How will the federal government pay for all of this stimulus aid?
WASHINGTON – Staggered by a self-induced economic coma to mitigate the fiscal impact of the coronavirus pandemic, the federal government is racking up growing debt by injecting trillions of dollars into the U.S. economy to keep it from collapsing .
The closure of all but essential businesses and the issuance of stay-at-home orders to workers to stop the spread of life-threatening COVID-19 has resulted in a severe recession worse than in 2008, resulting in layoffs, time off and something else. 22 million jobless claims in the past four weeks.
To alleviate these side effects, Congress and President Donald Trump last month approved an injection of $ 2.2 trillion into the economy, reducing an estimated federal budget deficit of $ 1 trillion for this fiscal year to 3. , $ 6 trillion, according to Goldman Sachs.
And Congress is talking about another financial boost in the coming weeks to bolster a popular small business forgivable loan program as it expands and expands relief in another spending bill that could cost up to $ 1,000 billion.
This begs the question: where are we going to get the money for these necessary expenses and loans, and how are we going to pay it back?
Here are some explanations to help you answer this question:
How much are we spending on the effects of the pandemic?
Most economists estimate the federal government spent at least $ 2.5 trillion on the three coronavirus spending bills enacted in March, and lawmakers say this is just the start of relief and rescue which we badly need.
The final tally of the cost remains in abeyance as no one yet knows how long the pandemic will last, when the economy can reopen, or how much economic damage needs to be repaired.
Senate Majority Leader Mitch McConnell (R-Ky.) Said last month, when asked if Congress could approve an additional $ 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 spend?
The federal government borrows the funds, and the Federal Reserve, the country’s central bank, increases available credit by “printing” money.
A senior congressional official described it this way: “We sell treasury bills to fund packages that Congress and the White House approve. And the Federal Reserve takes some of that money and uses it to lend more. “
Why are Trump and some lawmakers saying they are using borrowed money “for free”?
Interest rates on public debt are currently at a historically low rate, which means it will cost less to pay off loans, said William Gale, co-director of the Tax Policy Center in Washington.
“Debt is really cheap right now for the US government,” Gale said in an interview. “It is fortuitous that interest rates are low right now and it pays to go into debt because we have to fight the virus and ultimately just stimulate the economy.”
Yet Maya MacGuineas, chair of the Committee for a Responsible Federal Budget, said: “Just because you don’t have to pay interest on something doesn’t mean you don’t have to pay that money back. It is simply a matter of postponing this payment into the future.
Is the Fed Really “Printing” Money?
“Not literally, but yes,” Gale said.
“In traditional open market operations, the way the Fed would inject liquidity into the economy is to buy government bonds,” he said. “And now he’s buying a wide variety of bonds, not only from the federal government, but also from the public, local and private sectors.”
Last week, the Fed announced it would provide up to $ 2.3 trillion in loans, including about $ 850 billion to increase credit flows to households and businesses through capital markets, and to lend up to $ 500 billion to states and municipalities.
This increases the money supply, Gale said, by putting “money” or money into the bank accounts of businesses and state and local governments, giving them the ability to operate. The Fed can do this as long as inflation stays low, which allows it to keep interest rates low.
But don’t all these expenses increase an already historically significant federal debt?
At the end of last year – before the pandemic took off – federal debt held by the public stood at $ 16.8 trillion, or about 80% of gross domestic product, or GDP, according to the Congressional Budget Office. .
This is the highest level than at any other time since just after World War II.
“It’s going to get a lot bigger. We don’t know how much because we don’t know exactly what the forecast is, ”said Louise Sheiner, policy director at the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution think tank in Washington.
“It is likely to reach 100% of GDP, within a year or two,” she said in an interview.
Is this huge federal debt a big deal?
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 one-off, not a recurring cost that will continue to increase debt.
“Then it’s just going to grow like it’s been planted before, which in itself will end up being a problem,” she said, “because if you look at the long-term trajectory with the aging of the population, the debt is somehow inexorably climbing.
MacGuineas said the failure of Congress and the White House to bring debt under control, especially when the economy was strong, portended hard times.
“Once we get through that,” MacGuineas said, “figuring out what to do about it will be even more difficult and, frankly, painful.”
How are we going to pay off the debt and all the loans to deal with the pandemic?
Most economists and lawmakers agree that the issue will not be resolved until we are out of the pandemic and economic shutdown. This will include repaying a portion of the money loaned, “printing” the money, and calculating the federal budget in terms of reducing spending and increasing revenue.
The Fed expects its loans to be repaid. “I want to stress that this is about lending powers, not spending powers,” Fed Chairman Jerome Powell said in a speech last week.
“Once we get back to normal, whatever that means going forward, it’s basically going to be about 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 income, ”he said. “But even before this episode, the optimistic growth scenarios did not make a very big dent in the long-term debt situation.”
MacGuineas said: “We’re going to have to control our budget, and we’re going to have to cut spending, and we’re going to have to increase income, both of us.”
Why do we have to spend so much money in the first place?
“What we really want to do is make sure the GDP recovers quickly once the public health issue is lifted,” Sheiner said, and lawmakers are faced with a choice.
“If they do too little, the economy is likely to deteriorate, take a very, very long time to recover and maybe end up at a lower level almost permanently,” she said.
“On the other hand, if they are very aggressive in trying to do whatever they can to make sure that people have the income to spend, that businesses don’t go bankrupt and that they 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.”