Should We Worry About The Massive Government Debt From COVID-19 Spending?

Should We Worry About The Massive Government Debt From COVID-19 Spending?

There are really two questions here. The first is whether or not the cost of the CARES Act and the other federal government rescue/stimulus spending packages could drive the U.S. government into bankruptcy. The second concerns the impact on our children and grandchildren of the mountain of federal debt that will be left to them. (Full disclosure: this is an opinion piece and I am not an economist.)

The answer to the first question is an unequivocal “no.” I wrote the following piece back in 2016 and I think the explanation applies as well today as it did then. See https://www.cognizantwealth.com/2016/04/15/can-the-u-s-government-go-bankrupt/. Basically it can’t happen because the federal government has the ability to create as much money as it needs, and because the U.S. has grown so large relative to the global economy over the past century that our currency has become not only the standard for stability but also the most popular exchange mechanism for international trade.

According to Bond Capital, based on data from the St. Louis Fed the federal government spent almost $1.8 trillion (in today’s dollars) to stimulate the economy after the 2008 recession. The outcome: it took less than three years for real (inflation-adjusted) GDP to return to its previous Q4 2007 peak and seven for employment to recover. Contrast that with the Great Depression, where the government spent only $800 billion (again in today’s dollars) to revive the economy. That time GNP (the precursor to today’s GDP measure) did not return to 1929 levels for over ten years, and unemployment remained high until well into World War II. So I would expect that the $2.5 trillion-plus that the government will end up spending this year has the potential to stimulate economic recovery faster than in either of the previous big recessions. Logic suggests that it’s easier to get the economy started again by trying to keep businesses and workers in place rather than first forcing them into bankruptcy (which is a much harder financial and emotional hole from which to have to climb out). In my opinion the best way to minimize long-term damage from any recession (whatever the cause) is to have the government act as the funding source of last resort, pumping money into the economy when it has slowed down too much. It appears that the federal government has learned this lesson.

What about the second concern? The U.S. debt-to-GDP ratio had climbed past 100% in 2018 (partly due to Trump’s massive 2017 business tax cut without a concomitant reduction in spending). It could rise as high as 150% or more before the COVID-19 pandemic and consequent stimulus spending plays out. How will such a large debt burden impact future American economic growth? Frankly, nobody knows. Even economists appear to be very conflicted on this topic. Consider Japan as a positive case study. Despite having the highest debt to GDP ratio in the world (currently 273%), its economy has been doing relatively well. Unemployment slid from 5% in 2008 to less than 3% in 2017 and its inflation rate has not topped 3% for the past two decades. It’s quite possible that, despite a large federal debt balance, the U.S. might be able to continue positive economic growth in future decades just as Japan has been able to do.

Right now I believe the federal government should prioritize eliminating the health threat over mitigating the associated economic fallout. There’s no reason it shouldn’t be able to use its unlimited spending power to address both simultaneously. The accumulated debt can and should be dealt with afterwards. Unfortunately my impression is that the federal spending focus has been mostly on the economy with the healthcare spending left to the states. In my opinion that’s a dangerous strategy to follow. Fortunately the legislation just passed last week not only adds more dollars to the Paycheck Protection Program but additionally allocates funding to the states and hospitals to help pay for expanded testing and other resources needed to fight the virus. Even more spending is needed for the latter and I hope Trump and Congress understand that and can work together to provide it.

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