President Joe Biden's inauguration speech was full of calls for "unity" to a bitterly divided nation. But mixed in with a positive acknowledgment that "politics need not be a raging fire destroying everything in its path" were a politician's traditional calls to unify around favored policy proposals. And among those proposals is a $1.9 trillion pandemic "relief" package that might unite Americans the way a sinking ship brings passengers and crew together as they await their fate.
"We must set aside the politics and finally face this pandemic as one nation," Biden urged in his speech. But there's no way to set aside politics when government acts, since political concerns inevitably determine how governments use their power, including in terms of gathering and spending other people's money.
And what a lot of other people's money the new president has in mind! On top of the trillions already spent under the Trump administration to offset the pain of lockdowns or just to buy votes, the new Biden administration wants to distribute $1,400 per person "recovery rebates," give hundreds of billions to state and local governments, underwrite a national vaccination program, subsidize government schools reopening, and offer more billions to small landlords and childcare providers. Not counting the burden of hiking the national minimum wage to $15 an hour, which will fall on workers priced out of jobs and on frustrated employers, the total cost is an estimated $1.9 trillion.
The proposed spending is supposed to help people. The money is sold as s lifeline to a population hammered by social distancing and by government-mandated lockdowns as it weathers waves of COVID-19. But the money, whether spent wisely or poorly, has to come from somewhere. For a government that was spending well beyond its means long before anybody heard of COVID-19, that means the money has to be borrowed.
"In light of the enactment of the year-end spending and COVID relief deal, we estimate the deficit will total $2.3 trillion for Fiscal Year (FY) 2021," the Committee for a Responsible Federal Budget noted earlier this month. "This would be lower than the $3.1 trillion deficit in FY 2020 but at an estimated 10.4 percent of Gross Domestic Product (GDP), it would be higher than any other time in recorded history outside of World War II."
It's been years since the federal government balanced its books, so deficits add to debt accumulated long before the pandemic. As of January 18, total debt held by the U.S. government is about $27.8 trillion, according to the U.S. Treasury Department, up from an already astonishing $23 trillion at the end of 2019. By contrast, U.S. Gross Domestic Product at the end of 2020 was $21.17 trillion, according to the government's Bureau of Economic Analysis.
Deficits and debt of that size affect the economy. Back in September, when federal pandemic-related spending was already mind-boggling but had yet to reach its full extent for the year, the Congressional Budget Office (CBO) projected the estimated impact. "From fiscal year 2020 through 2023, for every dollar that it adds to the deficit, the legislation is projected to increase GDP by about 58 cents," the CBO pointed out, indicating that, at best, taxpayers would lose 42 cents on every dollar spent. "In the longer term, the legislation will reduce the level of real GDP, CBO estimates."
"The legislation will increase federal debt as a percentage of GDP, and in the longer term, CBO expects that increase to raise borrowing costs, lower economic output, and reduce the income of U.S. households and businesses," the CBO added. "In addition, the higher debt—coming at a time when the longer-term path for debt was already high—could eventually increase the risk of a fiscal crisis or of less abrupt economic changes, such as higher inflation or the undermining of the U.S. dollar's predominant role in global financial markets."
To be fair, the U.S. isn't the only country to have been spending beyond its means and to have piled massive debt on top of a large pre-existing bill.
"The pandemic has exacerbated the risks associated with a decade-long wave of global debt accumulation," the World Bank observes in its latest Global Economic Prospects report, published this month. "Debt levels have reached historic highs, making the global economy particularly vulnerable to financial market stress."
"The pandemic-induced global recession has already reversed a decade or more of per capita income gains in roughly 30 percent of emerging market and developing economies (EMDEs)," the report adds. "By 2025, global output is still expected to be 5 percent below the pre-pandemic trend—a cumulative output loss that is equivalent to 36 percent of the world's 2019 output."
That's a huge hit not just for Americans, but for a world in which governments were already borrowing against people's economic futures in order to finance current expenditures. Pandemic-related spending—such as last year's trillions in "stimulus," and Joe Biden's $1.9 trillion relief package—are proposed as means for alleviating suffering now. But, since the money they spend doesn't exist, they can only do so by making us poorer in the future.
At the end of 2020, the CBO returned to the problem of federal spending beyond the government's means with a report exploring options for reducing the deficit from 2021 through 2030. The report covered numerous ideas for reining-in spending and for hiking taxes, all with the goal of closing the gap between revenues and expenditures. Nowhere in the report was there a suggestion for another $1.9 trillion in borrowing and spending to offset pandemic restrictions; its numbers depended, instead, on the assumption that the economy will produce and employ to generate wealth.
Even so, the cost of just paying interest on the national debt is separately projected by the CBO to rise from 1.6 percent of GDP in 2020 to 8 percent in 2050. That's without accounting for massive additional "relief" spending, such as advocated by President Biden, to offset the cost of forcing businesses to close and people to restrict their movements. Not only do economic forecasts predict that the economy of the future will be smaller than it would have been, much of it is already allocated to pay for past spending.
Unity can be a good thing. But Biden's $1.9 trillion dollar vision of unity builds on an unfortunate history of forcibly shared economic pain. Instead of making everybody go down with the ship, he might try bringing people together for a voluntarily shared vision.