A woman walks past the U.S. Capitol in Washington, December 9, 2019.
Loren Elliott | Reuters
Remember when people were all worked up over trillion-dollar government budget deficits? Those might seem like the good old days, once Congress and the White House finish up the coronavirus rescue package expected to be approved in the next few days.
Estimates of just how big the final bill would be vary, but it’s assured that it will be a historic moment for sheer fiscal force being exerted at a time of economic duress.
Administration statements over the past few days point to something on the order of $2 trillion in economic juice. By contrast, then-President Barack Obama ushered an $831 billion package through during the financial crisis.
That type of fiscal burden comes as the government already has chalked up $624.5 billion in red ink through just the first five months of the fiscal year, which started in October. That spending pace extrapolated through the full fiscal year would lead to a $1.5 trillion deficit, and that’s aside from any of the spending to combat the coronavirus.
Already, the national debt stands at more than $23.5 trillion and will be on track to eclipse $25 trillion. Taxpayers shelled out $574.6 billion in fiscal 2019 on interest payments for the debt and another $229.1 billion in fiscal 2020.
In short, the shock from the COVID-19 spread will blow a fiscal hole through Washington, D.C., that could take years if not decades to patch.
‘A bridge to the other side’
Hand-wringing over what this will all do to the debt and deficit situation, however, will have to wait for another day. In times of crisis, there is little patience for fiscal austerity, only a sense of urgency that while government spending can’t stop the virus from spreading, it can mitigate what will be profound economic damage.
“It’s truly a bridge to the other side of an act of God,” economist Paul McCulley told CNBC.com. “We’ll deal down the road with the impacts on so many fronts of society with the whole thing. Right now, worrying about fiscal incontinence is the exact opposite of where we should be. We should have fiscal robustness implemented through effectively a joint venture between fiscal and monetary policy.”
McCulley, a former managing director at asset management giant PIMCO and now a Cornell University fellow and adjunct professor at Georgetown, has been one of the leading thinkers in economics particularly since the financial crisis. He coined the term “Minsky Moment” to describe sudden collapses in markets and “shadow banking” for non-bank lenders that were at the center of the crisis.
He’s an advocate of a philosophy that has taken more prominence over the past couple of years called Modern Monetary Theory — essentially the belief that debt and deficits matter less in times of low inflation and that government spending should be used to address the widened wealth gap in the U.S. as the Fed keeps interest rates low. Some of biggest backers include Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez.
While the theory has some prominent detractors such as economist Larry Summers, it is likely to become the de facto law of the land as the coronavirus economic impact intensifies.
“The bank of Uncle Sam needs to be open, period,” McCulley said.
What the spending will look like
Making that happen would take a variety of forms.
McCulley sees programs run jointly between the Treasury and Federal Reserve as key, with the central bank expected to keep interest rates flowing and liquidity programs running.
“Saying that too much central bank independence can be a problem is something that’s considered to be heretic in my profession,” he said. “That’s essentially what I’m saying now.”
This week’s stimulus is projected to be a combination of direct-deposit payments to individuals, extended unemployment benefits to the millions who will be displaced from the retrenchment of activity due to social distancing and business closings, and bridge loans to businesses that will be incentivized not to lay off workers.
On top of that, the Treasury will offer guarantees to the Fed that Treasury Secretary Steven Mnuchin said would allow the central bank to leverage up to $4 trillion of liquidity for the business and financial system.
The total price tag? Unimportant, at least as long as the nation suffers through an indefinite near-shutdown.
“The dude who is unemployed now gets a check and has gotten himself an asset that he can cash and go a store,” McCulley said. “He’s gotten an asset but Uncle Sam has gone into a hole. I have no problem with that whatsoever.”
Still, there will be efforts to calculate the fiscal damage.
Most debt since World War II
Moody’s Investors Service has been warning about deficit issues for some time, and said Friday that its previous scenarios are likely to look worse as government spending accelerates.
“We previously projected that adverse fiscal dynamics would increase the deficit to around 6.3% of GDP by 2029, but the coronavirus pandemic introduces significant downside risk to our medium-term fiscal outlook.” Moody’s analyst Gabriel Agostini said in a report.
“On the revenue front, a coronavirus-induced slowdown will remove workers from payrolls and weaken federal tax revenue intake. Combined with large sums of federal spending to support the economy, we expect the US fiscal deficit to rise to levels not seen since the 2008 global financial crisis, driving debt higher,” he added.
Agostini noted that low borrowing costs will help alleviate some of the burden. The Fed a week ago slashed its benchmark interest rate to near-zero, and Treasury yields have been in historically low territory.
But the fiscal balance sheet still will look worse than it has since World War II.
During the financial crisis, the budget deficit as a share of GDP hit a high of 9.8%. Prior to that, the only worse period came during the war when the level hit 26.9% in 1943.
A $2 trillion deficit, which seems conservative given the current scenario, would push deficit to GDP to 9.4%. A $3 trillion shortfall, which seems like not much of a stretch, would take the level to 14%.
Hopes for growth
Of course, the numbers are all fungible, and Mnuchin told Fox News that he expects short-term damage to the economy followed by “gigantic” growth in the fourth quarter of 2020. The administration’s efforts, though, are more geared to what’s happening now.
“As fiscal policy loosens, the deficit does increase quite substantially in the near term,” said Jeremy Lawson, chief economist at Aberdeen Standard Investments. “If the government isn’t filling that gap in that period where the private sector is retrenching, it effectively doubles the size of the economic shock that is taking place.”
In fact, Lawson said monetary and fiscal authorities probably will have to step up their efforts. He particularly said the Fed needs to get more aggressive because while “it might feel like they’re throwing the kitchen sink at this, at the moment you might say they’re only throwing the tap.”
So as the shock of trillion-dollar deficits will now give way to the shock of multi-trillion dollar deficits, there is little else for authorities to do except keep pumping.
“By using your balance sheet during the bad times, what you can actually do is help the long-term health of the budget by assuring there is an economy that can return when the private sector is able to start spending again. Then the fiscal authority can unwind that stimulus, the temporary parts of it,” Lawson said. “Yes, it looks like it’s blowing a hole in the budget, but that’s probably necessary from keeping a bigger one from being blown open later on.”