There is no such thing as a free stimulus bill, especially when those bills contain lots of free lunches for households and businesses. The massive federal largesse, by exacerbating already rising budget deficit problems, has increased the cost of interest on the national debt and will make it more difficult to get the nation’s financial house in order.
When it comes to fiscal policy, it is impossible to know what the optimal course of action is. Consequently, policymakers must consider the costs of doing too much versus doing too little and choose the most effective or least costly option. That has been the case with the stimulus bills.
When the pandemic hit, it was clear that doing too little was not an option. The economy was shuttered by an external shock, COVID-19, and there was little the private sector could do to lead the recovery. The government’s role was to stop the bleeding and stabilize the economy, at all costs.
The December round of stimulus was a temporizing package, passed to provide time for the incoming administration to develop its own approach. It was too limited in size and time to sustain growth long enough for the vaccination process to get the virus under control so the economy could return to the next normal.
The most recent package, which is likely to be the last major stimulus bill passed, was designed to guarantee that the economy would not be hobbled by having done too little.
One major lesson learned from the Great Recession recovery is that without sufficient stimulus, the resultant expansion could be slow and tortuous. The disappointing growth in the 2010s resulted, at least in part, from limited initial federal financial support and subsequent spending cutbacks. Having been vice president during that time frame, President Joe Biden determined that doing too little would cost a lot more over the long run than doing too much.
Indeed, he might be correct. Growth this year looks as if it will be massive. A month ago, consensus forecasts were for the economy to expand by 4.5% to 5%, which is really strong. With the size of the latest stimulus bill known, the latest forecast by the Wall Street Journal panel of economists (of which I am a part) now thinks growth could approach a robust 6%.
To put that in perspective, at 6% growth, at the end of 2021, GDP would be within 1% of where it would have been if the pandemic never happened, and the economy expanded in 2020 and 2021 by the same 2.2% pace it did in 2019. The incredible economic rebound, driven by $5 trillion of stimulus funding, could almost totally reverse the negative economic effects of the pandemic.
But those expenditures come with a cost: The size of the national debt, which was skyrocketing before the pandemic hit, is a lot larger now. Interest expenses on that total are rising, as well. And when you add that to the already baked-in-the-cake deficits that derive from current spending and tax laws, the potential interest payments on the debt could become unsustainable.
Is the deficit or national debt too high? That is not a simple question to answer. Typically, economists look at ratios of deficits or debt to things such as the budget or the economy (GDP). No matter how you look at it, those ratios are high and in the case of debt-to-GDP, it is now at a level not seen since the end of World War II.
Ultimately, though, what really matters is the true burden of the debt: the interest cost of maintaining it.
The national debt is not going to be paid down. It exceeds GDP and is roughly four times budget expenditures. It is here to stay.
Consequently, how much interest we pay, as a share of the budget, is the critical issue, because soaring interest costs could crowd out other spending.
The Committee for a Responsible Fiscal Policy recently published a piece (titled How High Are Federal Interest Payments?) that puts in real-world terms the interest cost of the debt, which the Congressional Budget Office projects will total about $303 billion this fiscal year. As the report notes: “This amount is more than it will spend on food stamps and Social Security Disability Insurance combined. It is nearly twice what the federal government will spend on transportation infrastructure, over four times as much as it will spend on K-12 education, almost four times what it will spend on housing, and over eight times what it will spend on research and development.”
What’s worse is that the interest payments are this large despite the fact we are in an extremely low interest rate environment. As interest rates rise, the costs of carrying the debt will surge. If rates move back toward or exceed expected longer-term levels, interest expenses could approach the cost of Social Security.
The stimulus bills, which were necessary, did not get us into this potentially unsustainable debt burden situation. Past spending and tax policies are to blame for the vast majority of the current and future deficits. But they have added to the problem.
The complaints that the latest stimulus bill is too expensive because it causes the deficit to rise even further are just political rhetoric. Even if it is unnecessarily high, the excess spending is small compared with all the other factors driving up the debt. But the criticisms do highlight the fact that the projected path of the budget deficit and interest costs is unsustainable.
Once the pandemic is put largely behind us, stimulus spending will end. But some really difficult budgetary decisions will remain. Getting the deficit, debt and interest cost situation under control requires either raising taxes and/or cutting spending. Growing out of the problem is not an option. In this political climate, the battle over those changes could get really ugly.