- Congress and the White House are working on an economic stimulus bill likely to approach $2 trillion.
- The spending comes with the government already expected to run a budget deficit exceeding $1 trillion this year.
- Economist Paul McCulley said aggressive spending to combat the coronavirus’ economic impact will be “a bridge to the other side of an act of God.”
- In addition to the spending, a Treasury backstop of Federal Reserve programs could provide another $4 trillion in liquidity.
- Administration officials say the spending will pave the way for greater growth later in the year.
Remember when people were all worked up over trillion-dollar government budget deficits? Those might seem like the good old days, once Congress and the White House finish up the coronavirus rescue package expected to be approved in the next few days.
Estimates of just how big the final bill would be vary, but it’s assured that it will be a historic moment for sheer fiscal force being exerted at a time of economic duress.Â
Administration statements over the past few days point to something on the order of $2 trillion in economic juice. By contrast, then-President Barack Obama ushered an $831 billion package throughÂ during the financial crisis.
That type of fiscal burden comes as the government already has chalked up $624.5 billion in red ink through just the first five months of the fiscal year, which started in October. That spending pace extrapolated through the full fiscal year would lead to a $1.5 trillion deficit, and that’s aside from any of the spending to combat the coronavirus.
Already, the national debt stands at more than $23.5 trillion and will be on track to eclipse $25 trillion. Taxpayers shelled out $574.6 billion in fiscal 2019 on interest payments for the debt and another $229.1 billion in fiscal 2020.Â
In short, the shock from the COVID-19 spread will blow a fiscal hole through Washington, D.C., that could take years if not decades to patch.Â
Hand-wringing over what this will all do to the debt and deficit situation, however, will have to wait for another day. In times of crisis, there is little patience for fiscal austerity, only a sense of urgency that while government spending can’t stop the virus from spreading, it can mitigate what will be profound economic damage.
“It’s truly a bridge to the other side of an act of God,” economist Paul McCulley told CNBC.com. “We’ll deal down the road with the impacts on so many fronts of society with the whole thing. Right now, worrying about fiscal incontinence is the exact opposite of where we should be. We should have fiscal robustness implemented through effectively a joint venture between fiscal and monetary policy.”
McCulley, a former managing director at asset management giant PIMCO and now a Cornell University fellow and adjunct professor at Georgetown, has been one of the leading thinkers in economics particularly since the financial crisis. He coined the term “Minsky Moment” to describe sudden collapses in markets and “shadow banking” for non-bank lenders that were at the center of the crisis.
He’s an advocate of a philosophy that has taken more prominence over the past couple of years called Modern Monetary TheoryÂ â essentially the belief that debt and deficits matter less in times of low inflation and that government spending should be used to address the widened wealth gap in the U.S. as the Fed keeps interest rates low. Some of the biggest backers include Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez.
While the theory has some prominent detractors such as economist Larry Summers, it is likely to become the de facto law of the land as the coronavirus economic impact intensifies.Â
“The bank of Uncle Sam needs to be open, period,” McCulley said.Â
Making that happen would take a variety of forms.
McCulley sees programs run jointly between the Treasury and Federal Reserve as key, with the central bank expected to keep interest rates flowing and liquidity programs running.Â
“Saying that too much central bank independence can be a problem is something that’s considered to be heretic in my profession,” he said. “That’s essentially what I’m saying now.”
This week’s stimulus is projected to be a combination of direct-deposit payments to individuals, extended unemployment benefits to the millions who will be displaced from the retrenchment of activity due to social distancing and business closings, and bridge loans to businesses that will be incentivized not to lay off workers.
On top of that, the Treasury will offer guarantees to the Fed that Treasury Secretary Steven Mnuchin said would allow the central bank to leverage up to $4 trillion of liquidity for the business and financial system.
The total price tag? Unimportant, at least as long as the nation suffers through an indefinite near-shutdown.
“The dude who is unemployed now gets a check and has gotten himself an asset that he can cash and go a store,” McCulley said. “He’s gotten an asset but Uncle Sam has gone into a hole. I have no problem with that whatsoever.”
Still, there will be efforts to calculate the fiscal damage.