How Much Can America Spend on the Coronavirus Pandemic?
Despite staggering coronavirus-relief outlays in the trillions of dollars, analysts widely believe long-term debt burdens are a better alternative to short-term economic collapse.
By Andrew Soergel, Senior Writer, Economics April 21, 2020, at 2:21 p.m.
The U.S. government has funneled trillions of dollars into keeping the economy afloat through the coronavirus pandemic.
IN A MATTER OF WEEKS, the federal government has signed off on roughly $3 trillion in coronavirus-related economic stimulus – rolling out record-breaking relief that experts say is necessary in the short-term but will exacerbate debt burdens in the years ahead.
More is on the way in the next few days, with an expected $500 billion tranche of support expected to make its way to President Donald Trump’s desk through a fourth round of congressional stimulus. So how much can the government continue to spend on safeguarding the economy in the short term without worsening economic outcomes down the road?
Economists have for years debated the issue of how much debt the U.S. can reasonably take on. But most agree that the Fed and members of Congress don’t have an unlimited pool of money to play with – despite the Fed’s actions largely being interpreted as an endorsement of unlimited asset purchases and monetary policy support.
Many analysts also agree the U.S. is entering dangerous budgetary territory. The immensity of America’s debt is expected to eclipse the magnitude of its economy by the end of the year.
There aren’t immediate, commonly agreed upon consequences for debt totals eclipsing the size of a nation’s economy. But it’s generally accepted that the path the U.S. is on is an unsustainable one – and, in some sense, it was an avoidable one, despite the ongoing coronavirus pandemic.
[ “What’s just absolutely reckless and inexcusable is that we entered this moment already facing trillion dollar deficits every year and debt levels that are almost at record levels in this country and in many countries around the world,” Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said during an appearance on “Bloomberg Markets: Americas” earlier this month. “We made it massively worse through spending increases and tax cuts. And that means once we get through the immediate crisis that we’re facing, the recovery is going to be much more complicated by the fact that the debt was already so large when this pandemic hit us.”
In the short term, massive debts mean little for an economy desperately clawing itself out of its most severe collapse since the Great Depression. Longer term, though, the country’s creditworthiness and ability to provide services may be challenged as interest payments spike. Tax increases may be unavoidable, and a reduced demand for Treasury notes could send interest rates higher, impacting not only U.S. economic growth but also consumers’ ability to borrow money.
“Observers can reasonably argue that the federal government had little choice but to put these fiscal measures in place to prevent a complete collapse of the economy,” according to a report published by a group of economists at Wells Fargo Securities on Monday. “But, there will come a time when some will begin to worry about the resulting build-up of government debt.”
The Fed is threading a needle in terms of injecting stimulus without creating asset bubbles or sending inflation through the roof. And Congress must balance what is necessary today with what will need to be paid for later.
As it turns out, though, many experts believe lawmakers can – and will need to – spend quite a bit, given the scale of the crisis. Declining to do so is expected to be far worse for the U.S. economy’s trajectory than hefty debt burdens, argues the Committee for a Responsible Federal Budget – an organization that has long been committed to manageable and sustainable spending and revenue policies on Capitol Hill. One of the most budget-conscious think tanks in the nation’s capital has had mostly positive things to say about what lawmakers have signed off on so far.
“Deficits are exploding, and they are going to continue to explode. In this situation, that is actually what you would want to be happening,” MacGuineas said. “As somebody who spends all of my professional time worrying about deficits, that is not what I’m worried about right now. This is the moment deficits were made for.”
And, given interest rates’ historically low levels, borrowing money is cheap right now. As a team of researchers at the Brookings Institution pointed out in an analysis published late last month, “there is a lot of room to increase borrowing without having to worry too much right now about impairing private investment.”
“There may, however, be political constraints on how much the government can increase its debt and how much government debt the Fed can buy,” they said.
So far, budget hawks and fiscal conservatives have been largely supportive in recent weeks of the unprecedented level of stimulus spending that lawmakers have signed off on – speaking in part to the severity of the economic contraction into which the coronavirus outbreak has thrown the country. Those who have not been supportive – such as GOP Rep. Thomas Massie of Kentucky, who attempted to force a recorded vote as lawmakers sought to quickly pass the most recent $2 trillion stimulus bill – have been lambasted by members of both parties.
And fiscal conservatives in Congress who traditionally may oppose such massive fiscal stimulus measures also widely supported cutting taxes at the height of the economy’s recent run of record-setting expansion – eating into government revenues and generating trillion dollar deficits in times of economic growth.
Still, reducing large deficits is seldom a politically popular endeavor, and it will have to happen eventually to get the country on a more sustainable path. Either President Donald Trump or whoever inherits his economy will need to push Congress to consider how the U.S. digs itself out of debt once the coronavirus pandemic is comfortably in the rearview mirror – either through tax increases, spending cuts or both.
Allowing the economy to collapse now would create a worse situation, but Wells Fargo projects the federal budget deficit will jump from about $1 trillion in 2019 to more than $3 trillion in 2020, with another deficit of $1.9 trillion in 2021. That would bring U.S. debt-to-gross domestic product ratios to levels unseen since the end of World War II.
“Congress faces some difficult spending and taxation decisions in the years ahead if it wants to stabilize the government debt-to-GDP ratio,” according to the Wells Fargo analysts. “Trying to return the debt ratio to its 2019 level is essentially politically impossible, at least in the foreseeable future.”
Andrew Soergel, Senior Writer, Economics
Andrew Soergel is a senior writer covering economics for U.S. News & World Report. He joined … READ MORE