The latest COVID-19 relief package looms large, but too many commentators miss the forest for the trees.
Outrage at various provisions, such as the unconditional cash payments or the extension of unemployment benefits, is certainly understandable. But we need more concern over what this package will mean for the future of U.S. public finance. Don’t lose sight of overall fiscal sustainability, which is rapidly eroding. $1.9 trillion is a lot of money. We should care how it’s spent. Yet, the size of the package matters independently from its composition. Perhaps because the media and public officials are desensitized to this amount in the aftermath of 2020’s spending extravaganza, we haven’t heard much about the sheer size of this latest budget-buster. That’s unacceptable.
Last fiscal year, Uncle Sam ran a whopping $3.1 trillion deficit. That’s roughly 15% of GDP, making it the largest as a share of the economy since World War II. These numbers boggle the mind, but we must remember that Washington’s public finances have been a mess for decades. Publicly held national debt is about $21 trillion, roughly the size of the U.S. economy. We’re deep in the hole and digging deeper every day. Many economists insist deficits and debt accumulation don’t matter. Interest rates are very low, after all. Therefore the costs of spending massively in excess of revenues are small, compared to the benefits. There’s some truth to this.
A deficit under low interest rate conditions doesn’t strain the public purse as much as an equivalent deficit under high interest rate conditions. Nevertheless, this Panglossian view is fundamentally flawed and dangerous to boot. First, and most obviously, interest rates won’t always be this low. Sooner or later, the global economy will start to pick back up again. When markets are happy, interest rates go up. The prospects for future growth means there’s higher demand for capital. Uncle Sam’s bonds have a special place in the world’s portfolios, but they’re still just one competitor for borrowed funds among many. Once rates rise, the costs of debt service can quickly become burdensome.
Second, contrary to fiscal policy best practice, relief packages are rarely “timely, targeted, and temporary.” Milton Friedman once quipped that there was nothing so permanent as a temporary government program. He was right. A government that showers goodies on its constituents immediately creates an interest group with a stake in keeping up the fiscal largess. Do you think public officials will be eager to end direct cash payments? Both liberals and “national conservatives” (but I repeat myself) can find ways to continue these policies using their preferred ideological justification. Perhaps Congress will retreat from the worst excesses of COVID-19 profligacy. But unless something extraordinary happens, we’ll be stuck with a permanently larger government, one that’s simultaneously more intrusive and less effective.
Third, even apart from nasty consequences, this degree of fiscal responsibility reflects poorly on the nation. We expect every household in America to make and stick to a budget. Yet when we act collectively, we pretend that fiscal responsibility is optional at best and downright silly at worst. The usual, puerile reply that “a government is not a household” misses the point. Making the books balance is a basic test of competency that we require of any organization. Budgetary failure is necessarily democratic failure. We reveal to the world we are unworthy of self-governance when we perpetuate this revolting display of political gluttony. Deficit apathy undermines the foundations of U.S. public finance.
To every politician who insists there’s “no constituency” for fiscal responsibility, I regret to inform you that in a battle between myopic voters and basic arithmetic, the arithmetic always wins. The time to get serious about spending is now.
Alexander William Salter is an associate professor of economics in the Rawls College of Business at Texas Tech University, the comparative economics research fellow at TTU’s Free Market Institute, and a Young Voices senior contributor. Follow him on Twitter @alexwsalter.
