On March 27, the Congress passed and the President signed a $2.2 trillion economic stabilization bill. It was by far the largest money bill ever enacted into US law. That bill followed two previous, smaller — but hardly inconsequential — bills for the same purpose, and was itself followed by a fourth bill. On top of those bills, the Federal Reserve will facilitate trillions of dollars of new lending; but noting the issues not yet addressed, the Congress has begun — via the press only, by all appearances — arguing over a fifth bill.
Nobody is counting all that money. Nor should they. You don’t worry about your cellphone bill when your stalled boat starts taking water just out of sight of shore. Likewise, you don’t dawdle on shoring up an economy that would otherwise be in free-fall.
Unfortunately, though, this isn’t just a cellphone bill. This is a minimum 25 percent increase in a public debt that is already far too large. After decades of bad behavior — and some bad luck — the US was already setting debt-burden records for peacetime. Now we are sailing totally off the charts — with near certainty that the debt burden will exceed the record highs of World War II. And there is zero prospect that anything like the post-war economic bounce will boost us out of the debt hole.
What should a prudent nation do?
If we demonstrate that we can manage the additional debt responsibly and affordably, then policymakers will be more willing to undertake the essential recovery expenditures, and the debt markets will be more willing to finance them.
First, we need to size up the problem. The economy has been dragged to a veritable standstill, with over 30 million people becoming unemployed in just six weeks. While public and private sector leaders work on a safe and responsible plan to start reopening the economy, a reasonable (but by no means precise) assessment is that when all the dust has settled the nation will have lost the equivalent of all of its production over a period of three months — or 25 percent of our annual GDP. If the federal government must spend or cut taxes by that amount to save the economy from a total crash, that is how much the nation must borrow — how much additional debt it must incur. And that is what takes our already swollen debt up to the record level of 106 percent at the end of World War II.
How can the nation borrow that much money? And how can the Treasury service that debt — that is, pay the interest on it — going forward?
The novel coronavirus outbreak and the public policy response are of a scale unknown to any living American. It is far beyond SARS and MERS and the annual flu in its communicability and virulence. It has been described as a “once-in-a-lifetime pathogen.” It makes perfect sense to finance the extraordinary necessary recovery efforts over a lifetime period.
Furthermore, the recovery effort has no connection to the everyday activities of government. When the pandemic is over, that spending will end. If the federal government had a specific plan to deal with this extraordinary one-time expense, financing it in the markets would be much easier. Therefore, it makes perfect sense to segregate the financing of this debt from the normal government finances, and to create a fully dedicated mechanism to pay for it.
Interest rates are very low, and the financial markets have shown themselves willing to consider very long-term securities. There is merit to consolidating all of the debt undertaken in a single separate financial entity (probably organized as a public corporation), and financing it with bonds of a 40- or even a 50-year maturity — longer than the 30-year Treasury bonds that are the longest the Federal government sells today.
What would that mean in dollar terms? The all-in cost of our estimate of three months’ worth of output — 25 percent of GDP — is about $6 trillion. At 3 percent rates, that would incur interest costs of about 0.75 percent of the GDP, or about $180 billion. For credibility with the financial markets — but only after the economy is fully recovered — the nation must raise that amount in addition to current revenues — a tax increase — that would be totally segregated. This will assure that the additional revenues could not trigger spending increases elsewhere in the budget. (Similarly, pledges to cut spending would not work because they could not be segregated from the budget and there is no assurance that savings would not be spent on something else. Furthermore, promises of future appropriations and Medicare reimbursement cuts have been repeatedly reneged upon.)
The public corporation that issues the bonds to cover the cost of recovery must have the sole claim to the additional revenues. The new revenues could be collected starting after the economy recovers, but an early commitment would keep the financial markets comfortable with low interest rates. Revenues raised in the initial years would cover interest costs, but the revenues raised must increase as the economy grows to retire the bonds gradually and fully over their 40- to 50-year maturity.
Some say that the United States has a privileged place in the world financial markets because every other nation is even worse off — we are “the best-looking horse in the glue factory.” Perhaps true — but now, the entire glue factory is underwater.
Out of justice to future generations, the nation today must tackle its ongoing expanding debt. A first step would be to prevent the struggle against the pandemic from undermining the federal government’s fiscal standing. Segregating the cost into long-term debt and providing for its servicing with new, separable revenues is the best way to do that. But it is only a first step; true and comprehensive fiscal responsibility must follow.
W. Bowman Cutter is senior fellow and director of the Next American Economy project at the Roosevelt Institute. He was director of the National Economic Council and deputy assistant to the President in the Clinton administration. He is co-chair of the ad hoc subcommittee on COVID-19 for theCommittee for Economic Development of the Conference Board (CED). Joseph E. Kasputys is chairman and CEO of Economic Ventures. He was assistant secretary of the Commerce Department in the Ford administration. He is co-chair of CED’s ad hoc subcommittee on COVID-19. Joseph J. Minarik is a senior vice president with CED. He was chief economist at the Office of Management and Budget in the Clinton administration.