The Washington Post

By Robert J. Samuelson, Columnist

May 10, 2020 at 3:40 p.m. EDT


The U.S. Treasury is planning to borrow almost $3 trillion during the second quarter (April to June) of 2020, a figure astounding in its size and implications. About $800 billion of that sum is designated as a financial reserve. If you were told that some or all of this reserve would be deployed by President Trump to win key voting blocs in the upcoming election, you might be shocked but not surprised.

If this story line seems too cynical even for Trump, you might argue that his aim is more modest: to inject as much “stimulus” into the economy as possible before the election. Either way, the behavior of the United States increasingly resembles that of a developing country. In many of these countries, an exploding national debt is a yardstick of economic malfeasance.

The national debt is out of control. There is a general disregard for covering new spending with new taxes or other spending cuts. It’s so much easier to borrow against the future. The debts pile up, and more often than not, the consequences can be evaded for many years or decades.

It is contended, correctly, that the latest U.S. debt binge reflects the pernicious effects of the coronavirus pandemic and, therefore, deserves to be exempted from a sweeping criticism of too much debt. This is true as far as it goes, but it does not go very far.

What’s ignored is the behavior before the pandemic. Republicans cut taxes despite large budget deficits. Democrats respond with their own tax cuts and, in the run-up to the 2020 election, have proposed all manner of new spending programs: guaranteed jobs, expanded health insurance, measures to combat global warming, “free” college for state schools.

The extra spending and larger deficits were dismissed as mere inconveniences. They were not to be taken seriously. Annual deficits and growing debt (the total of all past deficits) were not considered threatening. The result was complacency. We became exceptionally vulnerable to a true disaster, such as the pandemic.

It is customary to express the federal debt as a share of the economy, or gross domestic product. By this measure, the publicly held federal debt was almost 80 percent, or $17 trillion, in 2019, according to estimates by the Congressional Budget Office. The debt was rising faster than the economy, and was projected to reach 98 percent by 2030. That compares to the previous record of 106 percent of GDP after World War II.

No more. The White House and Congress have already approved trillions of additional spending and tax cuts to cushion the effects of the pandemic. Previously, CBO projected deficits of about $1 trillion for 2020 and for 2021, or $2 trillion altogether. Now, the CBO’s total for those two years is $5.8 trillion, and the debt would reach 108 percent of GDP by the end of 2021.

Even these figures probably understate the problem. With an unemployment rate of almost 15 percent, Congress and the White House seem likely to embrace additional “stimulus.” Remember also that the dollar is a global currency, used to settle cross-border trade and investment transactions. About $7 trillion of U.S. Treasury securities are held by foreigners, says economist Lou Crandall of Wrightson ICAP, a consulting firm. Their confidence is essential to maintaining the dollar’s stability.

To repeat: The national debt is out of control. This raises many dangers, including a run against the dollar. Investors, traders, multinational firms, insurance companies and pensions lose confidence in the dollar as a medium of exchange or a store of value. There is no law of nature prohibiting massive selling of dollars, which would trigger instability of interest rates, exchange rates, commodities, stocks and bonds.

You will be reassured — mostly by economists — that this is highly unlikely. Low interest rates (just over 1 percent on 30-year Treasury bonds) make it easier to service the debt. There is a worldwide clamor for “safe assets” — that is, financial securities that do not default, and Treasury securities are considered among the safest. Then there’s the proverbial question: What’s the alternative to the dollar?

All this is true. But there are also other truths. One is that economists perform poorly at predicting events and trends that are outside of their personal experience and intellectual worldview. The same economists who didn’t anticipate double-digit inflation, “stagflation” (the mixture of high inflation and unemployment), the global financial crisis of 2008-2009 and the Great Recession now ask you to trust them on the dollar.

We’re trapped in an economic cul-de-sac. There is no easy way out. If we continue to raise spending and cut taxes, the resulting debt explosion may ultimately incite some form of economic crisis. But if we raise taxes and cut spending, we may prolong and worsen the economic slump. The best that can be hoped for is that, somehow, we’ll muddle through.