The coronavirus pandemic and economic shutdown have induced Congress to spend whatever it takes to fund the health system and keep the economy afloat. Now we are starting to see just how overwhelming those costs are going to be.
My models estimate that the 2020 federal budget deficit—just the deficit—will top $4.2 trillion. To put that figure in context, last year the entire federal budget totaled $4.4 trillion, which left us with a deficit of $984 billion.
Entering 2020—and before coronavirus—the baseline budget deficit was $1 trillion. The CBO projects that federal spending from the first four coronavirus response bills will add $2.2 trillion to this year’s deficit. The remaining $1 trillion consists of the economic and technical effects of the economic shutdown—the non-legislative costs such as fewer workers paying taxes and more people signing up for unemployment and Medicaid benefits. (The CBO seems to assume a slightly lower economic and technical figure than my model, although it has not released details). Remarkably, Washington is projected to spend $49,000 per household this year—by far the largest total ever.
Economists were alarmed that the deficit—which had been growing steadily since hitting a low of $439 billion in 2015—would likely cross the $1 trillion threshold in 2020. Now, the best-case scenario—in which the economy recovers quickly with no additional legislation—shows a $4.2 trillion deficit this year, and future deficits that never again fall below $1.3 trillion. Combined with the mounting costs of Social Security and Medicare, the deficit will rise back to $2.6 trillion by 2030, and continue growing thereafter.
These new projections mean that this year’s budget deficit will reach 19 percent of GDP. That is the largest share of the economy in American history outside of the peak of World War II, and double the 2009 level during the Great Recession.
Over the full decade, the coronavirus recession is projected to add nearly $8 trillion to the national debt, pushing the debt held by the public to $41 trillion within a decade, or 128 percent of the economy. This would exceed the national debt at the height of World War II. And while that war ended before the debt could rise further, the expanding Social Security and Medicare shortfalls will continue to bury future budgets in red ink.
How should lawmakers address this unsustainable avalanche of debt?
First, unfortunately, they may need to spend more. America faces three crises that must be solved sequentially: The pandemic crisis, the economic crisis, and the deficit crisis. The pandemic must be addressed to a satisfactory level before the economy can begin to recover (allowing for differing definitions of “satisfactory”). And then Congress must spend to keep families, businesses, and industries afloat during the recession before they can cut the deficit. Allowing entire industries to disappear and the economy to enter a prolonged depression would cost more than any economic legislation to avert that outcome.
Yet this does not mean that Congress should spend beyond what is necessary to rebuild the economy. It should resist ineffective Keynesian stimulus (especially infrastructure stimulus), as well as bailouts of industries or state pensions whose financial problems predate the pandemic.
As soon as the economy recovers, Congress’s top economic priority should be to address the budget crisis. The $8 trillion coronavirus tab essentially accelerates the prior projections of federal debt growth by six years, and therefore gives lawmakers six fewer years to avert a potential debt crisis in which rising debt and interest costs would overwhelm Washington’s ability to tax or borrow.
In fact, Congress could soon begin enacting savings policies and triggers that would automatically occur a few years down the road when the economy recovers. This is not unprecedented: The 1983 Social Security reforms contained policy savings to be implemented on a preset schedule over the subsequent 44 years (no additional legislation required). If lawmakers feel compelled by the economic shutdown to spend today, the least they can do is accompany that spending with savings reforms to be implemented as soon as the economic recovery allows it.
Lawmakers could begin with broad budget targets, such as declining deficits, or the Swiss system that limits spending growth to recent revenue growth (with automatic adjustments for booms or recessions). Lawmakers could spend beyond these levels only with a supermajority vote.
From there, program-by-program triggers can be put in place. Social Security and Medicare could each be put on long-term budgets, with automatic reforms implemented (on both the revenue and spending side) if program deficits begin to exceed the preset path. Federal grants to states can be automatically pared back whenever the economy (and state tax revenues) grows quickly. Discretionary spending can be capped and then enforced with stronger supermajority requirements than prevailed during the last decade’s Budget Control Act. Yes, a bipartisan deal may also require a modest tax increase trigger during economic booms.
The alternative is to build the largest debt in world history, just as 74 million baby boomers retire into Social Security and Medicare systems that face $100 trillion in cash deficits over the next 30 years. This would all but guarantee a debt crisis, followed by as much as a doubling of most federal taxes.
The $8 trillion coronavirus tab is enormous. It not only vastly exceeds the $1.5 trillion spent by the Defense Department on Middle East wars since 2001, it also exceeds the cost of the entire Defense Department budget over the past 12 years combined.
Even if interest rates remain at 3 percent forever, it will add $240 billion in annual net interest costs every year, while driving the U.S. closer to a debt crisis. Ending the pandemic and rescuing the economy is job one, but Congress can also begin crafting a deficit reduction framework for the end of the crisis. This will require a degree of planning, preparation, and foresight rarely seen in Washington.
Brian Riedl is a senior fellow at the Manhattan Institute. Follow him on twitter @Brian_Riedl.
Photograph by Erin Schaff-Pool/Getty Images.
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