PANDEMIC SERIES: FOURTH ESSAY (a trillion here, a trillion there, eventually add up to trouble)

 As I write this Congress and the Administration are debating the size and composition of the next $1,000,000,000,000+  Federal Government rescue package to offset some of the economic damage associated with the fight against the COVID-19 pandemic and emerging variants thereof. This post examines the cumulative economic and financial implications of the Government's  trillion dollar-plus tax cut, tax deferral and expenditure programs approved in 2017, 2020 and expected to be approved in 2021.

 PANDEMIC SERIES, FOURTH ESSAY

(A trillion here and a trillion there eventually add up to trouble)

It’s as if three extra zeros don’t matter. One billion dollars worth of anything ($1,000,000,000) was a big deal in the 1990’s.  Fast forward one generation, however, to the first quarter of 2020, when commercial banks in America took in $1.2 trillion more than they recorded in the fourth quarter of 2019 and more than $2 trillion ($ 2,000,000,000,000) in actual deposits. Maybe as a nation we’ve just become inured with numbers having 12 zeros, or maybe they are simply too large to comprehend or relate to.  We live in the micro world, after all, and numbers with 12 zeros live in a macro environment, where we leave it to others to deal with their consequences.

Congressional leaders and the new Administration are in negotiations currently over the size and composition of the next round of support for our pandemic-ravaged economy. Republicans no longer in control of the Executive branch largely want to restrain spending, whereas Democrats reportedly favor an action plan costing about $1.9 trillion. For the sake of discussion let’s call it a $1.4 trillion rescue package in 2021 (closer to what the Democrats rather than the Republicans want in a final bill). Last year the Federal Government committed $2.59 trillion in resources and another $900 billion in tax deferrals and reductions, for a total commitment of $3.5 trillion of support to offset pandemic-related problems.  

Back in 2017 Federal tax cuts totaled $1.5 trillion. The sum of these government commitments, all of which contributed directly or indirectly to the Federal debt, is at least $6.4 trillion dollars. Keep in mind, too, these are over and above annual Federal operating budget deficits.  (It’s been 20 years since the Federal budget last showed an annual surplus.) Moreover, fighting the new strains of virus being associated with countries across the globe may exacerbate and prolong the pandemic battle and mandate additional Federal Government support for the economy later this year.                                                      

Setting aside political views about the need for and efficacy of each of those major commitments of Federal budget resources and tax breaks, which are questions for another day, THE questions I think that have not yet been asked and answered forthrightly are: How is the Federal Government going to pay the costs of funding the extra $6.4 trillion, and what will be the impact on the U.S. economy?    

Purely on an economic basis, at face value it would seem that at today’s low interest rates, funding tax cuts and deferrals, and trillion dollar rescue packages by issuing debt is the obvious answer, and maybe it is.   In future years, however, the refinancing of that debt that funded tax cuts and several trillion dollar-plus rescue programs will be at ever higher interest rates. Interest costs already are crimping the Government’s budget flexibility in 2021. Imagine how those mushrooming costs will translate into major Federal budget problems in the future.*                                                    

One could argue that pandemic-related spending programs should not be funded with Government debt, but rather by increases in Federal income taxes on current taxpayers, to avoid passing along the costs of today’s programs to tomorrow’s taxpayers. However, as my mortgage banking friends in Texas would say, “That dog won’t hunt.” Raising taxes today, in an economy already underperforming, is not going to happen. Moreover, the horrific effects of the pandemic are projected to last for a fairly long time into the future, even without additional complications from new strains of COVID-19, thereby acting as a drag on any incipient recovery. Raising taxes in an already weakened economy simply does not make economic sense, much less political sense.

One final point on these rescue packages: By design, the Government payments inject liquidity (spendable funds) into the U.S. economy, with the objective that the money will be spent and spent again (the multiplier effect) and generate or preserve jobs and add to incomes.  One problem is that for businesses, and small businesses especially, in today’s environment, liquidity is not their only major problem. Beyond shortages of liquid funds, the other problem needing to be fixed is insufficient equity capital, that is, stockholders’ and owners’ equity or permanent capital.

Rescue program dollars do not help build equity bases for firms, so the shortage of permanent equity capital will continue to plague small businesses and drive those with insufficient capital out of business. Also, firms (and families) receiving the rescue grants may choose to sit on/not spend the funds if they fear even greater liquidity problems in the future.  This behavior follows the concept of saving for a rainy day. In this case the multiplier effect does not occur, meaning these dormant funds are not helpful in promoting spending and job creation, as intended.

Bottom line: 1. raising taxes now to fund trillion dollar rescue packages, tax cuts and deferrals, hurts our already soft economy when it can least afford to be hurt and would slow any impetus toward recovery

                        2. borrowing today, refinancing the debt in the future runs risk of refinancing when rates        are already higher, and continuing to rise,  competing for funds with private sector borrowers trying to finance economic recovery

                        3.  rescue payments made are helpful to offset liquidity problems but not shortfalls in equity. They also lose their effectiveness if the funds are saved, not spent.

Solution: In fairness the seeds of America’s future budget crisis should be addressed head-on as a bipartisan issue when they are first sown. But that does not happen because there is rarely a good  (politically palatable) solution at the time the issues pre-ordaining the future budget crisis are first created. Which is why it’s almost standard operating procedure for members of Congress of either party and occupants of the White House, of either party, in the end to agree to take the debt route and kick the can down the road rather than face those difficult issues head-on.  Let future lawmakers wrestle with politically unpalatable policy alternatives under the cover that the budget problems were inherited, and were not of their own making. As often as not, their solution also is to refinance the debt again, kicking the can still farther down the road, which is a major reason why total U.S. Government debt at year-end 2020 has grown to $27.75 trillion.

 Readers old enough to qualify for the COVID vaccinations today may remember a card game that was popular when we were children: “Old Maid”. At the end of the game, the player stuck with the “Old Maid” card was the loser.  If America’s Federal Government budget game could be given a name, can you guess what I’d select?

Footnote*   In early 2021 consumer borrowing remains relatively soft, which eases demand pressures on interest rates and leaves more room for additional Federal Government borrowing to occur without pushing interest rates higher.  As job creation, income growth and national output gain strength, however, consumer borrowing will tend to increase and put upward pressure on interest rates. Business borrowing also will tend to increase. Couple those increases in demand for credit with the Government’s need to continue refinancing its mountain of debt, and the likelihood of interest rates rising-- possibly increasing faster than normal –is practically a “gimmee”.