Congress, after endless months of haggling and posturing, finally got around to putting together another COVID relief package. It is, of course, packed with all sorts of goodies for special interests and the wealthy (racehorse owners got a special tax break, for example).
But the legislation does at least put some money in the ordinary person’s pocket. Since about 70% of the US economy comes from consumer spending, and since a large portion of the country is in financial distress, most of this money will go right back into the economy helping, we hope, to avert a 1930’s-type depression. So on balance I think this was the right thing to do, and no doubt the Biden administration will try to do more next year unless the economy shows signs soon of a sharp rebound.
But this is almost a trillion dollars more added to the burgeoning national debt, added to the $2+ trillion from the March stimulus package, and the $1+ trillion budget deficit that we already had in 2020 before COVID hit. With an official federal debt (now about $27 trillion) greater that the entire nation’s annual GDP (about $21 trillion in 2019), and additional off-books unfunded obligations (mostly in Medicare and Social Security) totaling somewhere between $125 trillion and $200 trillion, depending on what one counts, we have an exceedingly large debt load. The federal income in a good year is only about $3.5 trillion, and that doesn’t even cover our current expenses, let alone begin to pay down any of the debt.
So I have been wondering, in the end who gets stiffed, how and when? Clearly someone is going to get left holding the bag eventually, and history suggests it won’t be the wealthy or the politically well-connected.
I see only three ways this can end:
One. Congress raises taxes (and restrains its proclivity to spend) enough to actually cover the current federal budget and also begin to pay down the debt. That would mean at least doubling everyone’s taxes, if not more. Pigs will fly before that happens!
Two. The fed lets inflation rise to begin to eat away at the debt. Suppose we try to get the real total debt (assume it is about $150 trillion in todays dollars) down to no more than the annual GDP – say about $25 trillion in today’s dollars. That is reduction to 1/6th its current size. A 6.2% inflation rate would reduce the real value (buying power) of the current debt to one-sixth its size in 30 years. (the dollar denomination of the debt stays the same, but they are cheaper dollars by a factor of 6). That assumes Congress doesn’t add any more debt during those 30 years, a highly unlikely assumption.
Of course a 6.2% inflation rate would also destroy the buying power of everyone’s investments, savings, and retirement plans as well. In effect it is exactly the same as simply confiscating 5/6th of everyone’s assets to pay down the debt. And a high inflation rate would have other troublesome aspects. The government would have to offer higher interest rates to roll over Treasury notes, which would increase the annual interest payments and hence the federal budget. And higher interest rates would put a damper on business investment and expansion, reducing growth and hence federal tax revenue.
Three. The government simply defaults on the debt. Promised pensions get reduced or not paid at all. Medicare/Medicaid and Social Security disappears. Pension funds invested in Treasury notes lose their investments, so they go under. And investors get very skittish about loaning any more money to the US government.
If there is another alternative I don’t see it. A mature economy like ours is unlikely to grow fast enough to increase federal income by enough to pay down the debt, and if it did Congress would likely simply spend the additional revenue. There is no dearth of expensive new programs that the left or the right would dearly love to fund.
So the question remains, who gets stiffed in the end? Probably those who can least afford it, and who have the least political power, as usual.
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