Recent stimulus measures have reawakened controversy over the national debt. Liam Glen writes on the federal deficit and why fighting the pandemic is worth spending trillions of dollars.
The US government is sparing no expense in combating the COVID-19 pandemic. Congress has recently passed a $2 trillion stimulus deal to prevent economic collapse, and there may be more of such bills to come.
But this massive expenditure has reawakened concerns about the national debt, which currently sits at over $23 trillion. Democratic and Republican leaders alike have adopted a blasé attitude towards the issue, but there is still a small subsection who remain deeply worried about deficit spending.
Some have even suggested that the looming peril of future debt is a greater concern than the current threat of COVID-19. Famed political cartoonist Michael Ramirez attracted mockery for presenting the COVID-19 pandemic as paling by comparison to the debt “epidemic” (not realizing that a pandemic is, by definition, worse than an epidemic). But the concern is widespread enough that it is worth interrogating the possible impacts of this massive expenditure.
How Much Does the Deficit Matter?
An important caveat when answering questions like this is that macroeconomics – despite its emphasis on complex quantitative models – is not an exact science.
To study COVID-19, for instance, doctors can see how it affects different patients in a controlled environment. Economists have no such ability. They can observe periods of boom and bust, crisis and prosperity, but they cannot determine the underlying causes with absolute certainty. For this reason, scholars often disagree about the fundamental principles of how the economy works.
That being said, many of us are accustomed to viewing national spending as similar to a household budget. Our income must always exceed our expenditures. If we do owe any money, we must pay it off as soon as possible lest we face dire consequences. This is often portrayed as an ominous, nigh-apocalyptic event – the day our grandchildren will pay for our reckless spending. The reality, however, is more complicated.
The US government, which oversees the largest economy in the history of the world, works differently from a typical household. When it runs a deficit, it makes it up by issuing out treasury bonds, on which it pays interest. However, there is no obligation to ever pay back the entire thing. The federal government has been in debt for the near-entirety of its existence. The amount of debt has increased over time, but so has the size of the overall economy.
The long-term impact of this is uncertain. But economists generally agree that running too high a deficit for too long can be highly problematic. More bonds lead to higher interest rates, which hurt economic growth and lead to lower wages. If investors start losing confidence in the US government, there is a chance (albeit a remote one) that it would precipitate a financial crisis comparable to the one seen in Greece.
But that does not mean that a country should run balanced budgets all the time. Keynesian economic thought, which has been dominant for much of the last century, advocates a countercyclical approach.
When the economy is good, the government should aim for balanced budgets to keep interest rates low. During recessions, however, the time comes for tax cuts and deficit spending to put more money in the hands of middle- and working-class people and stimulate the economy. As is often said in economics, “one person’s spending is another person’s income.”
The Scale of the Crisis
The question is whether the current crisis is severe enough to justify largescale expenditures. And the answer is an unambiguous yes. A number of conservative economists have come out in favor of stimulus measures. Both the right-wing Heritage Foundation and the Committee for a Responsible Budget criticize specific parts of Congress’s coronavirus response but acknowledge the overall need for deficit spending.
Allowing businesses to fail and Americans to lose their jobs on such a massive scale without government aid would precipitate an economic crisis far more harmful than adding a few extra trillion dollars to the national debt would. Meanwhile, the idea of ending restrictions and allowing the economy to re-open in the middle of a pandemic has the potential to cause mass death while creating an even greater economic meltdown.
Meanwhile, among the many arguments in favor of the stimulus is that the cost is not as great as it first appears. Unlike government departments and agencies like the CMS and the Pentagon which require funding every year, this is just a one-time expenditure. The deficit will spike in 2020, but it can return to normal as soon as the pandemic is under control.
The deficit is an issue which may merit consideration. But massive spending has presented itself as the only option in this time of crisis. The long-term nature of debt means that it can be addressed later.