Economists say that the federal government’s response to the coronavirus pandemic can and should at least double the annual deficit by $2 trillion or much higher.
“There’s potential for the deficit to hit 10% of GDP, and I’d say a fairly likely one,” Jared Bernstein told the Washington Examiner.
Bernstein was the chief economic adviser to Vice President Joe Biden from 2009 to 2011 and is now a senior fellow at the Center on Budget and Policy Priorities, a left-of-center think tank.
With the gross domestic product at nearly $22 trillion in 2019, a deficit that size could amount to more than $2 trillion.
On the other side of the political aisle, Doug Holtz-Eakin, who is president of the center-right economic think tank American Action Forum and a former director of the nonpartisan Congressional Budget Office, also projected a deficit-to-GDP ratio of 10% for 2020, if not higher.
“Ten is lower bound,” he told the Washington Examiner.
The current deficit-to-GDP ratio is just below 5%, according to the CBO, as deficits are expected to total over $1 trillion this year.
Washington has already enacted two anti-coronavirus bills totaling roughly $110 billion and is readying another piece of legislation costing at least $1 trillion. These bills are not paid for and will at least double the size of the deficit this year. If Congress and the administration enact additional bills that are not offset, they will add more to the already exploding deficit.
Still, economists of all stripes told the Washington Examiner that Washington should not concern itself with reducing the deficit as it combats the global pandemic.
“This is when we should run deficits,” Holtz-Eakin said.
Bernstein said that “it is antithetical to stimulus to offset its costs,” adding that “it’s not temporary measures like this that generate fiscal gaps … It’s the permanent measures that widen the gap between what you take in and what you spend.”
The provisions aimed at curbing the coronavirus are temporary.
Bernstein also noted that, during the last recession, the deficit-to-GDP ratio neared 10% before eventually lowering to roughly 2.5% after the crisis ended.
“In normal circumstances, your deficit goes up in recession and comes down in recoveries,” he said.
The deficit-to-GDP ratio usually increases during times of economic unrest. Olivier Blanchard, a former chief economist at the International Monetary Fund who is now a senior fellow at the Peterson Institute for International Economics, recently warned U.S. lawmakers on Twitter against becoming “squeamish” about using deficit financing to curb the spread of the virus.
Blanchard likened the current fight against the virus to going to war, and he highlighted that the deficit-to-GDP ratio ran as high as 26% during World War II.
The world is de facto at war (against the virus, rather than against each other—this is the good news…) With this in mind: US Federal deficits as a ratio to GDP: 1942: -12%, 1943: -26%, 1944: -21%, 1945: -20%. Let’s not be squeamish.
— Olivier Blanchard (@ojblanchard1) March 16, 2020
Similar figures today would imply deficits of about $5 trillion.
Economist Robert Fry, a former senior economist at DuPont, said that the stimulus bills should be deficit-financed until the bond market signals for fiscal responsibility.
“I think the bond market will tell you when we need to stop doing stimulus packages and worry about the deficit,” he told the Washington Examiner.
Fry said he thinks if the yield on the 10-year Treasury bond hits 3%, then Congress should turn its attention to lowering deficits. The yield on 10-year Treasurys is currently just above 1%, but it was recently below that figure as volatility in the stock markets drove investors to take shelter in Treasurys.
“The bond yields are not telling you that you have to stop yet, but that’s what is going to signal you’ve got to stop with deficit financing,” he said, adding, “I would not be trying to pare back the deficit right now. I think the timing would be terrible.”
