The dual rescues, each historic in its own way, put the country on track to eclipse World War II-era highs in the national debt and the Federal Reserve’s balance sheet.
All told, the U.S. government has committed more than $6 trillion to arrest the economic downturn from the pandemic. The moves appear to have calmed stock market investors but may not be enough to hold the economy together if the health crisis drags through the summer.
When you combine the steps taken by Congress and the Fed and account for how the two interact, America’s national coronavirus response represents more than a quarter of U.S. economic output. To feel the weight of that sentence, try thinking of “quarter” as a measure of time, not a fraction.
It’s a quarter of GDP. That is to say, the response from Congress and the Fed totals significantly more than the $5.4 trillion of goods and services spewed forth by the U.S. economy in the fourth quarter of 2019.
Consider everything the government studies to estimate gross domestic product: military wages and pensions, record sales, toll booth returns on local highways, high school sports participation, sewage-collection receipts, manufactured-home shipments and even the value of meals farmers grow for themselves. There are about 2,500 measurements like that, and the coronavirus response could easily purchase everything they represent for more than three months.
The fiscal response
The three phases of congressional stimulus are relatively straightforward: There’s $8.3 billion in response to Trump’s $2.5 billion request, $192 billion for an act extending paid leave and an estimated $2.15 trillion for the Cares Act.
On its face, that’s the largest covid-19 response of any government in the world, according to Columbia University economist Ceyhun Elgin. In fact, it’s larger than the entire annual economic output of Italy, Brazil and all but seven countries.
Still, that number lacks context. Luckily, we can get plenty of context from Elgin, who spends several days each week updating a database of 168 countries’ responses to the pandemic, in between caring for coronavirus-positive family members and a 4-year-old.
After they adjusted the congressional response for the size of the U.S. economy, Elgin and his collaborators, Gokce Basbug (Sungkyunkwan University) and Abdullah Yalaman (Eskisehir Osmangazi University), found that the huge congressional stimulus was, proportionately, the world’s 10th largest.
The nonpartisan Committee for a Responsible Federal Budget estimates stimulus spending, combined with current spending and the effects of the current recession, will contribute to a projected $3.8 trillion budget deficit in 2020 as well as a $2.1 trillion deficit the following year.
As those deficits pile up, they’re projected to lead to a notable national debt milestone: This year, for the first time since World War II, the United States will owe more than its economy can produce in a given year, the nonpartisan committee estimates. That’s expected to rise to 107 percent by 2025 and as high as 120 percent by 2030 — and that’s if major provisions from the 2017 Tax Cuts and Jobs Act aren’t renewed.
The monetary response
The Federal Reserve is probably doing as much (or more) to prop up the economy than Congress is, but its contributions are harder to measure. Several Fed interventions have no stated limit, and none of them is government spending in the traditional sense.
Peterson Institute for International Economics senior fellow Joe Gagnon, a veteran of the Treasury and Federal Reserve, said the Fed’s enormous pandemic response should be thought of as intermediation rather than spending.
“There’s a borrower and a lender out there, and they’re afraid of each other now — they don’t want to deal with each other because they don’t know if the borrower will go bankrupt, so the Fed is stepping in between, and Congress is giving the Fed money to guarantee those borrowers’ loans,” Gagnon said.
“It’s doing a lot of basically risk-free things to keep the economy working,” Gagnon said. To emphasize the safety of the Fed’s actions, Gagnon explained that, in an intervention of a similar scale in 2008, the Fed not only didn’t lose money — it came out ahead.
Unlike Congress’s spending, which shows up in the national debt, the lion’s share of these interventions will show up on the Fed’s balance sheet. The ledger, which totals up all the Treasury and mortgage-backed securities and other assets owned by the Federal Reserve, already ballooned from 4.16 trillion in late February to 6.08 trillion on April 8. The next update, expected Thursday afternoon, will show it lurching even higher.
How high can it go? That’s intensely complicated, but we can try back-of-the envelope math. The chart above ends on April 8. The Fed announced $2.3 trillion in new and updated programs on April 9. Combine that with the nearly $2 trillion the Fed already added to its balance sheet, and we’re looking at north of $4 trillion, even if some of those programs aren’t fully utilized.
That’s similar to the $4 trillion estimated by top Trump economic adviser Larry Kudlow and Treasury Secretary Steven Mnuchin, but those estimates, based on the $454 billion included in the Cares Act partly to facilitate Fed lending, didn’t include much of what we see on the balance sheet before April 9.
Given that several of the programs have no defined cap, it seems a safe bet that, as the Wall Street Journal’s Nick Timiraos wrote last week, the Fed will remain on track to double its balance sheet — a $4.5 trillion jump — by the middle of this year. That would pass the 40-percent-of-GDP line in the chart above, easily the highest point on that chart. But even if you look only at current programs, the theoretical maximum is much, much higher.
Before this year, the Fed had been reducing its balance sheet, as many argued it needed more wiggle room to fight the next crisis. Now that the next crisis has come, the Fed — and Congress — are finding more wiggle room than anybody had imagined.