One reason why economists are viewed as modern-day Cassandras is that they tell us many things we don’t want to hear. Economics points relentlessly to the costs and benefits associated with particular decisions about alternative uses of scarce resources. Not everyone likes to be reminded of the trade-offs and unintended consequences that flow from different choices. Some of those side-effects touch upon political questions. How much liberty are we prepared to exchange for some assurance of security? Are we willing to accept the significant levels of economic inequality that go with the greater economic growth that raises overall living standards? Whether we like it or not, everything has a price.
The sharpness of these trade-offs becomes more acute during crises like the coronavirus pandemic. Governments are making decisions that they consider necessary to protect public health, and they do so knowing that many of those choices will have negative side-effects upon economic life. Their present focus is upon the more immediate consequences: shuttered businesses, unemployment, etc.
Good public policy, however, also considers the likely longer-term effects of emergency responses to crises. To my mind, three challenges loom especially large as governments respond to COVID-19. These concern (1) the implications for America’s national debt, (2) the opportunities created for irresponsible government behavior, and (3) the difficulties in winding back state economic interventions after the crisis.
America’s National Debt Challenge Just Became Much More Challenging
As of April 15, 2020, the International Monetary Fund estimated that $8 trillion in direct payments, loans and guarantees had already been expended by the world’s governments in response to the coronavirus pandemic. Of that amount, $7 trillion was spent by the Group of Twenty advanced and emerging economies. These expenditures far exceed what can be covered from tax-revenues (which will fall as a result of recession). Debt is subsequently being used to fill the gap. Economic forecasting is a hazardous exercise, but the IMF is predicting that the world’s gross fiscal debt will grow from 83.3 percent in 2019 to 96.4 percent of GDP this year. The envisaged growth in debt is even bigger for advanced economies: from 105.2 percent to 122.4 percent.
America is the biggest net-contributor to that global increase. Some are estimating that U.S. government debt could increase from over 100 percent of GDP in 2019 to between 130–140 percent this year. To put this in perspective, consider that America’s national debt after World War II was just under 120 percent of GDP.
As a rule, public debt is how countries like America have obtained more capital for investment in their economic growth. As Alexander Hamilton’s First Report on Public Debt (1790) pointed out, a public debt would allow those wanting to invest in America’s economy to purchase government bonds. If the interest was paid on schedule, and creditors developed confidence that it would be paid, the underlying securities would attain stability of value.
Over time, America has demonstrated a stellar record for debt-servicing. This has allowed it to borrow cheaply enormous amounts of money to fund projects like the Louisiana Purchase or fighting two world wars between 1917 and 1945. It’s often forgotten, however, that Hamilton also thought there should be limits to public debt. In 1795, he argued that the growing accumulation of debt was “perhaps the natural disease of all governments.”
For the past twenty years, the U.S. government has increasingly relied on debt to cover an ever-increasing revenue-expenditure gap. In fiscal year 2019, the federal government’s income was $3.5 trillion, while expenses amounted to $4.4 trillion. Two-thirds of those expenditures are mandated by legislation, with most of this being expended on social security, healthcare, and income security. The alternative to using debt to bridge the income-expenditure gap is to raise taxes and/or cut spending. Neither measure is popular with voters.
For most of America’s history, large peacetime debt has been viewed with disfavor. The U.S. government made a point of reducing debt after the two world wars. That mindset, however, has evaporated from our political landscape. Both Presidents Barack Obama and Donald Trump pledged to reduce America’s national debt. Both went in the opposite direction.
It’s entirely normal for the federal government to take on more debt in emergencies. But we should acknowledge that once the risk-level of a country’s national debt becomes considered problematic by investors, they will charge higher interest rates: the higher the interest rates, the greater the cost of servicing their debt. This can result in governments spending more and more on debt-serving and less and less on their core functions—or, worse, taking on even more debt to continue avoiding hard decisions.
I am not suggesting that America will confront the type of sovereign-debt crisis that roiled the EU between 2009 and 2013. Presently low interest rates and America’s enviable record for meeting its debt obligations hedge against that possibility. But it would be unwise to imagine that going from an already high by international standards national debt of 100 percent of GDP to somewhere between 130–140 percent in just a few months could not have negative repercussions in years to come.
One such possibility is an acceleration of inflation—something of which Americans below the age of 40 have little experience. As one 2019 Congressional Budget Office working paper stated, “a rising level of debt relative to GDP could increase the likelihood that, at some point, the government might have to increase the money supply to finance its expenditures.” That, it added, “could boost inflation, which would reduce the real value of principal and interest payments to existing bondholders.” This translates into bondholders insisting on higher interest rates to compensate for the extra inflation risk.
Not only would it mean even more government expenditure on debt-servicing: increased inflation also corrodes consumers’ purchasing power. This hurts the poor, those on fixed incomes, and people who lack the financial knowledge to navigate inflation.
Political Opportunism Abounds
One reason for the sudden expansion of America’s national debt has been to fund interventions designed to counter the effects of freezing economic activity. Careful reading of the 880 pages of the $2 trillion CARES Act reveals the sheer scale of these interventions. They include extended unemployment insurance, payments to specific income groups, grants to hospitals, loans and loan guarantees to large corporations, partly forgivable loans to small businesses to prevent layoffs and closures, and payments to state and local governments.
Some of these interventions are highly targeted and thus minimize intermediaries. Others, however, do not. Officials in the Treasury Department and the Small Business Administration have been given wide discretionary powers to determine who does and does not receive assistance. That is a recipe for government officials trying to pick winners and losers—something they are infamously bad at. There is already considerable evidence of this occurring.
A related problem is that the CARES Act permits the Treasury to acquire equity stakes in large companies as a condition of lending, to “provide appropriate compensation to the federal government.” So far, this has not been required by the Treasury. If, however, the Treasury took any such equity stakes, it would increase the likelihood of company boards’ decisions being driven by political priorities of the Administration of the day instead of the type of sound business practices essential for economic recovery.
Nor can we discount the fact that many political leaders will view the coronavirus pandemic as an occasion to address non–COVID-19-related problems. On April 11, the National Governors Association stated that federal funds “should not be tied to only COVID-19-related expenses.” Congress, they insisted, “must amend the CARES Act to allow this flexibility for existing federal funding.”
This language was bound to encourage fiscally irresponsible states with massive unfunded liabilities to press for federal dollars to be used for bailouts. Less than a week after that NGA statement, for example, Illinois’s Senate president wrote to his state’s Congressional Delegation, asking them to push for Illinois to receive an extra $41 billion of federal assistance to address the pandemic’s effects. This is despite Illinois’s governor arguing that COVID-19-related budget shortfalls for 2020 and 2021 amounted to $6.2 billion.
What accounts for the $34.8 billion difference? Among other things, the Senate president asked for $10 billion of funding to be directed to replenishing the state’s pension fund and $9.6 billion for municipalities’ retirement systems. These are cash-strapped programs whose plight has nothing to do with COVID-19 and everything to do with years of fiscal irresponsibility. In this light, can anyone doubt that bailouts conducted under the guise of COVID-19 responses would simply incentivize even more fiscal recklessness by elected officials in the future?
Retracting the State Is Hard
Beyond specific challenges associated with the CARES Act, a bigger problem presents itself: winding back the scale of government intervention into economic life after the pandemic will not be easy. By that, I don’t mean that we cannot put the interventionist genie back in the bottle. Governments can always make that choice. But doing so will be difficult given the political climate that has developed over the past five years.
On the right and the left of American politics, substantive pressures to increase state intervention were well in place before COVID-19 hit America. Economic nationalism has been growing on the right since 2015. Some conservatives now number among the country’s leading advocates for protectionism and widespread industrial policy. Prominent progressives like Senator Elizabeth Warren have been pressing for policies that, truth be told, are similar in scope and intent to those of economic nationalists, albeit with much pandering to left-leaning groups like environmentalists, union officials, woke capitalists, and academics built into her propositions.
This preexisting context will enhance pressures to make some emergency interventions more permanent. How long will it be before some legislators start claiming that there are other reasons besides pandemics for publicly funded payroll-protection plans to cover any number of situations? Or consider the establishment of government equity stakes in large companies that I mentioned above. That would be one gateway for realizing some of Senator Warren’s propositions for reducing the independence of boards of large publicly traded companies.
Now add to these dismal prospects this melancholy fact: many younger Americans have now experienced two major economic downturns in just twelve years. While the coronavirus’s causes have nothing to do with capitalism, many believe that economic globalization helped facilitate the virus’s entry into America. This reduces the probability that many of those 49 percent of millennials who expressed a positive view of socialism long before anyone had heard of COVID-19 will adopt favorable views of economic freedom in the near future. Instead, the coronavirus pandemic may reinforce trends already underway in many Americans’ economic attitudes. And if there is anything that economists have learned over the past thirty years, it is that people’s values and expectations have far-reaching effects upon economic life.
From this standpoint, COVID-19 could augment emergent attitudinal obstacles to the pro-growth policies that America will need after our corona-nightmare has passed. As much as some on the left and right are reluctant to admit it, growth is the only alternative to mass poverty. Moreover, without economic growth, it becomes harder to sustain the jobs, businesses, philanthropy, cultural activities, and educational, legal, and religious institutions that help us pursue and freely choose goods like creativity, knowledge, work, beauty, charity, and truth that are central to human flourishing.
Should the coronavirus result in more Americans’ becoming indifferent to these realities, it would surely constitute one of COVID-19’s greatest long-term victories over us.