Historic Levels of Unemployment Claims and Business Shutdowns Have Required the Greatest Surge in Government Debt Since WWII
Because of the Covid-19 pandemic the Federal government, with the support of both parties, has issued close to $3 trillion in government debt to stop the economy from cratering. However, this debt could also create an opportunity to expand our economy. First, let’s review how we got here.
With stay-in-place laws and mandatory closing of most businesses, unemployment has skyrocketed. Before the pandemic it was at 3.5 percent on December 20, as of April 2020, the Economic Policy Institute has estimated that unemployment rate to be at 18.3 percent. Many economists using April’s Labor Department data predict that the unemployment rate could reach 25 percent this summer if the existing practices remain in force. That level would match the peak of the Great Depression in 1933. However, then it took three years not six months to reach that level.
The health security measures taken so far by states and the federal government have also dramatically reduced the size of our 2020 GDP. Fitch Ratings predicts it will shrink by around 6 percent from 2019. This would wipe out all the growth that took place in the last two years. The GDP has increased by 2.3 percent in 2019 and 2.9 percent in 2018.
With numbers like these, both President Trump and Democrat leaders pushed for federal loans. Trump initially said in February, “I think that we’re doing a great job,” requesting $1.25 billion in new funding to address the coronavirus pandemic. However, the House Democrats passed the CARES Act ( Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) at a much higher level of funding.
In the first week of March, Congress with bipartisan support replaced that bill with a Phase 1 funding package totaling $8.3 billion to treat and prevent the widespread transmission and effects of COVID-19. By the end of March, a new Phase 3 added $2 trillion more and was passed by the Senate unanimously and in the House by voice vote, with Trump signing it the next day. Still waiting in the wings is CARES 2, which provides another half-trillion for emergency relief. It is scheduled for a House vote when House Speaker Nancy Pelosi determines that it is safe for the members to return to D.C.
These loans are pumping up government debt to new levels. Previous government spending increases and tax cuts had already pushed U.S. government ratio of debt to the GDP to nearly 80%, the highest in over 60 years. It was only 35 percent at the end of 2007. Germany’s second-largest bank, Commerzbank, believes that the current coronavirus relief packages will push that figure to 96% by 2022.
Although the Republicans are reluctant to push for the larger CARES 2 funding package, economists have been predicting that more support for workers and companies harmed by the pandemic will be required. However, with unemployment approaching an all-time high,
tax revenue will decline along with economic activity, pushing the government deficit even further. Bernd Weidensteiner, one of the German bank’s economists, says that could well happen if Congress passes further aid packages and the economy does not revive quickly; US debt could then exceed the previous high of 106 percent set right after WW II.
The Next Administration Faces Two Options for Addressing Our Current and Growing Government Debt
Next year’s administration, whether under Donald Trump or Joe Biden, will face a huge federal debt due to the Covid-19 pandemic. There are two different approaches to take. On the whole, conservatives support paying off the debt as soon as possible to avoid inflation, while liberals support using debt to expand the nation’s services and economy.
Balance the Budget by Cutting Public Services
This month the leaders of the conservative Republican Study Committee (RSC) sent a letter to the top four leaders in both chambers saying that there is an “urgent need” to address the “fiscal health of our nation” because of the growing debt created by dealing with the COVID-19 pandemic. Their solution is to offset debt payments with spending cuts and to limit the growth of the federal revenue to 60 percent of the GDP.
Their approach is similar to the conservative movement to pass a Balanced Budget Constitutional Amendment, which would require the federal government’s total revenues to be equal to or greater than total expenses. Inflation would be avoided by cutting or curtailing the growth of social spending, like social security and Medicare entitlement programs. That effort has been around since the 80s.
President Ronald Reagan pledged in his first term to do “all I can” to get the Republican-dominated Congress to pass a resolution for a constitutional amendment to require balanced federal budgets. But in his two terms, he never proposed a balanced budget to Congress. Instead, he ran budget deficits as a result of providing business tax cuts. In particular, real estate developers benefited, like Donald Trump, who amassed $3.4 billion in debt by 1990, and was personally liable for a quarter of it. Meanwhile, during Trump’s presidency, our nation’s deficit is up nearly 50 percent from Obama’s last term by pushing big military spending increases and additional tax cuts.
Bush, like Reagan, believed in a balanced budget but continued to run deficits. His cure was to make funding cuts in social spending that impacted Social Security, Medicare, and education. However, Democrat Presidents Bill Clinton and Barack Obama also worked to achieve a balanced budget.
Clinton vowed to reform welfare but in 1996 when the Republicans gained control of both Congress’s chambers and he faced an election for his second term, he signed off on Republican legislation. It ended six decades of federal guaranteed help to the poorest and turned over the responsibility to the states. In the process, he balanced the budget – by abandoning his initial proposal to increase welfare spending by $10 billion and instead cut it by nearly $55 billion.
President Obama also pursued a balanced budget when he convened the bipartisan Simpson-Bowles “National Commission on Budget Responsibility and Reform” in 2010. It recommended a complete overhaul of the tax code, with the objective of lowering the debt-to-GDP ratio to 60% by 2023. Among its recommendations was increasing the normal retirement age to 69 by 2075, reducing federal retirement benefits, school loans, and farm subsidies. Congress never adopted it.
New York Times columnist Paul Krugman, argues that conservatives use budget deficits “as an excuse to cut social programs” — for example, a number of states have made it much harder to collect unemployment benefits when their budgets shrink. State business tax revenue has been drastically reduced by measures to control the Covid-19 pandemic. The Center on Budget and Policy Priorities estimates states could suffer a collective shortfall of $500 billion through the fiscal year 2022. Unless they receive national assistance, they will have to eliminate services to both citizens and businesses.
State assistance has been blocked by Senate Majority Leader Mitch McConnell; he says it would cost too much. He said if states cannot afford to handle the coronavirus pandemic, they should declare bankruptcy. There is a certain irony in that suggestion since McConnell’s Kentucky is one of only four states where local and state debt exceeds 90% of their combined revenue. Despite Trump tweeting, “Why should taxpayers be bailing out poorly run cities and states, in all cases Democrat-run and manage…” three of these four states have fiscally conservative Republican governors.
Focus on Expanding the Economy, not Balancing the Budget
Although cutting debt to achieve a balanced budget may still be pushed by Trump or Biden, the Covid-19 pandemic has created a new set of conditions. An increase in federal debt may not be a problem but a means to sustain a growing economy. Krugman recently wrote, “While we will run very big budget deficits over the next couple of years, they will do little if any harm.”
A report from the Brookings Hutchins Center on Fiscal and Monetary Policy came to the same conclusion. The world market is “awash in savings; people and institutions with savings are particularly eager to invest the money in U.S. Treasury debt right now.” This makes it “easier for the U.S. Treasury to borrow more without being forced to pay much higher interest rates;” And, “with interest rates at historic lows… investment demand is likely to be very low in the face of the uncertain economic outlook associated with the pandemic.”
An industrialized country can have a ratio of government debt to GDP to be well over 100 percent, and still have a growing economy without excessive inflation. Artie Green of Cognizant Wealth Advisors suggests looking at Japan as a positive case study. It has 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.
Four academics from the U.S. and Europe in the field of economics issued a paper on why running a government budget deficit is stabilizing instead of destabilizing, if it is used to invest in full-employment strategies and assisting small businesses. Both the owners and their employees’ benefit. The owners receive financial assistance to keep their businesses alive and their workers employed during emergency conditions, like the pandemic or the last recession
They point out that in past instances when the debt was expanded, like the Obama bank bailout after the 2008 crash, the Trump tax cuts and Coronavirus financial bailout, money was not used to finance new infrastructure, expanded employment, or improve living standards. Instead, most of it was given to the finance, insurance, and real estate sectors of our economy so that they could remain profitable.
This approach, highlighted by the balance-the-budget mentality and sustained by the belief that financing investors will create good-paying jobs, has been pursued by both Republican and Democrat administrations. The result is a gradual but measurable shift in wealth from middle class working families to a thin slice of the population whose wealth is measured in billions of dollars.
A report by Chuck Collins of the Institute for Policy Studies found that since 1980, the taxes paid by billionaires, measured as a percentage of their wealth, dropped 79%. He also found that after the 2008 financial crisis, it took less than 30 months for billionaire wealth to return to its pre-meltdown levels. But as of 2019, the net worth of middle-class families has yet returned to the 2007 level of wealth. “People went into the pandemic with the economic hangover from the Great Recession,” he says.
In order to have a growing economy, the federal budget will need to lift up employee’s wages. Our economy is consumer-driven and dependent on small businesses for sustaining our workforce. Consumer spending accounts for 70 percent of American economic growth. Over 99 percent of America’s 28.7 million firms are small businesses and they create two-thirds of net new jobs.
The Nation Needs a Plan for Moving Forward
The next presidential administration must have a plan for dealing with the Covid-19 induced government debt. The Trump administration’s tax cut and Covid-19 government debt cut services to balance the budget. If Biden is to offer something different, he needs to articulate how our current debt does present a challenge but also an opportunity to sustain and expand our economy.
The closing down of businesses and the restrictions of personal travel have hurt small businesses and their employees. It has also slowed down the spread of the pandemic. But it has come with a huge economic cost, resulting in protestors across the country demonstrating against these protective measures. They have legitimate concerns, but their actions are promoted by interests that want to see government funding flow to those least in need of assistance.
That practice will continue to hinder middle-class incomes from keeping up with increasing living costs. It produces anger, resentment, and a willingness to support whoever is willing to take drastic steps to alter their slide away from a stable income and secure future. In other words, they support candidates, like Donald Trump, who run against the government because it has failed to protect them. Such leadership does not seek solutions but someone to blame: a deep state of elites, dangerous migrants, fake media, and government-funded scientists. It is a pattern we are now seeing in countries with weak democratic institutions, like a free press or an independent judiciary. These countries will either face social unrest or move to cripple those institutions that protect their citizens.
The U.S. does not have to go down that path. The next administration can choose to use our debt to create decent-paying jobs and update our aging physical infrastructures. The public, the voters, need to hear a plan. One that uses the federal budget to provide us both economic growth and a safer, healthier environment. We need a leader that moves beyond blaming others for our problems to one who corrals our debt as a resource, not a burden to fund such a journey. Biden must step up to that challenge if he is to be a viable alternative to Trump.