On the latest Facing the Future, I was joined by Concord Coalition Executive Director Bob Bixby, Policy Director Tori Gorman and President of the Committee for a Responsible Federal Budget, Maya MacGuineas. We discussed fiscal policy in the era of COVID-19, national-debt and deficit related myths, as well as what is happening on The Hill with emergency relief legislation, marquee bills and even unemployment insurance.
[Note: Portions of this week’s Facing the Future can be seen in the video clips posted below.]
MacGuineas tackled a handful of myths related to the national debt and federal budget deficit in the COVID economy. Identified myths: that low interest rates mean there is no cost of borrowing, that like after World War II, it will be easy to reduce debt after the pandemic and that the Federal Reserve can keep buying our debt without consequences.
MacGuineas said it is common and politically advantageous for people to search for and develop theories for why deficits do not matter because dealing with the deficit and debt is hard work, and pretending you can borrow with no downside makes everything easier.
“Interest rates are one of the more interesting issues in the overall economy these days because they are so much lower than any of us would have ever thought they would be at a time when the deficit is this high,” she said. “That fact is giving an opening for people to rethink the issue.”
“I think there’s a big macroeconomic point, which is, clearly there is a smaller relationship between interest rates and deficits than we previously thought, but what it doesn’t mean is that borrowing is free,” MacGuineas said. “And those are the two things that people are conflating.”
“I think the main point is that because you can borrow cheaply, doesn’t mean you don’t have to pay the bill,” she said. “If and when interest rates go up, the larger your debt is, the more vulnerable you are to that change, and that’s very likely what we will see in the future.”
On the remaining two myths, MacGuineas said that our circumstances now are very different from what the nation’s budget and economy looked like after WWII and assuming the Fed can continue to buy all of our debt ignores a variety of likely consequences.
“After WWII, we didn’t have structural borrowing in place, in fact our deficit shrunk immensely quickly, and we had demographics on our side,” she said. “Now, what we’re facing is preexisting structural deficits … an aging population … and about $14 trillion of borrowing already planned for the next decade.”
She added that the notion that we can just turn around and bring that debt down just the same as after WWII is completely out of the realm of possibility.
“At the same time, the notion that the Fed will continue to buy all of our debt is, one, at odds with the mandate of the Fed, and, two, ignores the fact that that could cause a whole lot of problems in the broader economy.”
You can read the Committee for a Responsible Federal Budget’s analysis by clicking here.
MacGuineas also laid out four-phases likely necessary to help transition the country through the current pandemic and record-setting debt and deficit figures to a more sustainable path long-term.
Phase 1: Fight the pandemic. “The single best thing that we can do to deal with the economic situation that we have is work our way through this virus and be prepared and hopefully get a vaccine in place as quickly as possible so that we can restart the economy,” she said.
Phase 2: Provide a bridge loan for individuals, families and businesses. “So they can get to the other side without enduring real hardship, to the extent that’s possible, and keeping businesses that are viable afloat so that they will be able to restart as quickly as possible,” MacGuineas added.
Phase 3: Get the economy growing again. “The interesting thing is, during this part of the economic shutdown, our goal wasn’t stimulus or economic growth, our goal was to create a holding pattern where we are ready to recover,” she said. “But we actually needed the economy to slow down to fight the virus.”
Phase 4: Deal with the mountain of debt that has grown during all of this. “What’s important is that we not forget that fourth step, and that once the economy is strong enough, we pivot over to bringing the debt back down to manageable levels,” she said.
We spent much of the remainder of our discussion breaking down those different phases, where we are now and what Congress should focus on as it puts forth new legislation and revisits pandemic-related initiatives.
Gorman provided a quick update on legislation working its way through Congress, including the next potential COVID-19 relief package and funding for highway and infrastructure projects.
“We’ve seen a little bit of renewed energy regarding the transportation and infrastructure sphere,” she said. “The White House is talking about proposing a $1 trillion infrastructure package … the House proposed their own $500 billion package … in the Senate, a committee-passed bill provides about $300 billion for highways.”
She added that it will be interesting to see what happens if and when all those initiatives get mashed together in a final product.
On additional pandemic relief, Gorman said the White House wants a $2 trillion package. The House passed a $3.5 trillion package last month, and the Senate may be aiming for a $1 trillion package.
“Right now, we’re still talking about top-level numbers, and once you get in the ballpark of what people want to spend, then you get into the nitty-gritty,” she said. “I think any fifth package is going to contain at least three main components: more direct aid for households, an extension of the expanded unemployment insurance (UI) benefit and then there’s going to be aid for state and local governments.”
Gorman said that Congress is struggling with what to do with the expanded UI benefit because “in certain circumstances, UI actually pays more than what the beneficiary earned on the job prior to the pandemic.”
“So, there’s this discussion right now in Congress, which basically boils down to, ‘should they extend this benefit, should they amend this benefit or should they end this benefit?’ ” Read more analysis from Gorman on UI by clicking here.
Hear more on Facing the Future. I host the program each week on WKXL, NHTalkRadio.com (N.H.), and it is also available via podcast. Join me and my guests as we discuss issues relating to national fiscal policy with budget experts, industry leaders and elected officials. Past broadcasts are available here. You can subscribe to the podcast on Spotify, iTunes, Google Play Music or with an RSS feed. Follow Facing the Future on Facebook and watch videos from past episodes on The Concord Coalition YouTube channel.