Coronavirus Stimulus Bill — Democrats’ Impact on Debt and Growth

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The downtown district of Washington, D.C. remains largely empty to try to limit the spread of the coronavirus, April 7, 2020. (Jonathan Ernst/Reuters)

I have to say, I admire the way Democrats are using every opportunity they have to grow the size of government to levels unseen before, one “stimulus” bill at a time. Case in point: their new proposal to spend $3 trillion on top of what Congress has already agreed to in the past few weeks. The proposal is particularly striking in contrast to how far the Republicans in Congress would be willing to push for their policies if they were the ones in the minority.

The ink on the previous $2.2 trillion bill and the individual checks is barely dry, but Democrats are demanding the following:

  • $500 billion for states
  • $375 billion for local
  • $20 billion for tribal relief
  • $75 billion for housing assistance
  • $1.5 billion for broadband hotspots
  • $10 billion for small business
  • $25 billion for Postal Service

The hypocrisy of some in Congress is on full display here. In addition to more spending, the Democrats — the same ones who are always complaining about the rich not paying their fair share of taxes — propose a repeal of the $10,000 State and Local Tax Deduction cap for two years. That would, of course, disproportionately benefit higher-income taxpayers.

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There is a chance that this proposal goes nowhere in the Senate. That said, Republicans usually feel the need to respond to massive government-expansion proposals with relatively smaller government-expansion proposals — which still expand the government. They should resist the temptation.

There will be a life after this crisis. The impact of the already-approved spending increase will be severe. This new study looks at the projected impact the spending and the debt will have on our (and every other country’s) growth prospects:

Large fiscal expenditures, as well as more loans by households and firms, will lead to sharp increases in public and private debt in the near future. The resulting debt burdens may impact both post-lockdown economic recovery and medium-run growth prospects. This column presents evidence on the effects of the total debt burden on output dynamics. The results suggest increases in total debt to GDP have significant negative effects on growth. 

As a reminder, in a new paper, Jack Salmon and I review all the recent academic papers on the issue of debt and growth since the Great Recession. What we find isn’t encouraging:

A large majority of studies on the debt-growth relationship find a threshold somewhere between 75 and 100 percent of GDP. More importantly, every study except two finds a negative relationship between high levels of government debt and economic growth. This is true even for studies that find no common threshold. The empirical evidence overwhelmingly supports the view that a large amount of government debt has a negative impact on economic growth potential, and in many cases that impact gets more pronounced as debt increases. The current fiscal trajectory of the United States means that in the coming 30-year period, the effects of a large and growing public debt ratio on economic growth could amount to a loss of $4 trillion or $5 trillion in real GDP, or as much as $13,000 per capita, by 2049.

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


Read the Original Article Here

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