By Nick Weising
The U.S. budget deficit eclipsed $3.1 trillion last fiscal year. For the first time since WWII, debt is set to exceed gross domestic product (GDP). Almost all of the recent debt incurred is being utilized as COVID-19 relief, appropriated during the spring and summer of 2020. Deficit hawks within the Republican Senate stalled negotiations regarding more aid for fear of running up the national debt; concerns that appear misguided. Objectively, there is no ‘magic number’ to denote the maximum amount of debt the United States may take on. Rather, a more reliable metric is debt relative to the size of the economy, or debt as percent of GDP. Historically, low interest rates ensure that the federal government pays low interest relative to GDP and also indicate that growing debt does not negatively impact the economy.
Further, relief measures can also speed recovery, which subsequently decreases the debt ratio. Additionally, COVID-19 relief packages are only one-time injections into the economy, making them short-term retention of debt, thus not substantially affecting debt in the long-term like Social Security. Federal Reserve Chair Jerome Powell shared similar sentiments, stating that another stimulus package is needed to prevent economic recovery from stagnating and to prevent millions from falling into poverty. Fears of rampant government spending leading to recession are misplaced; we are already in a recession.
Even if the aforementioned conditions did not apply, the United States would still be able to safely pass more COVID-19 aid. The international community credits the United States in its ability to pay who it owes. For this reason, the U.S. dollar remains the strongest world currency, making up over 60% of all known central bank foreign exchange reserves and around 90% of forex trading involves the U.S. dollar. The importance of the US dollar to the world economy and the steadfastness of the US in paying its creditors allows the US to have high deficit spending relative to GDP.
The actual debt problem in America is under the hood. The high debt held by the US government, businesses, and consumers hamper a rebound from COVID-19, as consumer spending makes up 70% of the US economy. High household debt lengthens recessions and makes them more severe, according to the International Monetary Fund, because high debt levels mean people consume less. Moreover, state and local governments (who do not have the same trust afforded to them as the federal government) have seen a stark drop in tax revenue since the pandemic began, forced to fire or furlough 1.1 million public sector workers according to the Economic Policy Institute and cut essential services during a global pandemic. Perhaps most alarmingly, it endangers pension funds which millions of retirees rely upon for income.
Washington policymakers’ priorities should be twofold: increasing consumer spending by alleviating individuals’ debt obligations and bailing out state and local governments. This will establish the fastest route to recovery.