Given the economic hardships caused by the pandemic, the federal government was right to authorize stimulus checks and approve loans to help people cope with the sudden drop in economic activity.
But no one should discount the seriousness of what $3 trillion in new spending will do to the nation’s heavy debt burden, nor its impact on future generations. Washington was irresponsible leading up to this crisis. Once it has passed, Congress and the president need to work to reduce spending.
We are aware of the new “Modern Monetary Theory” that says governments that control their own currency — and the United States has done so since it left the gold standard and made the value of the dollar dependent on the full faith and credit of the government — may order up and spend however much money they want, free from adverse consequences. So long as interest rates remain low, the risk is minimal. The only limit is the ability of a nation’s workers, technology and resources to produce. Exceed that and you may encounter inflation, the thinking goes.
However, we prefer the opinion of Desmond Lachman, resident fellow at the American Enterprise Institute who, in a recent blog post, labeled this thinking dangerous. Among other things, he said, “when something is unsustainable it will at some point come to an end. In the case of the U.S., an unsustainable public debt situation might come to an end in the form of a dollar crisis.” This would happen when foreign investors begin to fear the United States has few options left other than to print money and induce inflation to minimize its debts.
Federal Reserve Chairman Jerome Powell sounded a similar note last week when he told the Senate Banking Committee that overspending has put the nation on an unsustainable path.
“The United States federal budget has been on an unsustainable path for years now,” he said, adding “the debt is growing faster than the economy, so debt-to-GDP is rising. That is, by definition, unsustainable.”
Consider that the annual budget deficit in Washington now is approaching $3 trillion, and that the national debt has surpassed $26 trillion. Interest on the debt is now $385 billion. This is money that must be paid through taxes before the government can begin funding necessary programs. It also is money that otherwise could be in private hands, funding businesses and innovations that create jobs.
In an op-ed published by insidesources.com, Duquesne University economics professor Antony Davies and the head of the Center for the Philosophy of Freedom, James R. Harrigan, calculated how long it would take the federal government to run out of money if it had an entire year’s tax collections in a lump sum and began spending at the current rate on Jan. 1. The answer is June 21, a date they labeled as “deficit day,” noting that everything spent after that day would be with borrowed money.
Because of the pandemic, this date has moved farther up the calendar than at any time since the end of World War II. Prior to this year, it had averaged sometime in October since the great recession.
“If federal spending returns to normal in 2021, we could achieve a balanced budget if Washington froze federal spending for almost a decade,” they wrote. If spending were held to the level of economic growth for every year thereafter, “it would take an additional 50 years to pay off the debt.”
The economy may return to prosperity once the threat of the novel coronavirus is gone, but fending off a much more damaging fiscal day of reckoning, in which the world loses faith in the dollar, will take hard work and sustained effort. That effort isn’t helped by the notion that deficits don’t matter.