Economy

Has the U.S. Government Finally Spent Too Much?

When COVID-19 arrived in America, Uncle Sam was already deep in debt.

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When COVID-19 arrived in America, Uncle Sam was already deep in debt. The federal government was poised to have a permanent annual budget deficit of at least $1 trillion. Debt was already sky high thanks to demographic trends and a few entitlement programs that experts had warned us about for decades. But after the most recent three months of frenzied, bipartisan spending, those previous balances seem like small potatoes.

Emergency spending related to COVID-19 has increased government outlays by $3.6 trillion. The net deficit impact of this fiscal incontinence is roughly $2.4 trillion. So far, $1.4 trillion of this authorized spending has been committed. Another $400 billion has been authorized through executive action, with a net deficit impact of $80 billion. And $300 billion of that $400 billion has already been committed.

The Federal Reserve has made what is essentially an open-ended commitment to continually buy debt from states, municipalities, and businesses, and to purchase treasury bonds, notes, and bills. The Fed has printed and loaned out $2 trillion so far and is expected to create $3.5 trillion in new money by the end of 2020.

Where is all the new spending going? There was the creation of a $500 billion fund for businesses with under 10,000 employees or less than $2.5 billion in annual revenue—a fund that includes $25 billion for passenger air carriers, $4 billion for cargo air carriers, and $17 billion for businesses "critical" to national security. Eligibility for Economic Injury Disaster Loans from the Small Business Administration was expanded, in addition to $649 billion in small business loans to companies with fewer than 500 employees though a newly formed Payroll Protection Program.

Medicare payments to medical providers from May 1 to December 31 have been increased; Congress has suspended federal student loan payments and interest through September 30 and created a Higher Education Emergency Relief Fund; and a new line of credit was extended to the U.S. Postal Service. With millions thrown out of work, Congress passed significant paid leave legislation and an unemployment insurance expansion. It also sent checks directly to millions of Americans.

Looking at the spending that had passed as of early May, Brian Riedl of the Manhattan Institute predicted that the budget deficit would be $4.28 trillion in 2020 and $2.19 trillion in 2021. This year's deficit is estimated at 19.3 percent of gross domestic product (GDP), nearly double the peak deficits during the Great Recession and second only to the deficits during World War II. Over 10 years, that spending is projected to add nearly $8 trillion to the national debt, pushing the debt held by the public to $41 trillion, or 128 percent of the annual GDP, within a decade. This debt-to-GDP ratio will exceed even that at the height of World War II. Moreover, the national debt came down after that war ended—but continued Social Security and Medicare shortfalls will keep the current debt rising indefinitely.

The numbers above assume no new additional spending. But of course such an assumption is utterly unrealistic. As of this writing, Democrats have proposed another $3 trillion stimulus bill. While that particular legislation probably won't get very far in the GOP-controlled Senate, by the time you receive this copy of the magazine, it isn't crazy to assume that President Donald Trump will have signed a massive spending bill with more Republican support. The White House is already talking about a cut to the capital gains tax and a payroll tax holiday that would likely speed up the Social Security trust fund depletion date by five or six years.

Extravagant money printing, increased spending, government meddling in the labor market, and corporate bailouts are sure to have consequences—but how exactly will those consequences play out?

I'm most uncertain about the first item on that list. Scholars can't seem to agree about the likely effects of printing money under the current circumstances.

Deflation happens when the prices of goods and services drop. Although such an outcome would be hard on some businesses, others would appreciate the falling input costs, and consumers would reap large benefits. The latter half of the 19th century, which was marked by long periods of deflation, was also a period of remarkable economic growth.

Basic economic theory suggests that printing money should decrease its value, driving up prices. However, as long as the demand for goods is crippled by the current public health crisis, the pressure on prices will likely be downward, even with an increased money supply. The speed at which the economy is reopened and American consumers resume spending their money—as well as the speed at which production returns to normal—will determine how much (if any) inflation we eventually see. It's virtually impossible to know ahead of time how these competing forces will balance out.

Even without severe deflation or inflation, a long-term increase in government outlays is bad news for America's future. While emergency spending generally falls over time as the underlying crisis passes, economist Robert Higgs persuasively documented in his book Crisis and Leviathan that some emergency spending does not ever go away; government grows permanently larger as a result of intervention.

This is very much a problem. In a recent analysis of the current situation, economist Jamus Lim wrote that "large fiscal expenditures, as well as more loans by households and firms, will lead to sharp increases in public and private debt in the near future" and that "increases in total debt to GDP have significant negative effects on [economic] growth."

In a review of academic papers published since the Great Recession, my Mercatus Center colleague Jack Salmon and I confirmed that insight. All but two of the studies found a negative relationship between high levels of government debt and economic growth. The empirical evidence overwhelmingly supports the view that a large amount of government debt hurts economic growth, and in many cases the impact gets more pronounced as debt increases. Prior to the COVID-19 crisis, Salmon and I calculated that "the effects of a large and growing public debt ratio on economic growth could amount to a loss of $4 trillion or $5 trillion in real GDP, or as much as $13,000 per capita, by 2049." And spending has only shot upward since.

Is there a best-case scenario? Sure. If a vaccine or a cure is discovered rapidly, Uncle Sam will lose a large part of its excuse to keep spending money at this rate. There is a chance that many of the rules and regulations lifted during the crisis won't be coming back, which could unleash new avenues for innovation and economic growth. And considering the abysmal failure of the federal government to head off and respond to the crisis, one can hope we'll see a newfound recognition that our big-spending and unwieldy government is a problem, not a solution. But a lot of denial is required to believe these best-case scenarios are realistic.

NEXT: Brickbat: Ooooh, That Smell

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  2. “Has the U.S. Government Finally Spent Too Much?”

    Whatever it takes to get Trump reelected. It’s worth every penny spent! We’re at war with fascist communists! And our Dear Leader can later decide to change the math. It’s so simple!

    1. The Democrat controlled House wants Trump reelected?

      1. The last time the deficit went down significantly over four fiscal years were the middle four years of W, when he had a GOP House and Senate.

        1. Bullshit.

          The eight years of Obama the deficit went from the trillion dollar + Bushpig deficit to the $450 billion that Trump later blew up six fold.

    2. Even I think you’re boring.

      You should change your name to “Lord of Tedium”

      1. What are you doing sarcasmic? All of us that don’t worship at the alter of Drumpf must be steadfast in our alliance and stick up for each other no matter what we post!

        1. Tulpa/Mary/Hinn is impersonating people again.

          1. I thought it was Tulpa/Satan/Mary’s period?

            I just can’t keep up anymore.

            1. Whatever it is, it’s psychotic.

              1. Cry more.

  3. The only thing that matters is who wins the elections in November.
    In particular, if a certain party keeps the senate and white house, and also recovers the house, or if the other certain party sweeps all three.

    1. Well, don’t blame me. I’m voting for Kodos.

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        1. I, for one, think it’s time this country finally had a black president.

  4. That’s the small stuff, the unfunded liabilities of entitlements are 4 times as great. But hey liberals want medicare for all, all aboard the sinking ship.

  5. Has the U.S. Government Finally Spent Too Much?

    God I hope so, I spent my life savings on gold at 1700 an ounce and I really need to unload these four ounces without losing my shirt.

  6. I guess we’re actually going to get data on whether MMT is valid or just a fever dream of a fringe school of economics.

    1. If it fails then it wasn’t real MMT

      1. I’m not part of the MMT fan club, but they do get a couple of things right. What they don’t seem to have is a coherent explanation of how to avoid harmful inflation – which is a concern since they keep saying that harmful inflation is the only risk in our system. The true MMT fans also believe in a federal jobs guarantee program, which I think would end up being a horrible bureaucratic, inefficient, and counterproductive mess. Lastly, the MMT crowd – if I understand their “theory” correctly, does not give proper credit to the notion that our private sector, through the banking system, creates much of the growth in our money supply. MMT’s best point is that the federal government is a currency issuer – while individuals and businesses and states/cities/counties are currency users. The operational differences between currency issuers and currency users are important.

        1. Um, the whole idea of MMT is that you avoid inflation by taxing the money out of the system. If the economy is going strong, you don’t worry about printing more because demand will snap up even the newly printed dollars. So the goal of your tax policy is to use it to suck out the glut, rather than balance the budget. It is an attractive idea, because Keynesians love the idea of the “Multiplicative Effect” of government spending. If they print $1, but it generates $5 of activity/demand, then they don’t need to tax it away, since it won’t be inflationary.

          So they do have an answer. It is just a bullshit answer, because absolutely ZERO congresscritters are going to go on record raising taxes for people- sometimes by significant amounts- to “save us from inflation”. Further, it is not clear at all that there really is a multiplicative effect. It is all theoretical, and every attempt to quantify it using real world data has been unable to find much of an effect at all (it ranges from .7- i.e. negative effect- to 1.5). This is because when the Government pays for something, it often crowds out other private actors.

          1. This is of course dumb because there are futures markets (broadly speaking, not just the specific financial ‘futures’ market). People make plans for the future that overbid the supply of real tangible things when price doesn’t accurately signal availability. Cost overruns occur. Projects fail. Economic downturns are locked in well before the bubble actually bursts. The government can’t just wait for the numbers to turn bad before it taxes out the ‘excess’.

          2. You make very good points – especially in your second paragraph.

            1. My comment was for Overt. Having said that – Squirrelloid makes a good point in the last sentence.

  7. Hopefully this will be a lesson that in good economic times we need to control spending. Right now, like it or not we can not stop spending at this time. The demands are such that we will have to keep going. That said we could look at priorities. Can we cut back some of our foreign adventurism, do we really need a Wall at this time, limit detention camp to the truly dangerous, review and eliminate unnecessary tariffs. To name a few. How about a national commission of former economic advisors, some from Democratic administrations, some from Republicans, if possible some from other groups (LIbertarians?). Ask them to review the Federal and State budget and make suggestions for cuts, or at least freezes.

    1. who is this “we” you’re mentioning? I for one have not done a damn thing and never voted for anyone who is doing this.

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  12. Has the U.S. Government Finally Spent Too Much?

    Nope!

    1. We haven’t run out of numbers yet!

  13. I am old enough to remember when Democrats, whenever they proposed reducing the rate of growth of entitlement programs- not actual cuts in spending, just reductions in the rate of growth- Republicans would accuse them of wanting to starve poor people and old people.

  14. There is a chance that many of the rules and regulations lifted during the crisis won’t be coming back

    Yeah… I’m not gonna hold my breath on that one.

    1. if anything, it will get worse in response to this ‘crisis’

  15. Basically it’s the last scene in ‘Speed’ when the subway car careened into the streets of Los Angeles.

    The metaphor is perfect.

    Jack and Annie are the American taxpayers handcuffed to the pole with no key to free themselves. The car is the economy controlled by spendthrift politicians.

  16. is money even a thing anymore?

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  19. And yet, Dipshit Scumbagetta and the rest of the Reason lefties still expect us to believe that bringing in tens of millions more peasants with no education, no advanced skills, no doctor, and no health insurance is going to somehow get us out of this death spiral we’re now in.

    It’s all complete and total bullshit. We can no longer take care of the population we have right now, much less that plus another hundred million more sad sacks.

    How much fucking higher does this goddamn debt have to go before you will finally acknowledge that what worked 100 years ago pre Welfare State not only doesn’t work anymore, but is now bankrupting and destroying the society?

  20. I understand Reason is libertarian and against government spending on most items. However, what is needed is a litmus test. Can something be better done in the private sector? Is it moral? The government spends a lot of money sending us to war and such, but there are matters that do require intervention. The US government is on its way to a failed state. People and businesses need a functioning government. Other counties did a much better job dealing with COVID and can get back to business. Other counties have universal health care and pensions without breaking the bank. We should be able to do the same.

    1. Other counties have universal health care and pensions without breaking the bank. We should be able to do the same.

      It’s called taxes. They tax their people to the hell and back again and then “generously” give it back to them in the form of social services, which are universally of low quality and filled with eye-watering amounts of graft and waste. In other countries, when the citizens’ money runs out, the government is obligated to cut back because they cannot issue unlimited debt. These cut backs always hurt the poorest and most dependent portions of the population, even though they were often made poor and dependent because of those programs. In America, being the world’s reserve currency (for now) we have the ability to print literally unlimited amounts of debt; money that not one single sane person can say with a straight face will ever be accounted for, and then we can spend that FREE WEALTH on whatever we choose, which is usually eye-watering amounts of graft and waste and like everywhere else in the world it’s the poor and the dependent who get shafted the hardest by the very system that made them poor and dependent.

      If this all sounds just like how communism is supposed to work you’d be right! I can only wonder how long until the kulaks go against the wall and the hopeless cycle of human suffering starts anew.

    2. “Other counties did a much better job dealing with COVID and can get back to business. Other counties have universal health care and pensions without breaking the bank. “

      The government handled COVID badly but we should have them give us healthcare? That seems like a bad plan.
      Government at all levels have shown complete incompetence in handling COVID. I will take my chances with the “evil” corporation thanks.

  21. No, the government has not spent to much, as we have not had total economic collapse yet, but it is coming.

  22. Hey, if it’s printable, it’s spendable.
    Just ask Krugman.
    He’ll set you straight.

  23. Congratulations to Reason for having uncovered a problem which has existed for at least the last sixty years. Yes, national spending routinely exceeds national income but the reasons seem almost too obvious to mention.
    Politicians of all political stripes have united in a bipartisanship effort to buy votes from their constituents using the Federal Treasury as their own personal piggy bank. As a result, our nation has run an annual deficit in fifty-five of the last sixty years and our National Debt has risen from 286 BILLION in 1960 to 22.8 TRILLION in 2019 (add in another 3.5 TRILLION expected for 2020.) Not counted are the unfunded liabilities for Federal pensions, Social Security and Medicare which were estimated to be another 87.6 TRILLION at the end of 2019.
    No company in America nor any American family could survive if its finances were managed like our elected officials manage our nation’s finances. Yet we continue to persevere. During this same timeframe, our economy has boomed and it’s bust, interest rates have been high and they’ve been low, the US Dollar has been strong and it’s been weak. If there’s a connection between deficits and the health of the economy, I’ve missed something big or the word “unsustainable” has ceased to have meaning. Not a peep has been heard from those whose vote has been bought. Ditto from elected officials who continue to be reelected at a rate that makes Vladimir Putin jealous. So it continues.
    Eventually, we will have a problem but not because anyone in a position of leadership in this country has the courage to address the problem and confront their constituents. We will have a problem when the Chinese finally realize that lending money to a bankrupt nation at close to zero interest rates for thirty years does not make economic sense. Not one day before.

    1. Plenty of risks in our system, but don’t compare how companies or families manage their finances with the federal government. Companies and families are currency users and the federal government is a currency issuer. As to China “lending us money”, for the time being, they are (in my opinion) far more dependent on us than we are on them. A simple explanation: China very much wants to sell us the stuff they make. We buy it, but China has to accept payment in “dollars” – in a U.S. bank account. Let’s say we buy $1 billion of widgets from China. We get the widgets and China has $1 billion sitting in a “checking” account in a U.S. bank. China can swap those dollars for some other currency, they can leave the money in the checking account – or, they can put the money in a “savings” account – which is what they do when they buy U.S. Treasury bills, notes, and/or bonds. When those Treasury issues mature – the money goes back in to a checking account. Same thing happens when they sell Treasury issues before they mature. I don’t think they want to risk the value of their savings account by dumping a whole lot of Treasury issues before they mature. China still wants to keep selling us widgets and until their own citizens can consume their output, China will be dependent on selling widgets to the rest of the world. Our new Treasury issues may be close to zero percent interest – but they’re not negative, like some issues in Western Europe.

  24. FINALLY spent too much? FedGov have been spending too much at least aince a former corporate railroad liar, er, squeze me, lawyer, launched a military invasion on sovereign foreign nation back about 1860. Once that nation was subdued and brought to heel, MORE FedBux were spent trying to “remake” them into something “more acceptable”, and that mostly failed endeavour launched a new direction that has gone from a rotten idea to a REALLY rotten reality in the 150 or so years since. Crazy new laws were passed, most of them unconstitutional, which set the stage for the mess we’re in now. Later, the Federrl Reserve was established, income taxes imposed (“temporarily”, of course) followed almost immediatley by direct election of the Senate by the People, rather than selected by the government of each state.
    Ron Paul has been hollering for decades about how harmful the Federal Reserve is, but most folks write him off as barmy. He has been right all along, and the coming inflation will be solid proof of his wisdom..

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