On March 11, President Joe Biden signed into law a $1.9 trillion COVID relief measure, which follows two other generous COVID packages passed by Congress during former President Donald Trump’s administration. These measures will send our nation’s finances further into the red.
This year, our federal budget deficit is expected to equal or exceed 10% of our economy, or GDP. Debt held by the public will exceed the size of our economy for the first time since World War II, when we borrowed heavily to finance our massive war effort.
Long-time readers of my column might expect me to sound the alarm about these numbers, as I have before. But I agree with Federal Reserve Board Chairman Jerome Powell and Secretary of the Treasury Janet Yellen, who argue that now is not the time to cut spending or raise taxes in order to reduce the deficit.
Don’t get me wrong. I am concerned about the path of our nation’s finances in the coming years. But as I’ve said before, the best time to grapple with our fiscal woes is when the economy is strong.
Why? A strong economy — driven by healthy business and consumer activity — doesn’t need extra stimulus from government spending.
But our economy is still struggling to gain enough momentum to pull out of its COVID-induced recession. Withdrawing the extra firepower provided by recent emergency spending packages would likely stall the recovery, prolonging the damage to smaller and larger businesses and sending the unemployment rate back up.
We’re fortunate that interest rates are very low and that the Federal Reserve aims to keep them that way at least until 2024. This means that interest payments on our federal debt also are low and don’t add much to our overall spending levels. (When the Treasury Department sells U.S. Government bonds and notes to finance federal spending, it then pays interest to bond and note holders. Low interest rates mean low payments to holders of U.S. Government debt.)
But this picture won’t last forever. If we’re fortunate, self-driven economic activity will rebound by later this year and hopefully carry forward into next year and beyond.
And we can’t count on interest rates to remain low forever. Some analysts fear a resurgence of inflation from all the extra stimulus being put into our economy by Congress’ COVID relief packages and the Federal Reserve’s large asset purchases. Even without inflation, the Fed surely will raise interest rates when our economy and employment levels rebound.
I’ve said it before, but there are only two ways to bring our federal spending and revenues into closer alignment. And that is by cutting our spending (or at least slowing its growth) and/or raising revenue through taxes (either higher rates or fewer tax breaks).
It’s simple math.
The question is whether our nation — we the public and our elected leaders — will be prepared to make the hard choices needed to put our fiscal house in order at some point.
I used to be an optimist, believing that when the risks of pushing our growing debt onto future generations were made clear to voters, then our political system could grapple with the very difficult choices involved, especially those involving the shaky long-term health of Social Security and other entitlement programs.
Now I agree with former President George W. Bush’s budget director, later Indiana’s governor, and now Purdue University president, Mitch Daniels. Known for his prudent budget management, Daniels wrote a Washington Post opinion piece in January, stating in part:
“I conclude, reluctantly and dejectedly, that it’s time to face the unpleasant facts. The past decade demonstrates amply that our political process is not capable of the kind of decisions that are necessary.”
But the question of putting our federal finances in order is a question for the future, in my view. Now is not the time to pull the supports out from under a still-fragile economy and labor market.
Joanna Shelton was Deputy Secretary General of the Organization for Economic Cooperation and Development (OECD) in Paris; held senior positions in the executive branch and Congress in Washington, D.C.; and has taught at the University of Montana.