Schansberg: The Co-Morbidity of Debt, ‘Stimulus’

April 1, 2020

by Eric Schansberg, Ph.D.

COVID-19 is causing all kinds of trouble — for physical, mental and economic health. Policy-makers are trying to limit the pandemic’s spread while dealing with its implications for individuals, companies, and the economy. 

For individuals, Congress and President Trump have chosen a dual approach. They’re mailing checks to everybody, and there’s assistance for those who have lost their jobs — an expanded form of unemployment insurance. 

With assistance, there is a general trade-off between two desirable goals: well-targeted and delivered fast. Targeted is better — for key efficiency and equity reasons (it’s less costly and why should people receive help if they don’t need it?).

But the bureaucracy may not be able to execute a targeted policy quickly enough to help people in need. It takes time to process so many unemployment claims. And even with mailing out checks, if you don’t have direct-deposit information already on file with the IRS, you probably won’t get the money anytime soon.

For small business, the government is providing subsidies, deferring loans and taxes. Again, one worries about whether the bureaucracy will be nimble enough to implement these well. And for larger businesses, the government is subsidizing loans. The chief concern here is cronyism. In all of this, the broad problem is whether government activism in practice will work (nearly) as well as one would hope. 

One implication: Our leaders are calling this “stimulus,” but that doesn’t make it so. Even if some of the pieces are stimulating, it does not mean that it will help overall. We only need to remember the Great Recession under Presidents Bush and Obama to see that “stimulus” does not always stimulate. 

Another concern is that this new spending of $2 trillion is additional deficit spending — when the government has already amassed an impressive national debt and has made promises that amount to liabilities (Social Security and Medicare). With any government debt, there are ethical and practical issues. When and why should we make future taxpayers pay for stuff today? (The best examples are long-lived infrastructure; the weakest contexts are redistribution.) 

With COVID, serious illness and death are more likely if there are underlying health conditions such as heart or respiratory ailments. These are called “co-morbidities.” It’s the same with our debt. This deficit spending, by itself, might be tolerable. But another $2 trillion — on top of the current $24 trillion and an estimated liability of $50 trillion to retirees — could be fatal. 

As in personal finance, there comes a point where one cannot recover from debt. Either the debt gets too large or the underlying resources to finance debt are diminished. Our economy is dealing with both right now: more debt and less GDP. How much debt and liabilities can we incur before the promises are incoherent and people will no longer loan us money at the same low-risk interest rates — or eventually, at all?

When that happens, the only option for an individual is bankruptcy. Government can do the same — reneging on the debt altogether or devaluing the debt (e.g., paying it back 50 cents on the dollar). Government can also print money to pay the debt — leading to rampant inflation. 

Default and inflation are devastating to those who have those resources, especially the retired. Both are painful for an economy and common in less-developed countries — a big part of why they remain “less-developed.” At what point would our first-world problems become third-world sorts of problems?

If we survive this round of borrowing, the growth of government in a crisis usually leads to bigger government in the long-run — even after the crisis has ended. The nature of government spending and bureaucracy is that it’s easier to add than to subtract. (Robert Higgs describes this beautifully in his classic book, “Crisis and Leviathan.”) 

Why don’t people take government debt seriously? For one thing, we’re spending someone else’s money. Another problem: Trillions are so large that it’s incomprehensible. It’s helpful to use what I call the “rule of 12.” Since we have one-third of a billion people in the U.S., every billion dollars will cost the average person $3 — and $12 from the average family of four. Trillions are more challenging, since it’s one thousand billions. But it’s still the same math: one trillion works out to $12,000 in future taxes from a household of four; $2 trillion is $24,000. 

Debt is useful in one way. If you follow the issue long enough, you can tell who’s a partisan. When their party is in control of government, debt is never as big of an issue as when the other party is in control. (This is especially galling for Republicans, who often claim to be fiscally conservative. Similarly, Democrats should be thumped for avidly advocating military interventionism and pounding the working poor and middle class.)

But it’s never a good look to be a partisan for lousy groups. We can hope they’ll self-quarantine soon. 

D. Eric Schansberg is professor of economics at Indiana University Southeast, adjunct scholar for the Indiana Policy Review Foundation and author of “Turn Neither to the Right not Left: A Thinking Christian’s Guide to Politics and Public Policy.” 



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