Prudence during Good Times Means Ability to Spend during Bad Times

Political News

[ad_1]

(Steve Marcus/Las Vegas Sun via Reuters)

I know it is very 2010 to write about debt and government spending, but here we are. As Eric Boehm at Reason reports:

In the halcyon days of yore—you know, 10 weeks ago—budget hawks were fretting about the return of trillion-dollar deficits, with the Congressional Budget Office’s latest 10-year projection showing that the annual budget deficit would hit $1.7 trillion by 2030.

Today, that projection is not even worth the paper it is printed on. . . .

The numbers are truly staggering. According to the Committee for a Responsible Federal Budget (CRFB), a nonpartisan group that advocates for lower deficits, the budget deficit will hit $3.8 trillion this year—that’s four times larger than the $984 billion deficit recorded last year.

Let’s take this in for a second. A nearly $4 trillion dollar deficit is 18.7 percent of GDP. Here is a chart showing this, which assumes that Congress doesn’t add more spending to it in the coming weeks and doesn’t make permanent many of the temporary spending extensions of the CARES Act:

You Might Like

It also means that suddenly our debt as a share of GDP is coming close to 100 percent soon, as opposed to 2030, as projected back in January.

Now, it makes sense to spend and borrow a lot of money in times of crises, such as this one. But this is why politicians should be relatively frugal during good times. We have been warned over and over by the Congressional Budget Office. Here are a few samples:

2020:

High and rising federal debt would reduce national saving and income, boost the government’s interest payments, limit policymakers’ ability to respond to unforeseen events, and increase the likelihood of a fiscal crisis.

2014:

The large amount of debt would restrict policymakers’ ability to use tax and spending policies to respond to unexpected challenges, such as economic downturns or financial crises. As a result, those challenges would tend to have larger negative effects on the economy and on people’s well-being than they would otherwise. The large amount of debt could also compromise national security by constraining defense spending in times of international crisis or by limiting the country’s ability to prepare for such a crisis.

2010:

Moreover, rising debt would increasingly restrict the ability of policymakers to use fiscal policy to respond to unexpected challenges, such as economic downturns or international crises.

Did anyone listen? No. Politicians are to blame of course since there is no program they aren’t happy to spend on. I do agree with Robert Samuelson at the Washington Post that some academic economists share in the responsibility for this mess.

That said, many economists have studied and warned about the consequences of dent on our economy. At the George Mason University Mercatus Center, Jack Salmon and I have a study coming up tomorrow that reviews decades of research on the relationship between government debt and economic growth. Even ignoring the more controversial Reinhart and Rogoff study, we find that, except for two studies, all others find a negative relationship between government debt and economic growth. According to the empirical evidence, there is little doubt that large government debt has a negative, and in many cases, worsening, impact on the growth potential of a debt-burdened economy.

I do have one minor point of disagreement with Samuelson, when he writes that:

The growing debt makes it harder to pay for other vital programs, from the Centers for Disease Control and Prevention to the FBI to defense.

All these programs have seen their budget grow, sometimes quite dramatically. I wrote about how the CDC failure in this crisis has nothing to do with a lack of funding but rather is usual bureaucratic ineptitude and lack of focus on the agency’s core mission. CDC prefers fighting the vaping, obesity, and gun-violence “epidemics” rather that preparing for a pandemic. But will we finally learn our lesson this time around?

I will leave the conclusion to Samuelson:

The coronavirus pandemic, while unavoidable, has been made worse by our past expedience. The future almost certainly holds similar surprises: a nuclear exchange, a biomedical attack, another financial crisis or something no one has yet imagined. A prudent nation would be saving against this prospect. We aren’t.

 

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

[ad_2]

Read the Original Article Here

Articles You May Like

US vice president demands ‘immediate ceasefire’ in Gaza, calling for Hamas to accept terms – as Israel ‘boycotts’ talks
When Radicals Cheer Self-Immolation
Bill Maher ridicules elderly Biden for walking like ‘toddler with a full diaper,’ tells him to ‘let his old fart flag fly’
President Biden Delivers Speech Attempting to Spin Border Crisis – 2/29/24
Victor Davis Hanson: Biden is Melting Down While Trump is Having Greatest Political Recovery Since Nixon (VIDEO)

Leave a Reply

Your email address will not be published. Required fields are marked *