That stimulus money will have to be repaid

This post was published in the Wilson Times May 1, 2020.

If you’re pleased with your pandemic stimulus check, just wait until the payments come due. As someone who paid federal taxes last year, you qualified for a $1,200 stimulus check; you don’t even have to sign away all your privacy rights. If you gave up your bank account number, you get a direct deposit into your account instead of a paper check with Donald J. Trump’s name on it.

Do a little math, though. If everyone is getting $1,200 ($2,400 for two-earner households), how much money does that total, and where is it coming from? The stimulus checks sent to individual taxpayers were part of a $3 trillion bill that included payments to small businesses, supplemental unemployment payments, cash for state and local governments and hospitals. The individual checks were estimated at about $209 billion.

This generosity comes on the heels of the 2017 tax cuts, which added more than $1 trillion to the budget deficit, even as the economy was bursting at the seams and little of the tax cuts went to people who would spend it on basics.

If these numbers sound familiar, you may recall an earlier stimulus package in 2008-09, which involved payments and tax changes boosted by the Bush and Obama administrations. In addition to one-time payments of up to $1,200 for couples, plus $300 per child, this stimulus included a pause in payroll taxes (that support Social Security and Medicare with 6% of wages). The Bush administration spent $120 billion to prop up the economy.

The money must have helped, although surveys showed a lot of recipients saved their stimulus money instead of spending it as intended. Even so, the economy had been zooming for a decade until the Corona Virus pandemic caused an economic collapse.

Because this year’s stimulus package was financed with borrowed money, this fiscal year’s federal budget deficit is expected to be $3.7 trillion. That’s 3,700,000,000,000 dollars. It’s more money than you can imagine. As Everett Dirksen famously said, “A billion here, a billion there, pretty soon you’re talking real money.”

The government’s stimulus package in the 2008-09 Great Recession and the current economic reactions to the COVID-19 pandemic were needed to prevent a total collapse of the global economy. But neither Congress nor the White House sought to offset the stimulus with tax increases or spending cuts. Annual deficits have increased the national debt and debt-to-income ratio to near-suicidal levels.

The relief package for America’s worst depression, in the 1930s, included government jobs to put people (mostly men) back to work in an economy that had no job openings. The Civilian Conservation Corps and the Works Progress Administration built or improved roads, national parks and buildings, including the Wilson County Public Library, a WPA project. In 1936, the federal deficit was $4 billion. In that case, the federal stimulus created an asset — government buildings, roads and parks — that added to the government’s worth.

We’ll never go back to the pre-New Deal federal budgeting, but the deficits we’ve run up every year since 2000 will have to be repaid by our children and grandchildren. The federal debt at the end of World War II was $259 billion. It has not fallen below $300 billion since 1962. This year, it is expected to top $24 trillion — more than the total value of the nation’s output (GDP).

Enjoy your stimulus check, or give it away to charities in need. But you might want to have a talk with your grandchildren. They (and their grandchildren) will have to pay for the nation’s stimulated economy.

Lower taxes and higher spending have consequences

That government shutdown didn't last long. By the time I knew about it, it was over. That can happen when Congress is doing its most important work in the dead of night.

But give Congress credit for doing something. The two houses of Congress and the two political powers managed to reach an agreement that will keep the government operating for another year. This, it was emphasized, is not another "continuing resolution" that Congress has too frequently relied upon to keep the government running, despite Congress' inability to pass a budget on time, or even at all. Before we celebrate another Era of Good Feeling, we must remember that the legislation dramatically increases government spending without offering a way to pay for it.

The authorizations approved very early this morning are expected to result in a budget deficit next year of more than $1 trillion. That is a monstrous deficit, and it comes at a time when the U.S. economy is growing. Unemployment is down, job creation is up, wages are rising. This is a stimulus package for an already stimulated economy. 

It comes just weeks after the December 2017 tax cut, which is expected to add $1.5 trillion to the federal debt. Between the tax cut and the newly generous appropriations, the U.S. economy is going to be like an out-of-control motorcyclist — headed for a terrible crash.

To fully appreciate this, consider that today's federal debt is about 77% of gross domestic product, which is the highest percentage since the aftermath of World War II. With the 2017 tax cut and added spending, the debt will rise to 111% of GDP by 2027, the Committee for a Responsible Federal Budget calculates. 

President Trump had touted the rising stock market as proof that his approach to the economy was working. That was before a 3,000 point drop in the Dow Jones index. Now he will have to defend a stock market that has gone through turmoil and has arrived at a "correction," a 10 percent drop in tax values. Although still above where the market was before his election, the new reality on Wall Street is much less optimistic than it was just a month ago. 

Monday's 1,000 point drop in the Dow coincided with the swearing-in of Trump's appointee to chair the Federal Reserve Bank. Trump chose not to appoint the then-chair Janet Yellen to a second term, which had been the traditional choice. Yellen has said that she was willing to serve another term, and it looks like stock traders were more comfortable with the known Yellen than with a new Fed chair whose skills and philosophy are less known.

The new Fed chair is likely to face an economic crisis in the near future. The overheated economy will likely result in sharply higher inflation. Inflation has been a non-factor for the past two Fed chairs because changes in the economy and a tight leash by the Fed and other national banks have kept inflation at bay. But inflation has long been the greatest danger to the economy. The double-digit inflation rates of the late 1970s are reminders of how disastrous sharply rising prices can be.

The federal government will have a harder time meeting its new debt obligations when inflation causes interest rates to rise. Interest on the debt will become a larger and larger part of the federal budget. A huge tax cut coupled with more profligate spending makes an economic collapse almost inevitable.

A temporary dodge of long-term issues

The economic crisis might be over. The Senate has voted 81-18 for a compromise plan to get the federal government running again and raise the debt ceiling so that economic chaos doesn't befall the world by the weekend. Assuming the recalcitrant House of Representatives can find a majority in favor of the Senate bill, the crisis will be over.

Popular opinion has it that the Republican Party lost this battle. Speaker of the House John Boehner said as much. The pointless crusade against the Affordable Care Act resulted in the shutdown of the government and a too-close brush with default on the national debt, but the GOP got no concessions on health care. They got a temporary continuation of the funding sequester, but the entire Senate bill is temporary. Funding of the federal government will go on for a couple of months. The debt ceiling will raised enough for the government to pay its debts a little longer. But the long-term problems in Washington have not been addressed.

The Republican delegation had a point that the government cannot continue on its path of borrowing to pay for 30 percent of its expenditures each year. Our deficit spending tops $1 trillion a year, and the federal debt has climbed to about $17 trillion. A bipartisan conference from both houses of Congresses is supposed to meet to resolve this issue in the next few weeks. Such conferences have been tried before. The Bowles-Simpson Commission offered a reasonable but painful route to solvency, but neither the president nor Congress wanted to take the medicine. A super committee two years ago failed to come up with an acceptable budget plan, resulting in the "sequester," which was never supposed to go into effect but only be a frightening consequence no one would allow.

Each year of trillion dollar deficits makes a solution even harder. Compromises must be found in "entitlement" programs such as Social Security, Medicare and programs for the poor. These programs are growing faster than the government's revenue can keep up. Federal money can be found in almost every governmental activity, from municipal housing programs to state highways to farmers' choice of crops. Reducing the federal role in many of these areas could help reduce the deficit. The rate of increase in Social Security and Medicare can be reduced without severe consequences for beneficiaries.

And broader, more sensible taxes should be part of the solution. Fixing this problem will cause pain that should be shared by everyone, and small tax increases can ensure that everyone pays.

To prevent future crises brought about by members of Congress who have carefully drawn safe voting districts, Congress should require that congressional redistricting follow municipal and county boundaries wherever possible, that voting blocs not be packed deliberately to achieve sure victories for one side or the other and that truly bipartisan independent commissions, not state legislatures, draw the congressional districts. With a little more camaraderie and a little less electoral certainty, members of Congress might discover that compromise is better than stalemates.

It's too late for a federal spending freeze

Later tonight, in his State of the Union Address, President Obama is expected to propose a freeze on federal spending — or at least on a little bit of it. The freeze would not affect "security" programs, including the military, nor would it apply to entitlement programs such as Social Security, Medicare, Medicaid and others. The net impact of $250 billion over 10 years sounds impressive until you remember that over the next decade, the federal budget is expected to roll up another $9 trillion in debts. Last year's budget deficit was a record-shattering $1.4 trillion, and this year's deficit will be almost as large.

A spending freeze that exempts the better part of the federal budget is not going to fix this problem. The budgetary problem has gone way beyond a simple gesture like a spending freeze. If you're going to trim a $1 trillion-plus deficit and get the nation back to the surplus it enjoyed just a dozen years ago, elected officials will have to make some painful decisions. And the first decision is that we can't afford all the things the government is buying.

It's too late to just trim back on existing programs; we're going to have to eliminate whole programs. We can't do all the things we've been doing. We'll have to decide what programs to eliminate: Farm subsidies? NASA? Federal grants? The latest new ship, tank or airplane? Tax deductions for mortgages? Ethanol subsidies? Like a person with $20,000 in credit card debt, the federal government is going to have to find out what it can live without. As my father used to say, it's going to have to learn the difference between wants and needs. The current course of spending better than a trillion more than you take in every year is unsustainable, and a relatively painless spending freeze won't fix the problem.

Stimulus today, federal debt tomorrow

News reports today say that President Obama has rediscovered the federal budget deficit, and he's going to promise to do something about it. Good for him.

There has been little discussion of the budget deficit or how our grandchildren will repay all this money as Congress has debated the stimulus package. We are now looking at annual budget deficits in excess of $1 trillion! Remember all the grief Ronald Reagan took when deficits under his watch reached $100 billion? Several times that amount has disappeared into the banking system in the past six months, and no one seems to know where it has gone.

Obama says he wants to cut the deficit in half by the end of his current term. If that promise sounds familiar, it should. George W. Bush expressed the same wish, and I seem to recall Reagan and George H.W. Bush making the same or a similar promise. Funny thing about cutting something in half: You can cut by half for 50 years, and you never quite get rid of it. Still, it's a starting point.

Few economists fault Obama's push for federal spending to bolster the feeble economy. Now, they say, is not the time to worry about deficits. But we will need to worry about deficits sometime, and Obama deserves some credit for bringing up the topic now. After spending trillions of dollars salvaging banks and boosting the economy, cutting the deficit will be difficult.

Obama is calling a meeting this week to discuss long-term budget problems, which includes the long-term insolvency of Social Security and Medicare. Democrats, whose campaign rhetoric denied any problem with Social Security's finances, have to tackle this issue. George W. Bush's futile effort to shift SS investments to the stock market never got going, and all Americans are now grateful for that, since the market has lost nearly half of its value in the past year or so. The federal deficit is greater than usually acknowledged because Social Security revenues now mask the depth of the deficit.

The nation's long-term fiscal health depends upon finding a solution to the Social Security and health care problems. The federal debt has now topped $10.8 trillion, which is more than two-thirds of the gross domestic product of around $14 trillion. Annual payments on that debt are around $500 billion, nearly as much as the Defense budget. As a nation, we cannot sustain this forever. Obama is right to address the deficit issue now and to think ahead about how we are going to get our spending back into balance and thereby provide for the economic growth we and our grandchildren will need.