The recent passage of the $1.9 trillion COVID-19 stimulus bill on March 10 has raised concerns over whether America can afford it. Two University of Georgia economics professors said the relief bill won’t cause the United States to go broke.
Recent numbers show that the U.S. federal debt was at $26.9 trillion on Sept. 30, 2020, according to the U.S. Government Accountability Office, and the projected budget deficit for 2021 alone is $2.3 trillion, which is the second-largest budget deficit since 1945, according to the Congressional Budget Office.
William Lastrapes, an economics professor at the University of Georgia who holds the Bernard B. and Eugenia A. Ramsey Chair of Private Enterprise, said in a lecture hosted by the UGA Economics Society on March 22 the federal government’s COVID-19 relief packages would not cause the government to go broke or default on its debt.
“Worrying about the debt and deficits, to me, is a second order issue. The debts can be paid back,” Lastrapes said in the lecture. “Deficits will turn into surpluses somewhere down the road, or at least they’ll get small enough so that governments can pay back their debt.”
The relief package, which included $1,400 direct payments to individuals, funding for schools, funding for vaccine distribution, aid to businesses and other measures, will be primarily paid for by the government issuing more debt or borrowing more in order to pay for it, but this will be a “completely sensible strategy for the federal government,” Lastrapes said in the lecture.
“It’s almost certain that the U.S. will pay back that debt,” Lastrapes said.
Dwight Lee, a professor emeritus in the economics department at UGA, said when it comes to the $1.9 trillion relief bill, the important thing to look at is the ratio of debt to gross domestic product.
The ratio of debt to GDP compares how much a country earns to how much a country owes. A high percentage means that the country isn’t producing enough to pay off its debts, and a low percentage means there is enough economic output to pay off debts.
For 2021, the debt-to-GDP ratio is “almost sure” to reach more than 100% again and will “continue upward,” Lee said. This is because it’s hard to reduce transfer payments, which are what make up most of the CARES Act, Lee said.
Transfer payments are payments in which no good or service is exchanged. The most common example is the government using tax revenue for social security or for pensions.
“The desire to live at the expense of others is far more durable than wars and can be more economically destructive,” Lee said.
Polarized on policy
There should be no concern about the federal government defaulting on its debt, Lastrapes said, because markets aren’t worried that the U.S. will default.
“Markets trust the federal government to be able to collect taxes, which back up the debt,” Lastrapes said.
In addition to an effective tax system, Lastrapes said the public shouldn’t worry about the debt because the implementation of a wealth tax and corporate tax, which the Biden administration has said it wants to implement, will allow for continued spending by the government.
“Any time tax revenues go up, that reduces the need to issue new debt levels, and that provides some constraint on debt,” Lastrapes said.
Another factor for Lastrapes is that the federal government is an “insurer of last resort.”
“You can think about the federal government as … an insurance company. … The federal government is big enough, and it's got enough tax structure to be able to simply borrow from people to provide relief when these bad outcomes happen,” Lastrapes said.
Though Lastrapes doesn’t think the U.S. will go broke from its relief bills, he said federal government spending should go toward public health so the economy will not have to shut down the next time there is a pandemic.
The Congressional Budget Office forecast that by 2051 the ratio of federal debt to GDP will be 202%.
“There are reasons to believe that once federal spending gets in that range, politicians will have effectively no motivation to reduce the continued growth in the debt to GDP ratio. Of course, it cannot continue increasing forever,” Lee said. “Unfortunately, the ending is unlikely to be enjoyable.”