alt=Matthew BrownSALT LAKE CITY — For decades, federal budget hawks pointed to the United States’ fiscal picture at the end of World War II as a precarious high water mark to avoid. Fever charts show a line climbing sharply from 1941 to 1946, when the nation’s debt-to-GDP ratio — an often cited measure comparing a country’s debt to its economic output — peaked at 106%.
Balanced budget advocates will be updating their Power Points soon.
Economists, politicians and policy wonks predict a new record ratio will be set when Congress passes its next — and probably not the last — emergency spending package this month to stem the economic devastation caused by the coronavirus pandemic.
“I can’t tell you how many times I’ve said, ‘This is the biggest debt since World War II.’ I won’t be using that caveat any more,” said Phil Smith, national field director for the Concord Coalition, a nonpartisan group that advocates “responsible fiscal policy.”
Economists and politicians on both sides of a decades old balance-the-budget debate agree big spending is needed to blunt the pandemic’s health and economic impact. But they are also eyeing the mounting debt as a long-awaited opportunity to make their respective cases on what prudent fiscal policy means.
Fiscal conservatives are signaling that the record-breaking 2020 deficit, which could exceed $6 trillion if the latest emergency proposal by the House passes, sets the stage for reining in federal spending after the worst of the coronavirus outbreak has passed.
“As our nation’s long-term fiscal position erodes precipitously, America urgently needs Congress to once again focus on our nation’s finances,” stated an April 30 letter from 18 conservative groups to House and Senate leaders.
The more liberal-leaning Brookings Institute recently urged Congress to dust off some bipartisan budgeting proposals when it comes time to deal with the national debt. Among those proposals is the Trust Act, sponsored by Utah Republican Sen. Mitt Romney, who seeks to eventually reconcile spending with revenues for the nation’s Social Security, Medicare and other trust fund programs.
Meanwhile, 60 members of the Republican Study Group, a conservative GOP House caucus, sent a letter of their own, The Hill reported.
“Congress should offset future COVID-19-related deficits. Given the present fiscal crisis, the thought of any more debt-financed spending seems unimaginable,” they wrote.
Also sensing the momentum toward a serious debate on fiscal policy is Utah Democratic Congressman Ben McAdams, who introduced an ambitious balanced budget amendment last year. McAdams, who is also a House co-sponsor of the Trust Act, anticipates discussions on the COVID-19 response and its impact on the federal budget when Congress begins its budget process for 2021 this week.
But the huge amounts of federal spending are also creating a moment for an unorthodox view of deficit spending and debt. Modern monetary theory, which contends that countries controlling their own currency can run up higher deficits to fuel economic growth without negative consequences, has been gaining believers in the finance and political realms — beyond the academic world where it developed.
President Donald Trump voiced the theory’s primary tenet in defending the amount of federal spending it will take to fortify the economy against the virus: “It’s our money ... it’s our currency. We can handle it,” he said at a news conference in late March.
And Randall Wray, an economics professor at Bard College who has authored influential books and papers on modern monetary theory over two decades, is confident the feared future debt reckoning will prove the theory correct after years on the fringes of economics.
“Before the pandemic, MMT was called crazy,” he said. “This gives the opportunity for everyone to see that none of the predictions about the bad things having to do with deficits come true.”
The need to spend
Wray gets no argument from fiscal conservatives on the need for deficit spending to shore up an economy that’s been in free fall since lockdowns and travel restrictions were imposed in mid-March to contain the virus. More than 30 million people have filed for unemployment benefits and the U.S. unemployment rate in April was the worst since the Great Depression.
After Congress passed several programs to shore up the economy through the COVID-19 crisis, the Congressional Budget Office projected the budget deficit — the difference between what the government spends and what it collects in taxes — will hit a record $3.7 trillion this year. Lawmakers are negotiating the cost of another tranche of emergency spending this month and House Speaker Nancy Pelosi’s initial proposal unveiled Tuesday is for $3 trillion in coronavirus aid, the Associated Press reported.
Election-year politics, however, are coloring the latest debate over federal aid. Trump and some Senate Republicans are against helping out Democrat-led states and cities, the New York Times reported Monday, despite pleas by nonpartisan organizations of state and local leaders for more federal dollars to soften the economic impact.
The Treasury Department works with the Federal Reserve, the nation’s central bank, to get the emergency funding into the bank accounts of those who need it. Fed Chairman Jerome Powell recently implored Congress to set aside worries that aggressive rescue programs will produce excessive debt.
“I have long time been an advocate for the need for the United States to return to a sustainable path from a fiscal perspective,” Powell said. “This is not the time to act on those concerns. This is the time to use the great fiscal power of the United States to do what we can to support the economy and try to get through.”
Wray and other adherents of modern monetary theory couldn’t agree more. But spending our way out of a catastrophe is only half of the issue.
Unlike balanced budget hawks, he sees the ominous amount of debt incurred to pull the country out of the Great Depression and fight a world war as a high point for the United States’ economy.
He explains how the borrowing helped maximize the nation’s resources and fuel an era of unprecedented expansion that eventually addressed the feared debt burden. Congress didn’t panic and rush to pay off its wartime debt, instead, the economic growth allowed the debt-to-GDP ratio to shrink over time.
“The U.S. came out of World War II as a developed country, where we went into World War II as a developing nation, with poverty all over the place. It was the New Deal plus World War II that made us modern America,” he said. “So I think the same thing could happen this time, if we chose that path.”
‘Junk economics’
While fiscal conservatives appear on board with spending the nation out of a crisis, they retreat to the traditional consensus that the record amount of debt accumulated through years of budget deficits is unsustainable in the long term.
“This is a bright warning that the debt situation will not fix itself,” Maya MacGuineas, president of the nonpartisan Committee for a Responsible Federal Budget, said in a statement last week responding to record borrowing. “To return to a position of strength, we will need to manage the pandemic, return the economy to a period of growth, and then bring our debt back down to manageable levels.”
Smith, with the Concord Coalition, and others who lament Congress didn’t take advantage of the pre-pandemic years of growth to eliminate deficit spending and lower the national debt said not doing so after the pandemic has passed threatens to increase inflation and crowd out private borrowing.
Romney said fears the United States could not meet its debt obligations could drive up interest rates on Treasury securities that are sold to domestic and foreign investors to finance government. Interest on government debt was the fastest-growing portion of the annual federal budget last year, Smith said.
McAdams, who agrees with all of those concerns, is more blunt in his assessment of economists who argue the consequences of ballooning national debt are overblown.
“Modern monetary theory is junk economics,” he said. “Many economists will tell you that unrestrained deficit spending will eventually catch up with us and we will start seeing inflation rise and the value of the dollar devalued.”
A survey by the University of Chicago last year of top economists found no agreement on basic aspects of the theory.
Warming trend
Wray has weathered such criticism for years, but said economic history has borne out his theory. Circumstances differ from one cycle to the next, and he said the current economic slump is unusual because the lockdown orders across the country have caused both supply and demand to decline. The anomaly could result in inflation, but the recent experience of climbing out of the Great Recession has shown that neither inflation nor interest rates rise much when the economy strengthens.
That’s largely due to what the Associated Press described as a “near insatiable appetite” for U.S. Treasury securities. Wray contends the attraction to so-called Treasurys is because the government won’t default on its interest payments since it controls its own currency.
The nation’s $22 trillion debt is “the collateral behind the whole global financial system. It’s the safest asset on planet Earth, maybe in the whole universe.”
In the past year, an increasing number of economists and observers have warmed to the reality that government debt is not to be as feared as it is. In a highly noted speech last year, Olivier Blanchard, a former chief economist of the International Monetary Fund, pushed back on the long-held consensus that rising government debt will inevitably have negative consequences.
“Put bluntly, public debt may have no fiscal cost,” Blanchard said in his outgoing speech as president of the American Economic Association. “The probability that the U.S. government can do a debt rollover, that it can issue debt and achieve a decreasing debt-to-GDP ratio without ever having to raise taxes later, is high.”
While Wray argues the downsides of government debt are negligible and the U.S. isn’t spending enough to address its economic and social problems, he acknowledges that politicians who embrace his theory can pay a price. Among those who have championed modern monetary theory to pay for their big ideas are Sen. Bernie Sanders, who advocated universal health care as a presidential candidate, and Rep. Alexandria Ocasio-Cortez, who unveiled a Green New Deal to address climate change last year.
But Wray said others he’s met with over the years prefer to keep their opinions to themselves.
“We talk them through it. They say, ‘Yes, I understand this. But I cannot say this in public,’ ” Wray said. “That’s always the response.”