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Covid stimulus and trillions for infrastructure spending ignore that U.S. debt still matters

A flood of spending and a flood of debt — all of it pretty popular with voters. If they don't care, why should the politicians?
All that government spending and borrowing comes at an eventual cost, both to taxpayers and the health of the economy overall.
All that government spending and borrowing comes at an eventual cost, both to taxpayers and the health of the economy overall.Yulia Reznikov / Getty Images

Do you know the cost of the Covid-19 relief bill that President Joe Biden just signed? It’s the one that includes more stimulus checks, more unemployment benefits and more aid to cities and states. The Congressional Budget Office estimated the price tag at $1.86 trillion over 10 years — but we’ll give you full credit if you guessed “nearly two trillion bucks.” Most news headlines have opted for a nice, round $1.9 trillion.

Aside from possibly winning an online current events quiz, there’s little need for precision. After all, those numbers may well turn out to be way off. The package contains a bunch of tax credit expansions — the child tax credit, the child and dependent care tax credit and the earned income tax credit — that are presented as temporary. They might not be, however, given their popularity, especially among Democrats. So that "nearly $2 trillion" bill could really be a more than $3 trillion bill, according to an American Enterprise Institute analysis.

Then again, what’s another $1.5 trillion or so when you just spent $5 trillion? (Indeed, no rich country has spent more on pandemic relief than America.) Additionally, the upcoming Biden proposal to overhaul infrastructure and address climate change may call for spending another $3 trillion, with only a portion paid for via tax hikes, perhaps.

Measured as a share of the economy, the federal budget deficit will total 15.6 percent of gross domestic product this year and average 4.7 percent over the coming decade, according to the fiscally hawkish Committee for a Responsible Federal Budget. And those historically big deficits — only the ones during World War II were bigger than what we’re going to see this year — will drive a bigger overall debt. The group estimates that the enactment of the stimulus bill, or the American Rescue Plan Act, will alone push the national debt to 108 percent of GDP this year, surpassing the record of 106 percent set just after World War II.

A flood of spending and a flood of debt — all of it pretty popular with voters. If they don’t care, why should the politicians? Even Wall Street seems blasé about the risk. As the expected cost of the American Rescue Plan rose, so did growth and job estimates at the big banks.

For the moment, at least, it may seem like there’s been a sea change in economic thinking about debt: that concern about debt and deficits is an anachronism with only a few gray-haired scholars or retired bond investors still purporting some concern. It’s really not something to be worried about after all and definitely not something to prevent popular legislation from being passed.

But there really hasn’t been a big change. Econ 101 is still in effect. Over the long run, bigger deficits mean government is gobbling up funds that could otherwise be available for private investment. And less investment means economic growth is slower than it would be otherwise. A slower growing, less productive economy is one where wages and living standards also grow more slowly than they would otherwise, if at all.

What economists don’t know is how much debt is too much debt for the United States. Good thing they have more time to think about the problem: Few economists have argued that the U.S. should have done anything other than spend massively over the past year to blunt the worst economic effects of the pandemic. Even the ones who think the most recent relief bill was either too big or even unnecessary — a group mostly on the right but not entirely — aren’t warning of impending doom given the need for relief and lack of market concern.

But just because it doesn’t automatically follow from our ballooning deficits that there’ll be a debt crisis — as happened in Greece with the global financial crisis of 2008 — that doesn’t mean big debt isn’t a big problem. Higher debt levels can be like sand in the gears of the American economic machine, causing it to operate a bit less efficiently and less powerfully year after year. After a massive economic downturn thanks to Covid-19, we can afford that slowdown even less. Not only do we need economic growth to help pay down that debt, but some economists worry the post-pandemic world will be one of less risk-taking and less innovation.

That said, high debt does make an economy more vulnerable to inflation and the unexpected. The CBO concluded in its 2020 budget outlook, “The growing debt burden also raises borrowing costs, slowing the growth of the economy and national income, and it increases the risk of a fiscal crisis or a gradual decline in the value of Treasury securities.” In other words, there is still reason to think that an ever-growing debt could eventually freak out investors who might worry that Washington will either default on all those U.S. bonds or, more likely, pay them back with an inflation-ravaged currency.

In any event, it’s poor governance to assume tomorrow will be just like today. Voters should be alarmed when policymakers feel they have license to borrow and spend with little consideration about risk and tradeoffs. It’s OK to borrow big in a crisis. It’s also OK to spend a lot of money on stuff that government is supposed to provide: defense, a safety net, infrastructure, scientific research. But there is no money tree. All that spending and borrowing comes at an eventual cost, both to taxpayers and the health of the economy overall. That was true before the pandemic, and it will be true long after.