On Monday the Treasury Department announced it is borrowing roughly $3 trillion this quarter. The government claims it needs this sum to pay for the multiple relief packages that have been passed by Congress. Additionally, there are plans to borrow an additional $677 billion between July and September. Total U.S. government debt is now near $25 trillion, with the current fiscal year’s deficit running at $744 billion. The mind blowing figures have added fuel to the debt-debate fire that seems to be constantly raging.
Supporters of the astronomical borrowing point to the dire and extenuating circumstances brought on by the pandemic. Normally one to argue against runaway federal deficits, Federal Reserve Chairman Jerome Powell explained “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 this with as little damage to the longer run productive capacity of the economy as possible.” Furthermore, even though federal debt is expanding at a rapid clip, the cost of borrowing is historically low. For many, this makes the burden more bearable. Moreover, the Federal Reserve has promised to buy as much debt from the Treasury as needed to prop up the economy during the pandemic. Ultimately, the increase in spending has been largely met with bipartisan support.
Critics, on the other hand, have expressed their concerns about increased spending and are hesitant about new measures including a potential “phase four” relief package. In general, fiscal conservatives compare America’s budget to any normal household, and contend that borrowing more and more money will lead to a never-ending game of chasing our tail. Here’s how the process works: More debt, means more risk. More risk means higher interest will have to be paid on government debt. This will cause borrowing to become difficult at all levels, including those for individuals, corporations, and mortgages. Operating in the U.S. will be viewed as riskier in the eyes of the world, undermining continued foreign investor confidence and investments in the U.S. This would lead to downgrades, which would lead to higher interest rates on government debt, and the cycle repeats itself until it spirals out of control. That’s the macro-level logic of runaway debt. On a micro-level, Brian Riedl, a budget specialist at the conservative Manhattan Institute, argues, “If the U.S. government keeps spending like the Europeans, the American middle-class will be taxed like Europeans.”
Flag This: To some extent the United States is dipping its toes in the water of “Modern Monetary Theory” or MMT, which has been popularized by figures like Rep. Alexandria Ocasio-Cortez and Bernie Sanders. In essence, MMT claims that governments who control their own currency can spend freely, as they can always create more money to pay off debts in their own currency. There’s much more to the controversial economic theory than that one-sentence explainer, but the takeaway is that even fiscal conservatives are on board with this progressive idea, because without the massive amount of spending to prop up the economy, there might be only a skeleton of an economy to come back to after the virus is defeated. At the end of the day, the coronavirus has turned our world upside down. As Balaji S. Srinivasan notes, “every Socialist wish list item has been granted: MMT-in-all-but-name [with] trillions printed, prototype universal basic income (stimulus checks), price controls, mask seizures, attacks on “hoarding”, and control of industry via Defense Production Act. At the same time, “every conservative wish list item has been granted as well. There’s been a “halt to immigration, re-shoring of manufacturing, woke colleges shut down, dinner with family, crash in Tinder usage, and a society so physically modest that everyone covers their faces when outside.”