Huge Government Spending: Is it What We Need During the Coronavirus Crisis?
Exploring what would happen if no more stimulus packages are passed versus the future if Congress continues to borrow and spend.
2020 is testing our nation in ways we’ve never seen. Protests rage as the country vents pent-up anger at the senseless killing of George Floyd. The coronavirus continues its deadly march, oblivious to the pain and suffering happening around it. And yet, in addition to a deadly virus and systemic racial inequality that Americans have to fear, there’s also the threat of virus-related, long-term damage to our economy. Washington continues to haggle over whether to spend, how much to spend, and what to spend on to help defeat the virus and save the economy. So what is the right course of action for our federal government to take? To answer that question, we first have to understand the stakes. A virus-ravaged economy is a concept that most people like me have a hard time coming to grips with. How will it happen? What will it look like? And how bad will it be, for the country and for citizens like us, personally?
A virus-ravaged economy
As we’ve all seen, a country living in fear of a deadly infection acts very differently than normal. People who would normally take a summer vacation, shop at a mall, or even start a new business and hire a bunch of other people stop doing so and stay home. The American economy is based on consumption, so when people aren’t confident enough to go outside and spend money, the economy slows. Businesses, especially small ones like restaurants and salons, are hard hit, and many are forced to close and lay off workers. People who lose their jobs not only lose their current cash flow, but also lose their business contacts and relevant skills if the economic downturn lasts long enough, forever damaging their earning potential even after the economy recovers. This could very well happen to a lot of people if the virus continues to run amok. In addition, consumer attitudes will change as a result of this virus. For example, instead of making a business trip across the world for one face-to-face meeting, people might just decide to hop on Zoom. Airlines, and all the people and industries that rely on their success, would suffer.
What does that mean for me?
This is obviously bad for the average American, especially for the unemployed (that’s about 13% of Americans in May).¹ In general, income will decrease, meaning a lifestyle change for many Americans, e.g. fewer trips to the movies and smaller quinceañeras. Less money also means fewer business ventures, leading to less potential for future employment and greater poverty down the line. Families can be forced out of their homes when they can’t pay their rent or mortgage, and may even have to rethink their children’s college plans.² Many will have to dig into their savings to pay for living expenses, hurting their chances to retire comfortably at a reasonable age. All these effects will last past the virus and the initial economic recovery as Americans struggle to regain previous income levels, savings, and lost opportunities for business or education. To put it simply, a prolonged coronavirus recession, like any long recession, will seriously hurt many Americans, especially those with middle and lower income, and will introduce thousands, if not millions, to poverty for years to come.
Just to be clear before we move on: we’re not in an official recession yet. A recession is defined as when the economy (GDP) shrinks for two quarters in a row, or for six months. However, this could easily become the reality if we can’t get a strong grip on the virus by the fall.
What should we do about it?
OK, back to it: We’ve established that a virus-ravaged economy is a scary thing. What should we do about it? Well, there are a couple of competing philosophies when it comes to solving this economic crisis. Actually, these competing philosophies come up during every economic crisis we’ve seen in the last century. Some hold that the U.S. government should spend a ton of money in an active effort to save the economy, through things like business bailouts, unemployment benefits, and even plain cash to Americans. Others say the government should show restraint, spare the future debt burden, and see what happens. As of now, Congress has already passed the $2 trillion CARES Act, providing money to small businesses, airlines, the unemployed, hospitals, state and local governments, and even low-to-middle income American citizens.³ Going forward, Republican lawmakers have presented the cautious side when it comes to future aid money, pointing out that states are opening up and testing is becoming more widely available (though recently Senate Majority Leader Mitch McConnell has seemed to change his mind, mentioning the possibility of a second relief package coming soon), while House Democrats continue to pass large spending bills meant to support individuals and small businesses and provide funds to fight the virus, like money for local governments and testing. So who’s right? What is the best course of action to take to spare America from severe economic damage that could leave millions in poverty? What would the country look like in, say, a year or two if Congress spends little to none in further aid, and what would it look like if it does decide to spend massive amounts of money in an attempt to halt the virus and bolster the economy?
The path of little to no government spending
Let’s start with what would happen if the federal government refrained from passing any more significant relief packages. One important thing to note is that the current economic slow-down, unlike those past, is not caused by underlying problems in the economy. Thinking logically, it makes sense that we need to fix the real cause of the stumbling economy, whatever it is, before the economy can get back to its normal bustling self. In this case, that cause is not subprime mortgage lending or overly speculative investing by Wall Street as it was in 2008. It’s not an oil crisis, and it’s not inflation. All these causes and their economic effects can in some way be mitigated by traditional government anti-recession techniques, like the Fed changing interest rates to manipulate business and consumer behavior. But as we’ve noted, none of those traditional causes of recession are the problem here.
The true economic problem now is the public’s fear of a virus, which in turn significantly reduces economic activity, right? So it seems logical that while that crippling fear exists, we’re going to have to suffer the economic consequences. A future with no further relief packages or a comprehensive plan from Congress means we are marching ahead with the status quo: a fragmented, often contradicting combination of responses from the White House and state and local governments which desperately need funding to continue the fight.⁴ So where is this status quo taking us?
First, let’s lay down a worst case timeline. Some experts believe a COVID-19 vaccine, which would provide the public the confidence it needs to participate in the economy again, will be available mid-2021.⁵ There’s no guarantee that a vaccine will be done by then and that it will work (there’s never been a vaccine developed for any previously seen coronavirus diseases, AND vaccines usually take years if not decades to produce while we want this one in one year), but for the sake of argument let’s pretend that the worst case of whatever path we go on is a virus that is eliminated in the summer of 2021.
How our COVID response stacks up against other countries’
To get an idea of where we may end up a year from now, we can compare the American numbers and current virus war strategies to those of other countries around the world. Sweden is an interesting case. The government espoused relatively soft measures to combat the virus, banning large gatherings but keeping restaurants and schools for young children open. Some say they are trying to achieve “herd immunity,” where a majority of the population gets sick, recovers, and is now immune to the virus. (Herd immunity does not have a strong scientific basis; in fact, it’s still unknown whether COVID-19 survivors are immune to getting the disease again.) Sweden now has one of the highest mortality rates in the world, at 40 deaths per 100,000 people.⁶ It’s hard to compare Sweden directly to the U.S. due to the many complex differences between the two countries. But when you compare Sweden to similar neighboring Nordic countries like Denmark, Norway, and Finland, who imposed much more strict lockdowns and travel bans, there’s a stark difference. Denmark has less than 10 deaths per 100,000 people, while Norway and Finland have around 5.⁷ Countries like Singapore and Australia, who have the best numbers concerning the virus, implemented strong quarantining measures, like early lockdowns, strict virus tracing, travel bans, and mandatory self-isolation.⁸ Already, many of those countries who responded quickly to the virus, including Australia, Denmark, and Norway, are lifting many restrictions as their new cases numbers dwindle.
So where does the United States’ current approach to combating the virus fit in among these other countries? Unfortunately, we’re much closer to Sweden than we are to Norway or Australia. The current charted path looks pretty grim. The White House has decided not to lead a centralized coronavirus response and instead is touting a localized public health strategy, where governors must shoulder the load even as their budgets fall short. To their credit, our leaders have often put experts, such as Drs. Fauci and Birx, front and center, but then they decline to follow those experts’ advice (e.g. not wearing masks in public and urging states to reopen their economies before the recommended public safety goals are met). What we’ve been left with is an “every man for himself” mentality and no cohesive mitigation, testing, or tracing framework. Our numbers show what one might expect from such a haphazard response. About 20,000 new cases are being confirmed each day, and although that number isn’t increasing, 17 states are exhibiting a worsening in infections.
Trusting the problem to solve itself
Without significant federal action to deal with the virus, we’re putting it in the hands of state and local governments to solve our health and economic woes. But since we’re not supporting those governments with a coordinated plan or money, we’re really trusting the problem to solve itself. We’re trusting the free market economy to create its own guidelines for consumer confidence. It’ll be a slow and painful process, subject to setbacks when there’s a new surge in cases due to premature reopenings and unsafe business health practices. The economy will have to operate in a “virus-mode” until consumers feel ready to spend. That means a continuation of empty seats on airplanes, extra space between tables in restaurants, and an absence of fans in sports stadiums. That means a depressed economy until the virus goes away, which we think will be at least mid-2021. And without government bailouts for businesses and average Americans, we will see even more widespread economic fallout that will take years to recover from.
If Congress takes an aggressive approach
So it doesn’t look too good if the federal government continues with the current course of action. What about if Congress takes an aggressive approach to bolstering the economy and fighting the virus: passing large relief bills to aid ailing state and local governments, businesses, hospitals, and the unemployed, and to allocate funds for testing and tracing? Well, there’s a consensus among leading economists that governments should pursue aggressive spending during this outbreak for a reason. Economists like Harvard’s Kenneth Rogoff, who has traditionally advocated for lower debt in the interest of long term growth, now are agreeing with Fed Chairman Jerome Powell, who has repeatedly urged Congress to spend more to combat the virus and its effect on the economy. Money given to state and local governments and hospitals and for a nation-wide testing and tracing system makes obvious sense. It would allow for a quick return of consumer confidence within a couple of months and a clear reopening timeline similar to what we see in Norway and Australia now. Targeted funds for businesses can also make sense if they help businesses keep their employees on the payroll, which would keep those workers from losing their skills and networks for a bit longer. Increased benefits for the unemployed and cash to average Americans is a little more debatable in their benefits. Certainly hunger and poverty can be staved off for a while, but if that money runs out while the economy is still in the dumps, it’s at best a temporary fix. There’s also an argument to be made that since the increased unemployment benefits are higher than the wages that workers lost in 38 of the 50 states, they are actually a disincentive to go back to work.
A new “New Deal”
Some better uses of money that could benefit the unemployed and help in permanently building back the economy are infrastructure projects and job retraining that hearken back to the success of the New Deal era. Special safeguards would have to be taken to protect the health of the workers, of course. But once that is done, there are worlds of possibilities to provide jobs in improving the country. Projects to modernize roads or create new modes of transportation (like Japanese style bullet trains please!) would pave the way for a more efficient economy and attract future business. Or a plan like the one China just announced to spend $1.4 trillion to modernize their technology infrastructure over the next 5 years would create hundreds of thousands, if not millions, of jobs. Funding for retraining, relocation, and education for people who have permanently lost their jobs during the pandemic also would be a lasting boon.⁹ In other words, a modern “New Deal” of sorts could help Americans weather the current economic storm while simultaneously preparing the American infrastructure and working class for a new kind of 21st century global economy.
But the national debt…
That sounds pretty great to me. But there’s the literal cost to spending these trillions of dollars. Many opponents to the huge spending during this crisis point out the exploding U.S. debt burden as a good reason to show restraint, and rightly so. The Treasury Department said it will borrow $3 trillion this quarter to pay for things like coronavirus relief, six times the previous record for a quarter, set in 2008 during the last financial crisis.¹⁰ Right now the U.S. government owes over $20 trillion to its citizens, various government funds, and to foreign nations. That number has been growing every year, blooming during financial crises and continuing to rise rapidly under President Trump’s tax cuts and spending increases (which has added about $3 trillion to the debt over the past 3 years).¹¹
Nobody knows when the accumulation of all this debt is going to come back to bite us, but we can predict the consequences¹²:
- Lower Standard of Living — As the U.S. debt gets more precarious, the Treasury Department will have to raise yields to attract more investors. More government budget will have to be used to pay the interest on the debt, thereby lowering the amount available for government services and programs. Less money available for economic enhancement also means a less vibrant economy. In addition, it will be costlier for Americans to borrow money to buy a car or go to college.
- Inflation — As treasury yields increase, corporations will have to compete for investment dollars by raising corporate bond yields when they want to borrow money. Then, they’ll have to raise prices to cover the increased cost of paying interest on their borrowed money.
- Depressed Housing Market — Mortgage rates are tied to interest rates determined by the Federal Reserve, which will rise. Therefore, fewer families will qualify for large mortgages, reducing demand and pulling down home values.
- Less Investment in the Private Sector — Higher treasury yields means the riskier corporate bonds will look less appealing, resulting in the reduction in spending in the private sector. The increased cost of borrowing will also discourage businesses from investing in new projects.
- Loss of American Power and Influence Abroad — If the country is at risk of defaulting on its debt payments, the U.S. will lose international influence. It’ll be harder for the country to borrow, affording less flexibility to respond to war or crisis, making us beholden to creditors.¹³
These consequences paint a scary picture and a strong argument for being responsible in our spending. However, the vast majority of experts agree that fixing our nation’s long-term fiscal challenges is not to be done during an existential crisis like the one we face now. They assert that to actively protect ourselves from immediate and lasting damage to our health, economy, and society, we will have to accept a significant increase in the national debt. So by going the government spending route, we must expect consequences down the road: we’ll probably see higher taxes and possibly the reduction in several government programs, else an early onset of a debt doomsday.
Trust
Alright, I think we’ve covered it, at least at a high level. We’ve talked about how a virus-ravaged economy isn’t really good for anyone. We explored how going down the path of little to no government spending is a path that pretty much lets Jesus take the wheel. We could avoid catastrophe if the virus miraculously disappears or a reliable vaccine comes out in the next couple of months, but that seems pretty unlikely. Compare that to the alternative of big government relief bills: a trade-off between adding significant debt today and the possibility of combating the virus and mitigating its economic consequences. That could be the better option. But can we trust Congress and our president to come up with efficient and effective spending bills and programs to defeat the virus and save the economy? Can we trust ourselves to be disciplined and responsible in paying down our debt in the future? If we can’t, well, we can always close our eyes, hold hands, and leave it to fate.
1: https://www.statista.com/statistics/273909/seasonally-adjusted-monthly-unemployment-rate-in-the-us/
2: https://www.moneycrashers.com/effects-recession-families/
3: https://www.investopedia.com/coronavirus-aid-relief-and-economic-security-cares-act-4800707
5: https://www.bbc.com/news/health-51665497
7: https://coronavirus.jhu.edu/data/mortality
9: https://www.nytimes.com/2020/05/27/opinion/coronavirus-economy-stimulus.html
10: https://www.cnn.com/2020/05/06/business/us-debt-deficit-coronavirus/index.html
12: https://www.investopedia.com/articles/economics/10/national-debt.asp
13: https://www.pgpf.org/the-fiscal-and-economic-challenge/fiscal-and-economic-impact
