As a result of the shutdown that was instituted to slow the spread of the coronavirus, the economy is now in a deep recession.
Our elected officials have taken economic policy actions that are designed to minimize both the depth and the length of the current recession in order to avoid something worse.
Congress has already agreed to spend an additional nearly $3 trillion to stimulate the economy. Most of the money has been sent to households and business already, but because the economy is still mostly shut down, the impact of that spending has yet to be seen. In spite of that, the Democrats in the House of Representatives want to spend an additional $3 trillion.
This new spending is not needed at this time and may cause long term harm to the economy. After examining the bill, it is easy to conclude that the Dems latest proposal contains unneeded spending and more government regulations, leading to more government control.
Already Congress has agreed to give $1,200 to nearly every tax-paying adult and $3,400 to nearly every household with a family of four people. Adults receive this free money whether they have been adversely impacted by the coronavirus or not.
The purpose of this free money is to make sure households can meet their monthly financial obligations and to ensure that households have money to spend once the economy is permitted to re-open.
The government has also agreed to pay all unemployed workers an extra $600 per week. This is in addition to the unemployment compensation the worker is receiving from their state. While Dems hailed this spending, the extra $600 will result in workers desiring to stay unemployed, at least until the $600 runs out.
Prior stimulus packages included loans to small business to pay the wages of employees as well as other expenses, for two months. If the business does not lay off any workers, the loan turns into a grant and does not have to be repaid. This will permit small businesses to remain solvent during the shutdown and allow them to quickly respond when they are allowed to fully re-open.
In total already approved spending of $3 trillion should be sufficient to keep both households and businesses afloat. Any more is probably not needed and will add significantly to the deficit.
Prior to the virus the annual deficit was budgeted to be $1.1 trillion. Since Congress already agreed to spend an additional $3 trillion the annual deficit will now be more than $4 trillion. Once spent, the public debt his will increase to $27 trillion. The Dems new proposal will increase the annual deficit to $7 trillion and the public debt to $30 trillion.
Since annual GDP is about $21 trillion, with the Dems proposal, the public debt will be almost 50% greater than annual GDP. Economists worry whenever the public debt exceeds than annual GDP.
Even though interest rates have been low for more than a decade, annual interest expense on the public debt is about $400 billion this year. As interest rates rise and the public debt increases, annual interest expense will increase significantly.
Aside from the interest expense there is a fear that business will be crowded out of financial markets meaning if the federal government is borrowing trillions, there may not be sufficient funds for corporations to sell their bonds. This will slow economic growth and could cause more inflation.
The high debt will eventually put upward pressure on interest rates.
The real long term problem is the burden placed on future generations, since there is no mechanism in place to ever pay the debt back. When a deficit is incurred, to finance that deficit, the government sells bonds that mature in 10 or 20 years. When the bond comes due, the government simply sells new bonds to pay off the mature bonds, so the debt continues to grow.
The answer to stimulating the economy is to safely re-open. Then the effects of the already passed spending bills should be enough to begin the recovery. Continuing to spend trillion of dollars that the government simply does not have, will do far more harm than good.
Say no to the Dems' latest spending proposal.
Dr. Michael Busler, Ph.D., is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years.
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