports estimated to cost more than $100 billion annually in the provision of “permanent assistance to families.”

However, a main item on the Democrat's wish list was not included and that was the proposed doubling in the minimum wage to $15 per hour. However, progressives indicate they will seek separate legislation on this issue.

The Hill argues that the main issue for investors is increasingly what the “overall budgetary impact of increased federal spending” will be. Last year, the federal deficit ballooned to a post-war high of nearly 14% of GDP — an increasingly controversial policy seen by many as boosting the risk of higher inflation and interest rates in the future.

This view is enunciated in detail by Michael Bordo and Mickey Levy, who have studied the relationship between expansionary fiscal policies and inflation for over two centuries, the Hill says.

They suggest that a key difference from the 2008 global financial crisis is the growth in the money supply which has surged this past year partly as a result of excess saving associated with COVID transfer payments. Meanwhile, the increase in federal debt outstanding has created a situation of “fiscal dominance” in which the Fed is compelled to keep interest rates low for the foreseeable future to keep the government's debt service costs manageable.

For some observers, these conditions are similar to those that developed in the mid-late 1960s when President Lyndon Johnson expanded “Great Society” programs as the Vietnam War was ramping up. The initiatives included a “War on Poverty,” Medicare and Medicaid, the Head Start program, urban renewal and the Motor Vehicle Air and Pollution Control Act.

When these programs were first unveiled the federal budget was close to balance and interest rates and inflation were low. Thereafter, federal spending rose by 50% as social programs expanded and costs for the Vietnam War rose. Because tax rates then were substantially higher than today (with the top marginal tax rate for households at 70%) the increase in the federal budget deficit did not rise above 3% of GDP.

Nonetheless, consumer price inflation, which was only 1% at the beginning of the 1960s, rose steadily in the second half and approached 6% in 1970. The principal reason was the Fed's slow pace for interest rate increases as inflation expectations increased.

The situation culminated with the first U.S. dollar devaluation in December 1971 that was the precursor of the breakdown of the Bretton Woods system of fixed exchange rates, The Hill says.

By comparison, few economists today believe the economy is headed for a repeat of the 1960s and 1970s because the Fed has “regained its credibility as an inflation fighter in the 1980s and it has kept inflation at or below its target of 2% for several decades now.” Accordingly, proponents of fiscal stimulus contend low interest rates mean the opportunity costs for new programs are low.

However, even if inflation does not resurface quickly with unemployment still elevated, the likelihood is that Treasury bond yields will continue to climb as the economy recovers. Ten-year yields have already increased by more than 50 basis points this year to 1.6% recently and they could reach or surpass 2% as COVID vaccines become widespread and businesses resume normal operations.

Beyond the near term, the big issue is how much, or whether, government programs will be rolled back as economic conditions improve.

The main cost incurred by the “Great Society” — added healthcare expenses associated with Medicare and Medicaid — did not show up immediately but grew exponentially over time. For example, U.S. spending on healthcare was only 5% of GDP when these programs were launched as compared with 18% today and federal programs now account for nearly one third of the total.

Observers continue to argue that it is clear that the pace of increase of federal debt held by the public over the past decade is not sustainable: It has doubled to nearly 80% of GDP from less than 40% before the 2008 global financial crisis. Moreover, some forecasts call for further increases in the coming decade.

Meanwhile, the administration is expected to unveil its plans for boosting taxes on corporations and the wealthy to help to defray some of the costs of the federal programs enacted. According to Wharton's Budget model the tally could exceed $3 trillion over the coming decade, while other forecasts call for taxes to increase between $1 trillion to $2 trillion. Only as actual tax increases are finalized, will investors have a clearer idea of the sustainability of the budgetary outlook.

So, we will see. It is clear that the size and impacts of the public debt are expected to become increasingly important as new social programs are implemented — fights that are increasingly important to producers and which should be watched closely as they intensify, Washington Insider believes.

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