Just a few weeks ago, before the coronavirus pandemic burst into everyone’s lives, President Donald Trump was under fire for widening America’s federal deficit to more than $1 trillion, in large part as a consequence of his tax cuts.
The economy was growing strongly. But the deficit continued to bloat and there was little sign that the tax cuts, the benefits of which skewed to better-off households, were paying for themselves, as Trump had promised when making them.
Budgets are in deficit when they have more cash going out than coming in. When governments run a deficit, they add more debt. As it stands, the U.S. federal debt pile is worth $22.7 trillion, official data shows, equivalent in size to 105 percent of the American economy.
Now, with a deep and painful recession in the offing, and potentially a depression unless drastic action to support the economy is taken swiftly, concern about the trillion dollar deficit is relegated to the trivial, a small blur in the bigger picture. Even the deficit hawks agree.
The Committee for a Responsible Federal Budget, a nonpartisan think tank that scrutinizes public finances, released a statement making its peace with the massive $2 trillion deficit spending Congress is about to unleash.
“The current crisis is in many ways unprecedented, and Washington entered it unprepared,” said the statement, posted to Twitter by the organization’s head of policy, Marc Goldwein.
“Instead of spending the last five years addressing the nation’s long-term fiscal imbalance, policymakers enacted a series of tax cuts and spending increases that doubled our budget deficits.
“We entered this crisis facing permanent trillion-dollar deficits and with the debt-to-GDP ratio already headed to record levels. As a result of this crisis, deficits could easily exceed $2 trillion this year and next.
“However, now is not the time to worry about near-term deficits. Combating this public health crisis and preventing the economy from falling into a depression will require a tremendous amount of resources—and if ever there were a time to borrow those resources from the future, it is now.
“Larger deficits are not only an inevitability, but are, unfortunately, a necessity.”
The message, however, came with a caveat: “That doesn’t mean resources are limitless nor that all ideas to spend more money or cut taxes are wise. Dollars should be injected into the economy quickly, but they should be spent as efficiently and effectively as possible.”
Alan Blinder, an economist and former vice chair of the Federal Reserve’s Board of Governors, told Newsweek that deficit concerns are “water under the bridge, but it’s too bad we didn’t go into this with a deficit smaller than a trillion dollars a year.”
“But we did that. So now, despite that, we should throw caution to the wind and spend whatever is necessary to prevent this economy from falling into a black hole,” said Blinder, who was also a member of President Bill Clinton’s Council of Economic Advisers.
Kenneth Rogoff, the former chief economist at the International Monetary Fund and now an economics professor at Harvard University, told Newsweek that by taking on masses of public debt to spend on economic stimulus “we are absolutely doing the right thing.”
“This is war, an alien invasion. The whole point of saving for a rainy day—of maintaining a very strong credit rating—is to be able to use full-throttled deficit spending in wars and extreme crises,” Rogoff told Newsweek.
“The United States, Germany, and the U.K. are countries among those in a particularly good position to borrow right now, and we are very fortunate for that.
“Many other countries, overstretched emerging markets, probably Italy, are not. The U.S., by the way, is in a good position despite coming into the crisis with trillion-dollar deficits, thanks to the fact the dollar rules the global economy like never before.”
Millions of Americans face losing their incomes as efforts to combat the coronavirus pandemic, which include statewide lockdowns and travel bans, choke the domestic and global economies. Job losses have surged and businesses face extinction.
To help struggling Americans through the economic crisis, Congress is voting on a bill that will see checks sent to households, the federal government pay the salaries of laid-off workers, grants and cheap loans for businesses, and much more emergency spending besides.
Without costly measures such as those, and the heavy government borrowing that comes with it, the recession could become a depression, devastating the economy for a long time and destroying the lives and livelihoods of tens of millions of Americans.
The best scenario now is a sharp V-shaped recession, Blinder said, but that is predicated on the pandemic passing through quickly: “I’m chastened by the fact the Spanish flu made a comeback for a second season.”
The Fed has pushed interest rates as low as it can, which will help the federal government to borrow money cheaply and to support the recovery when it eventually begins further down the line, Blinder, a professor of economics at Princeton, told Newsweek.
“So the fiscal part of this is going to spell a very big deficit for some time and we don’t know how long,” Blinder said, adding that a $10 trillion deficit is extreme but “not an unthinkable number.
“The debt to GDP ratio under the Trump tax cut was heading for about 100 percent of GDP anyway,” Blinder said.
“If because of this event that winds up 110 or 120 percent of GDP, that’s not wonderful, but we should think of that as something that can be worn down over the coming decades.”
Blinder added it is important to understand this does not mean the government needs to consistently run a budget surplus, but that “you get a little bit of a handle on the deficit so that the debt is growing slower than the GDP.”
Rogoff cited a finding from his 2009 book This Time Is Different written with Harvard economist Carmen Reinhart that government debt has risen by more than 80 percent on average during financial crises.
“Some of that is stimulus, much of it is lost tax revenues plus ‘hidden debts’ from implicit guarantees to the financial sector, private debt that is socialized, and to government entities,” Rogoff told Newsweek.
“Debt should not be the primary concern right now, this is not a political war as have been many recent debt disputes, this is a real one.”
Blinder highlighted the administrative difficulties in making sure money gets out to everyone who needs it at this moment in time, especially the lowest earners and the smallest businesses, who are hard to reach because they fall through the system’s cracks.
But at a time like this, worries about inefficiency in handing out the money should be overwhelmed by the urgency of making sure those who need it, get it—even if that means there is wastage here and there.
“If your need is immense and it needs to be fast, it probably can’t be neat and tidy and perfectly targeted,” Blinder told Newsweek.
“You’re going to have to live with the fact that you’ll look back on this later and think oh, we wasted 10 percent of the money and we never should have done it that way. Which is a shame, but we don’t have a choice.
“If this was a slow-moving catastrophe, we would have time to plan and put the right mechanisms into place and be much more careful with public money, which is what we should do in normal times. But these are not normal times.”