Don’t Believe the Debt Hawks—More Stimulus Is the Only Path to Recovery

Fear-mongering over the deficit is the absolute wrong approach to the Covid-19 crisis.

Josh Bivens April 30, 2020

Mitch McConnell has it all wrong. (Photo by Drew Angerer/Getty Images)

As pol­i­cy­mak­ers scram­ble to try to mit­i­gate the eco­nom­ic fall­out of the coro­n­avirus shock, a pre­dictable cho­rus has emerged wor­ry­ing that these efforts will lead to dam­ag­ing increas­es in the nation’s pub­lic debt. The Wash­ing­ton Post and New York Times have been among the out­lets sound­ing alarms over the impli­ca­tions of increased gov­ern­ment spend­ing. And even Sen­ate Major­i­ty Leader Mitch McConnell (R‑Ky.) warned against fur­ther eco­nom­ic stim­u­lus, say­ing: giv­en the extra­or­di­nary num­bers that we’re rack­ing up to the nation­al debt … we need to be as cau­tious as we can be.”

Debt used to finance relief and recovery measures is smart.

Base­less fears about deficits and debt were a prime imped­i­ment to doing the smart things for spurring a fast recov­ery from the Great Reces­sion fol­low­ing the 2008 crash, and the result was a recov­ery that was far weak­er than it should have been.

Before we repeat the same mis­take this time, we should remem­ber two impor­tant things about fed­er­al bud­get deficits and pub­lic debt. First, tak­ing on debt can be stu­pid or smart — it depends on con­text, and the debt to GDP ratio pro­vides no such con­text. Sec­ond, the pop­u­lar anal­o­gy between house­hold bud­gets and the bud­get of the fed­er­al gov­ern­ment is active­ly misleading.

Let’s talk first about the dif­fer­ence between smart and dumb addi­tions to debt. For a house­hold, bor­row­ing to go gam­ble at the race­track would be dumb. But bor­row­ing to finance an edu­ca­tion that pro­vid­ed you with a skill or cre­den­tial to increase your life­time earn­ings would be smart — even if it’s a shame we make stu­dents take on debt at all.

For the fed­er­al gov­ern­ment, decid­ing to add $1.5 tril­lion to the debt to give cor­po­ra­tions tax cuts back in 2017 was dumb. But in the cur­rent cri­sis, tak­ing on debt to finance expan­sions to unem­ploy­ment insur­ance and aid to state and local gov­ern­ments and invest­ments in hos­pi­tals and test­ing is very smart.

So, the thresh­old ques­tion for decid­ing whether or not to add to debt should sim­ply be: is this dumb or is it smart — does it solve a press­ing social prob­lem or not? Debt used to finance relief and recov­ery mea­sures is smart.

The sec­ond thing to keep in mind is that rules that apply to house­holds about debt don’t apply to the U.S. gov­ern­ment. Peo­ple often claim that because house­holds reduce spend­ing dur­ing tough times as a pre­cau­tion­ary mea­sure, the fed­er­al gov­ern­ment should too. But this is a ter­ri­ble anal­o­gy, because what might make sense for one house­hold to do in the face of anx­i­ety about the econ­o­my leads to a cri­sis if every­body does it. In fact, the fed­er­al gov­ern­ment should take on more debt exact­ly when house­holds are try­ing to take on less.

Reces­sions start and wors­en when it’s not just one house­hold decid­ing to pull back spend­ing, but mil­lions of house­holds. This is because one person’s spend­ing is anoth­er person’s income. If I decide to delay buy­ing a new wash­ing machine because I’m wor­ried about the econ­o­my, this reduces the incomes of the peo­ple mak­ing and sell­ing wash­ing machines. If those peo­ple in turn now have to pull back their spend­ing because I didn’t buy any­thing from them…you can see the vicious cycle that can start and make reces­sions so damaging.

As pri­vate house­holds start pulling back spend­ing, and as this sets off a chain reac­tion that wors­ens a reces­sion, you need some enti­ty in the econ­o­my to break the down­ward spi­ral by ramp­ing up its spend­ing as pri­vate house­holds ramp theirs down. That’s the fed­er­al government.

Fur­ther, this spend­ing ramp-up should be financed by debt, not high­er tax­es that might drag on pri­vate spend­ing. Even bet­ter than financ­ing with debt might be print­ing mon­ey — but the dis­tinc­tion between debt and mon­ey-print­ing is a lot less impor­tant than the dis­tinc­tion between either of those and taxes.

Don’t get me wrong, we should raise tax­es sub­stan­tial­ly and in a pro­gres­sive way over the long-run to build a fair­er and bet­ter econ­o­my. But we don’t need to do that before prop­er­ly respond­ing to the cri­sis in front of us.

An effec­tive response in the next round of stim­u­lus should include $500 bil­lion in aid to state and local gov­ern­ments, make addi­tion­al invest­ments in unem­ploy­ment com­pen­sa­tion, pro­tect work­ers’ pay­checks, include work­er pro­tec­tions and invest in our democ­ra­cy. Yes, these actions will increase the debt, but they’re also crit­i­cal to ensur­ing a real and fair recovery.

Some would say that allow­ing the debt to GDP ratio to climb back to lev­els last seen in the 1940s is a rad­i­cal thing to do. It’s not — it’s just smart eco­nom­ics. But allow­ing unem­ploy­ment and suf­fer­ing to climb back to lev­els last seen in the 1930s while doing none of things we now know could avert that would be tru­ly radical.

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