WASHINGTON — Staggered by a self-induced economic coma to mitigate the fiscal impact of the coronavirus pandemic, the federal government is racking up soaring debt by infusing trillions of dollars into the U.S. economy to keep it from collapsing.
Shuttering all but essential businesses and issuing stay-at-home orders to workers to stop the spread of the potentially deadly COVID-19 has led to a severe downturn worse than in 2008, leading to layoffs, furloughs and some 22 million unemployment claims in the last four weeks.
To ameliorate those side-effects, Congress and President Donald Trump last month approved injecting $2.2 trillion into the economy, driving an estimated $1 trillion federal budget deficit for this fiscal year up to $3.6 trillion, according to Goldman Sachs.
And Congress is talking about another jolt of cash in the next few weeks to bolster a popular small business forgivable loan program as it extends and expands relief in another sweeping spending bill that could cost as much as $1 trillion.
That prompts the question: Where are we getting the money for these necessary expenditures and loans, and how are we going to pay it back?
Here are some explanations to help answer that question:
How much are we spending on the effects of the pandemic?
Most economists estimate the federal government has spent at least $2.5 trillion in the three coronavirus spending bills enacted in March, and lawmakers say that’s just the beginning of badly needed relief and rescue.
The final tally on the cost remains up in the air because no one knows yet how long the pandemic will last, when the economy can reopen or the amount of economic damage that must be repaired.
Senate Majority Leader Mitch McConnell (R-Ky.) said when asked last month if Congress might approve another $3 trillion or $4 trillion in relief, “Well, we’ll have to wait and see what happens.”
Where do Congress and the White House get the money they are spending?
The federal government borrows the funds, and the Federal Reserve, the nation’s central bank, expands the credit available by in effect “printing” money.
One senior congressional aide described it this way: “We’re selling Treasury bonds to finance the packages the Congress and the White House are approving. And the Federal Reserve is taking some of that money and using that to kind of lend out even more money.”
Why do Trump and some lawmakers say they are using “free” borrowed money?
Interest rates on government debt stands at an historically low rate right now, and that means it will cost less to pay off the loans, said William Gale, co-director of the Tax Policy Center in Washington.
“Debt is really cheap right now for the U.S. government,” Gale said in an interview. “It’s fortuitous that interest rates are low right now and it's advantageous to take on debt because we need to fight the virus and then, ultimately, just stimulate the economy.”
Yet Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said, “Just because you don’t have to pay interest payments on something, it doesn't mean you don’t have to pay back that money. It’s just pushing that payment into the future.”
Is the Fed really “printing” money?
“Not literally, but yes,” Gale said.
“In the traditional open market operations, the way the Fed would inject cash into the economy is that it would buy government bonds,” he said. “And now it's buying a wide range of bonds, not just federal government but state and local and private sector as well.”
Last week, the Fed announced it would provide up to $2.3 trillion in loans, including about $850 billion to increase the flow of credit to households and businesses through capital markets, and to lend up to $500 billion to states and municipalities
That expands the money supply, Gale said, by putting “cash,” or money, into the banks accounts of businesses and state and local governments, giving them room to operate. The Fed can do that as long inflation stays low, allowing it to keep interest rates low.
But isn’t all this spending raising an already historically large federal debt?
At the end of last year — before the pandemic took off — federal debt held by the public stood at $16.8 trillion, equal to about 80% of the gross domestic product, or GDP, according to the Congressional Budget Office.
That’s the highest level than at any other time since just after World War II.
“It is going to get a lot bigger. We’re not sure how much because we don’t really know exactly what the forecast is,” said Louise Sheiner, policy director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution think tank in Washington.
“It’s likely to go up to 100% of GDP, within a year or two,” she said in an interview.
Is that huge federal debt a big problem?
It was a problem that existed before the pandemic, and it will be a problem after the pandemic, experts said. Sheiner called the federal response to the pandemic a one-time thing, not a recurring cost that will keep raising the debt.
“Then it’s just going to grow the way it was planted to grow before, which in itself will eventually be a problem,” she said, “because if you look at the long- term trajectory with the aging of the population, debt is sort of climbing inexorably.”
MacGuineas said the failure of Congress and the White House to get the debt under control, especially when the economy was strong, foretells hard times ahead.
“Once we get through this,” MacGuineas said, “figuring out what to do about it is going to be ever so much more difficult and, frankly, painful.”
How will we pay down the debt and all the borrowing to address the pandemic?
Most economists and lawmakers agree the question will not be answered until we’re out from under the pandemic and economic shutdown. It will include having some of the loaned money paid back, "printing" money and a reckoning on the federal budget in terms of cutting spending and raising revenue.
The Fed expects its loans to be paid back. “I would stress that these are lending powers, not spending powers,” said Jerome Powell, chair of the Fed, in a speech last week.
“Once we’re back to normal, whatever that is going to mean in the future, it’s basically raising taxes or cutting spending,” said Gale, who describes himself as a fiscal hawk.
“If we can grow faster, we should. And that will help because it will generate more revenues,” he said. “But even before this episode, optimistic scenarios on growth did not make a very big dent into the long-term debt situation.”
MacGuineas said, “We are going to have to get control over our budget, and we're going to have to cut spending, and we're going to have to raise revenues, both of them.”
Why do we need to spend so much money in the first place?
“What we really want to do is make sure that GDP recovers quickly once the public health concern is lifted,” said Sheiner, and lawmakers face a choice.
“If they do too little it risks having the economy get really bad, take a very very long time to recover, and possibly end up just at a lower level almost permanently,” she said.
“On the other hand, if they are very aggressive at trying to do as much as they can to make sure that people have the income coming out of it to spend, that businesses don’t go bankrupt and still exist, ... we can recover quickly,” she said.
“If you're going to do the cost-benefit analysis,” Sheiner added, “you’d rather err on the side of doing more than doing less.”