Covid Debt: Baby Steps

Last week I brought up the idea that it might be necessary to think of Covid 19 as equivalent to war financing. That is, with a war on Covid,  we might have to spend a lot of money and go into considerable debt to win the war. I worried primarily about the aftermath of the war using data from 1940 to 1955 to illustrate the difficulties of reversing engines – of bringing debts back to pre-war levels.

I offered no solutions for how we could reverse engines but I have had some nice discussions with several of you about that topic. So here we go again. At one extreme is one friend who basically said that we shouldn’t worry about the government debt. He is in no hurry to return to pre-war debt levels. Technology is roaring and will restore economic growth even in the face of historic debt.

Should we worry about the national debt in 2020 and 2021? It’s a good question. With household and business debt at high levels and government debt historically high, I wonder where all the saving comes from to buy all that debt. With the world in a recession, surely the amount of saving is low. Yes, it might be high as a percent of income when stores are closed, but the gross amount can’t be much.

And where do global investors want to invest? Much depends on how they see the US as the leader when these investors view the strength of the US government and economy. Will they see us as handling our issues better than Japan or Germany? Or will we look like global village idiots? If it is the latter, then the world will not want to fund our debts and we will be indistinguishable from Venezuela. If the former, then we can move forward with historical debts for the time being.

So maybe we have some time. What do we do with it? The first thing to note is that we don’t have to clean up historically high debt over the weekend. We could send a decent signal to the rest of the world that we have started on the right path.  Perhaps your doctor puts you on a diet because you have been gaining 10 pounds each year. A good sign might be to only gain 5 pounds next year. It might seem better to start losing weight – but in a tough situation you might see halving your weight gain as the beginning of a  win.

My point is that we don’t have to balance the budget tomorrow. But we could begin by making a bold statement that we will start by improving budgetary dynamics and then will turn to smaller deficits and debt. You gotta start somewhere.

But even that seems tough right now. How do you start? Where do you start?

Logically you start by remembering that the debt is the result of annual budget deficits and annual budget deficits are the net result of decisions about government spending and taxing. With respect to spending – you are already in a fight. What gets cut? What gets cut the most? What spending items are sacred?

If this is not your usual budget year and you face challenges of historic proportions, you don’t get wild and crazy. You just had the flu and you haven’t eaten well in days – so you don’t go out and run your fastest mile. With respect to the US government budget recently – it might not be that hard to find a little fat in the spending. What I am saying is that you let government spending grow but you let it grow a little slower than before. Seriously, are you telling me that a bipartisan group of adults could not pare back a little of the future growth of government spending? Stop it.

The story about tax revenues is the same – find a way to have revenues grow a bit faster. Don’t gouge business or the middle class or even rich people. I am sure you can find a loop hole or two. The point here is to start a turnaround. Make a statement. You cut back some of the growth of spending. You also will increase the growth of tax revenues. The deficit will get smaller.

The result is a beginning wherein you reduce the 2021 or 2022 budget deficit by a few billion. Hey mom, we turned things around. The deficit is smaller this year.

I am running out of space (and your patience) so let me say that once you get started, take five to 10 years rolling in the same direction. So long as you move in the right direction and you do things that seem reasonable and not cutthroat – you don’t scare away world investors. 

There was a major, historic  shock to the US economy in 2020. It will take a while to reverse it. As we get into the process, the decisions about spending and tax revenues will get harder. But with some years of working together on the budget, and seeing progress in the economy result, then maybe our politicians will catch the hint. 

But if you don’t take the first step, I am not sure what you do next. Let's get off the dime.