The federal government is being asked to spend more money amid the coronavirus pandemic.
This past week, House Democrats proposed a $3 trillion economic stimulus package that includes all sorts of spending not directly related to the coronavirus emergency. The $3 trillion would come on top of the $2 trillion package already in the pipeline.
For those calling for everything from $2,000 regular government payments to Americans to forgiveness of all student debt, it's pertinent to examine the wisdom of all this government spending.
Louise Sheiner is the Robert S. Kerr senior fellow and economic studies policy director at the The Hutchins Center on Fiscal and Monetary Policy. David Wessel is director of the The Hutchins Center on Fiscal and Monetary Policy and senior fellow of economic studies.
Writing for the Brookings Institution, the two state:
"Beyond taking action to minimize the severity of the epidemic by boosting testing and hospital capacity, the government can provide financial help to people during the crisis so that they can pay basic expenses like food, rent, and utilities. This helps not only ensure that people don’t go hungry or become homeless, it also means that they come out of this crisis with money in their bank accounts and their credit ratings unimpaired. In other words, once it is safe to start shopping and traveling again, consumers will have the means to do so. If they don’t, temporary problems associated with lower demand during the crisis will translate into lower demand well even after the virus ebbs.
"Another role for government is to keep businesses on life support for a few months so they don’t go bankrupt and we can more easily re-start the economy when the virus recedes; in other words, to limit the long-run damage to the economy’s productive capacity. A few bankruptcies would be manageable; mass bankruptcies would not be. Sure, new businesses will sprout, but it takes time to hire workers and find suppliers and creditors to get a new business running."
They contend the borrowing by government right now is wise in preventing the coronavirus emergency from doing more economic damage than it already has. "There is ample room to increase borrowing now at a relatively low cost."
But there is a limit.
Sheiner and Wessel write: "There is only so much the government can borrow without raising interest rates and crowding out private investment. That would hurt economic growth. But with interest rates at historic lows (inflation-adjusted, or real, interest rates are actually negative), there is a lot of room to increase borrowing without having to worry too much right now about impairing private investment."
But what about the national debt?
"Measured against the size of the economy, the federal debt is more than twice what it was before the Great Recession (80% of GDP today vs. 35% at the end of 2007) and larger than at any time in U.S. history except immediately after World War II. We are going to bust that record, for sure. But at times like these – like times of war – government borrowing to fund essential spending is prudent if the alternative is devastation, economic or otherwise. As long as interest rates remain low, the government can shoulder a heavier burden of debt than if rates were higher.
"Yes, we are passing the bill onto future generations, but with interest rates this low, that bill is probably pretty small. In any case, the alternative – not doing the fiscal stimulus necessary to keep the economy afloat and get it restarted after the epidemic ends – would likely be worse for future generations."
It's good to see economic experts being so optimistic about the fiscal path upon which the nation has embarked.
But even they acknowledge what we've stated often: The bill will come due.
"To be sure, the federal debt is on an unsustainable path, largely because of the aging of the population (the more older folks, the more spending on Social Security and Medicare), and because health care spending (much of that paid by government) is growing faster than the economy. Huge borrowing now (provided we aren’t launching any new long-term spending programs) will be a one-time increase in the level of the federal debt, but won’t have much effect on its growth over time. We’ll have to deal with the rising federal debt eventually, but not now."
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