Federal debt, as a share of the economy, hit 98 percent in the 2020 fiscal year. Many economists are pushing lawmakers to add even more to it.
By NYT – Jim Tankersley- September 2, 2020
WASHINGTON — A surge in government borrowing in the face of the pandemic recession has put the United States in a position it has not seen since World War II: In order to pay off its national debt this year, the country would need to spend an amount nearly as large as its entire annual economy.
And still, economists and many fiscal hawks are urging lawmakers to borrow even more to fuel the nation’s economic recovery.
The amount of U.S. government debt has grown to nearly outpace the size of the nation’s economy in the 2020 fiscal year and is set to exceed it next year, as the virus downturn saps tax revenues, spurs government spending and necessitates record amounts of federal borrowing, the Congressional Budget Office said on Wednesday. Federal debt, as a share of the economy, is now on track to smash America’s World War II-era record by 2023.
The budget office report underscored the scrambled politics of deficits in 2020: It showed debt held by the public climbing to 98 percent of the size of the economy for the fiscal year ending Sept. 30. Forecasters had previously expected the nation to reach those levels at the end of the decade, a time frame that had already alarmed fiscal hawks in Washington, who warned ballooning deficits would consume federal budgets and chill private investment.
But the virus has upended those predictions, prompting even longtime champions of fiscal prudence to urge lawmakers on Wednesday to keep borrowing more for the time being, in order to help people and businesses survive the lingering pain of a sharp recession and now-slowing recovery.
“We should think and worry about the deficit an awful lot, and we should proceed to make it larger,” said Maya MacGuineas, the president of the Committee for a Responsible Federal Budget in Washington, which has for years pushed lawmakers to take steps to reduce deficits and debt.
The turnabout on deficit fears caps several years of declining concern over Washington spending more than it takes in, particularly among Republicans. Lawmakers voted along party lines in 2017 to pass a $1.5 trillion tax cut that President Trump and Republican leaders insisted would pay for itself but has instead added to the deficit. The budget deficit surpassed $1 trillion in 2019 — before the coronavirus pandemic hit — a jump of 17 percent from 2018 as tax cuts and spending increases continued to force heavy government borrowing.
The pandemic has plunged the economy into its sharpest quarterly contraction in growth in nearly 75 years, ballooning the deficit in the process. With millions out of work and businesses shuttered, tax revenues have fallen for the federal government, along with states and municipalities.
Congress and Mr. Trump moved quickly to approve more than $3 trillion in new federal spending to help businesses and individuals stay afloat through the abrupt slowdown in economic activity. All of those factors necessitated large sums of government borrowing, sending deficits — which had grown steadily even in the middle of a record economic expansion — skyward.
The deficit — the difference between what the United States spends and what it earns through taxes and other revenue — is expected to reach $3.3 trillion for fiscal year 2020, the budget office said on Wednesday. That is more than triple the level it reached in the 2019 fiscal year.
That financial gap is exacerbated by additional borrowing over the past decades. At the end of the fiscal year, the budget office predicts, total debt held by the public will be about $20.3 trillion. By comparison, the total output of the American economy — its gross domestic product — is projected to be just over $20.6 trillion for the fiscal year.
Economic theory has long held that rising debt as a share of the economy would drive up the amount of money governments must pay in interest to borrowers. Like a household with a lot of loans, the theory went, creditors would demand higher interest rates to hand cash to a heavily indebted borrower. With its debt payments more expensive, the household — or government — would have to borrow even more to stay current on its obligations.
That would result in a debt spiral in which the government was not able to do anything but fund its debt, the economists said, though such a spiral did not materialize over the past decade, as debt climbed and interest rates stayed low.
Because the pandemic hit the economy so quickly and painfully this year, lawmakers raced to borrow money much faster than they did during the last recession, when it took two years for the debt ratio to climb by a similar amount, in percentage-point terms: Debt as a percent of gross domestic product grew from 39 percent at the end of the 2008 fiscal year to nearly 61 percent at the end of 2010.
But it has been decades since the amount of federal debt was larger than the sum of the nation’s annual economic output. That came in 1946, shortly after the war ended.
The fiscal woes are not just confined to the United States’ need to borrow. In a separate report released on Wednesday afternoon, the budget office updated its forecasts for the solvency of the Social Security Trust Fund, showing it will run out of money faster than the office previously forecast in June.
The new estimates imply the fund will be exhausted by 2031, a year earlier than previously projected, forcing immediate benefit cuts, unless lawmakers intervene. Medicare’s hospital insurance trust fund is now on track to run out of money in 2024, instead of 2026.
The aggressive federal response to the pandemic in March resulted in trillions of dollars in additional government spending, as Washington looked to provide tax breaks, assistance for small and large businesses, direct checks for low- and middle-income individuals and supplemental benefits for the unemployed.
Those measures were widely supported, as millions of workers were suddenly unemployed and businesses were forced to close their doors. Most economists have continued to call for additional spending, as the pandemic shows no sign of abating.
Loretta Mester, the president of the Federal Reserve Bank of Cleveland, who has warned about previous deficits, told reporters on Wednesday that her own forecasts for the economic recovery hinge in part on continued fiscal support, and that without it, the United States might struggle to make it through shutdowns and onto a sustained growth path.
While Ms. Mester said that she was “not one of those people who think that deficits don’t matter,” the United States cannot worry about loading up on debt in the middle of a nascent recovery.
“This isn’t the right time to have that conversation,” she said.
In a sign of how unconcerned investors are about the deficit, stocks rose on Wednesday, with the S&P 500 rising 1.5 percent to set another record. It was the index’s best day since July 6.
Republican lawmakers who were little troubled by the increase have since cited debt concerns as a reason to move slowly on a new package of economic assistance amid the pandemic. Democratic leaders in the House drafted and passed a $3 trillion opening bid for a new rescue package this week, but they pared it back and dropped some members’ top priorities from the bill out of deficit concerns.
Yet while Mr. Trump, as a candidate in 2016, famously pledged to pay off the entire national debt in eight years, he and his fellow speakers during this year’s Republican National Convention did not raise the deficit issue at all. Mr. Trump’s most recent budget proposal, offered before the pandemic spread rapidly in the United States, did not include a balanced budget even if he were to win re-election.
For decades, analysts argued that an explosion of government borrowing risked devouring a large part of the nation’s savings, leaving less cash available for private businesses to use for investment.
Those companies would then be forced to pay higher interest rates to gain access to that smaller pool of funds. And those higher borrowing costs, it was argued, would curtail investment and hurt economic growth. The process is known as “crowding out,” and there is no sign that it is happening now. Interest rates remain low and inflation is muted.
“We’re in an era where more government debt is not doing so much crowding out,” said Douglas Elmendorf, a former director of the Congressional Budget Office and the current dean of Harvard’s John F. Kennedy School of Government.
“I think the idea that we should not let the debt constrain our response to the pandemic is exactly right,” he said. “But I think the idea that it never matters how much debt you have, because there’s always some way around that, is wrong.”
Even some fiscal hawks, like Ms. MacGuineas and Michael A. Peterson, the chief executive of the debt-focused Peterson Foundation, say lawmakers should continue to spend for now, while targeting their efforts more effectively to help the economy recover. Eventually, they say, that spending will need to yield to debt reduction.
“When this devastating pandemic is behind us,” Mr. Peterson said, “our leaders must come together to address our growing debt so the next generation can have better preparedness and greater prosperity.”
Matt Phillips and Jeanna Smialek contributed reporting.
Jim Tankersley covers economic and tax policy. Over more than a decade covering politics and economics in Washington, he has written extensively about the stagnation of the American middle class and the decline of economic opportunity. @jimtankersley