Can Washington Borrow and Spend Without Limit?
By Paolo von Schirach —
WASHINGTON – Parts of the US are still suffering from the devastating consequences of the economic freeze enforced because of the ongoing pandemic that began in January 2020. Millions of Americans are still out of work. Therefore, there is nothing wrong with Washington directing emergency funds to the millions of unemployed Americans who lost their jobs because of draconian restrictions caused by the Covid emergency. There is also nothing wrong in launching a major national infrastructure plan aimed at fixing America’s old and poorly maintained roads and bridges, while adding new ones. And, finally, there is nothing wrong in Washington’s pledge to substantially increase funding for basic R & D in order to buttress American innovation and ultimately competitiveness.
These are common sense policy measures aimed at helping millions of fellow citizens, while strengthening the national innovation potential, as well as our transportation and logistics backbone. The problem is that President Joe Biden and his team attached all sorts of other important but less pressing issues to these urgent matters.
The result are two truly colossal programs and bills. We are looking at at least four trillions of dollars in additional new spending which must be added to the already expansionary policies adopted by the Trump administration (and passed by Congress with bipartisan support) resulting in large structural federal budget deficits –well before the Covid pandemic kicked in. Before any Covid-related emergency spending, the US was running a one trillion dollar federal budget deficit. Yes, one trillion deficit, at a time of good economic growth (above 2%) and historically low unemployment.
New taxes may help some
True, Biden proposes to pay for at least some of this new spending by increasing tax revenues. He proposes some income and corporate tax increases. But most of it is not paid for. (In any event, good luck in getting the Republicans in the Senate, and even a few Democrats, to go along with significant tax increases, whatever the justification. Remember that in the US Senate, unless the filibuster is abolished or substantially modified, you need 60 votes to pass laws, including tax reform. Even assuming unanimity among Democrats, they can muster only 51 votes.)
Swelling deficits and a ballooning US national debt
Whatever you may think about the justification for these new gigantic federal programs, this incredible spending increase means significantly more borrowing by Uncle Sam. And this new borrowing means colossal new annual deficits that will be piled on top of current deficits that are already extremely high. And all this borrowing ultimately means a larger and larger national debt eventually swelling to unprecedented proportions. We have to go back all the way to the need to finance the American war economy in WWII in order to find similar levels of federal borrowing.
No longer fiscal insanity
Until not too long ago, these stratospherically expensive proposals –good or bad as they may be on their merit– would have been dismissed by almost everybody as crazy and fiscally irresponsible; therefore not even thinkable, let alone feasible. But now the fiscal impact of these gigantic Washington spending programs (whatever your opinion on the merit of the various policy goals to be funded by such spending) is hardly mentioned at all.
Now the arguments and the criticism are only on the items included in the packages and the amount of “pork” attached, and on which constituencies President Joe Biden is trying to please by ladling hundreds of billions here, and more there.
Simply stated: there is no outcry on the actual size of the bill. Not much said about spending 4 trillion dollars or more we do not have, on top of the regular federal expenditures included in the approved budget which already includes historically huge deficits because of spending not matched by tax revenue.
Overspending is fine
This state of affairs reflects a new reality. Without much debate, a few years ago we entered a new world. In this new world, US public spending is no longer constrained by revenue. As noted above, the last pre Covid federal budget, a budget approved without too much controversy, contemplated a federal budget deficit of one trillion dollars.
Please remember that this enormous deficit was approved when everything was going very well. The US economy was expanding at more than 2%. Unemployment was historically low. The stock market was booming. There was no emergency. No recession. No pandemic.
And yet both parties agreed that it was perfectly normal to add another trillion to the national debt at a time of more than decent GDP growth and almost zero unemployment! How do you justify this level of government overspending when everything goes well in the American economy?
In the past, massive over spending (and borrowing) was justified only in emergencies. Usually it included measures to counter a bad recession with the goal of keeping or creating jobs. But nobody raised any concerns about the massive fiscal imbalance at the beginning of 2020, that is before we knew anything about the incoming pandemic.
Now the argument is that we need truly supersized spending in order to fight the negative economic impact of Covid; even though some argue that, as millions of Americans are getting vaccines, the economy will soon take care of itself because most people will be able to go back to work. Still, let us assume that new government spending measures are indeed needed, especially measures targeting the most vulnerable, low income Americans who are still out of work.
No limits on spending?
That said, even if we recognize the need to do something urgently to help the weakest members of our society, are there any limits on the amount of assistance that can be provided? Apparently not. The US Government is free to spend whatever it wants. Its borrowing capacity is unlimited. Swelling deficits, and an outsized and growing national debt are of no concern. Nobody is worried about how we shall pay for all of this: not President Biden. nor the Treasury, nor the Federal Reserve, and almost no one in Congress.
The “New Normal” is universally accepted
Combine this indifference with the widely accepted notion that the Federal Reserve can buy bonds and finance everything –indefinitely– without any negative consequences on interest rates and inflation, and you realize that we are now well into a “New Normal” when it comes to fiscal policies. This New Normal denies the truthfulness of everything we thought we knew about the serious dangers of protracted, large scale fiscal imbalances.
Now there are economists who publicly claim that, since the US dollar is still the world reserve currency and Washington controls it, almost any level of US federal spending and borrowing is fine, and essentially risk free.
I really hope this is true. Until yesterday this wave of spending would have been considered sheer madness, unthinkable fiscal irresponsibility. Now the argument (if any) is on how well or badly targeted such spending may be.
There is no serious challenge to the amount of money budgeted based on the old fundamentals that, if you keep spending money you do not have, sooner rather than later you will be in serious trouble.
Paolo von Schirach is the Editor of the Schirach Report He is also the President of the Global Policy Institute, a Washington DC think tank, and Chair of Political Science and International Relations at Bay Atlantic University, also in Washington, DC.