This was the mother of all bailouts — and it’s not finished yet. The amounts above must be increased by roughly $3 trillion, representing what the Federal Reserve has lent to keep credit flowing, prevent financial panic and stimulate a recovery. Is this the end of it? Nope. What comes next? You guessed it. More bailouts. Conceivably, the next stimulus could be even larger than the last.
The theory is that if the first stimulus lapses, the economy’s recovery will falter. House Democrats have already passed legislation whose price tag is estimated at $3.4 trillion. (The bill is called the Heroes Act, short for the Health and Economic Recovery Omnibus Emergency Solutions Act.) The bill has two purposes: first, to prevent an economic free-fall by making up the income lost to unemployment or “sheltering in place”; and second, to stop the virus from spreading by making it easier for people to stay home and providing funds to local governments to fight the pandemic. Economist Mark Zandi of Moody’s Analytics summarizes the outlook this way:
“A downturn is more than likely without additional fiscal support [more spending, tax cuts and deficits]. With the Heroes Act, the economy is expected to recover all of the jobs it lost this spring by summer 2023. Without any additional fiscal support, that job recovery would take until the end of 2024.”
About one-third of the Heroes Act spending would go to state and local governments (the $150 billion in the Cares Act reimburses states and localities for expenses caused by the virus); the remainder would support unemployment insurance and other safety net programs, according to Zandi.
As yet, there is no consensus on the size or contents of another package. According to news reports, President Trump favors cuts in payroll taxes and in capital gains taxes (profits on stocks, bonds and other financial assets). Some Republicans reportedly worry about the lax use of deficits; they suspect that the economy may be recovering faster than expected. In May, retail sales rose 17.7 percent, a big rebound from April’s 14.7 percent decline.
Oh, did we mention there’s an election this year?
The United States is addicted to deficit spending. At present, that’s okay. When the country faces a calamity — war, natural disaster or a national emergency — large deficits are often necessary and desirable. We need the ability to bail ourselves out of hard times. But normally, we should be running balanced budgets, small surpluses or (at worst) small deficits. Government worth having should be worth paying for through taxes.
The trouble is that we’ve violated this sensible principle repeatedly. Except for five years (1969 and 1998 to 2001), we’ve consistently run deficits since World War II. The discovery by politicians and economists that we could run deficits without incurring any immediate adverse consequences led — predictably — to more deficits. The operative theory was “all gain, no pain.” The ease of running deficits inspired more deficits. That’s well-known.
What’s less well-known and, frankly, more speculative, is the effect on businesses. Corporate executives and the owners of small businesses have been quietly conditioned to follow the government’s lead in setting their own policies. They’ve become more risk-averse. It’s safer to wait and watch what government does before doing anything yourself.
The result is that our business system is less spontaneous and, in dire circumstances, more dependent on government. No one knows the long-term ramifications of acquiring so much debt so quickly. It’s easy to deplore all the bailouts, but — on the spur of the moment — it’s also hard to think of something better, especially when the side-effects of being wrong are so momentous. Throwing money at the problem may be bad, but the other possibilities may be worse.
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