The U.S. Congress and President Trump are testing whether there are any limits to debt-financed fiscal policy. Already running a $1 trillion deficit, Congress has tripled the deficit with three bills to combat the health and economic effects of the novel coronavirus.
The first bill — H.R. 6074 — Coronavirus Preparedness and Response Supplemental Appropriations Act — appropriated $8.3 billion for public health needs, including $6.2 billion to pay for the development of a coronavirus vaccine and $2 billion for state efforts through the Centers for Disease Control and Prevention. To help taxpayers stay afloat financially, the IRS extended the filing and payment deadline for income taxes until July 15.
Shortly after that bill, Congress passed a bill — H.R. 6201 – Families First Coronavirus Response Act — that would cost an estimated $104 billion to support paid family leave, food assistance for the poor, and a larger Medicaid match for states. For North Carolina, the federal match would climb from 67.4% of Medicaid spending to 73.4% to mitigate the likely increase in people enrolled and the additional costs of testing and treatment.
Just last week, Congress added the $2 trillion CARES Act (H.R. 748), a bill as unprecedented in its ambition as the near-shutdown of the economy itself has been. “The need to help individuals and small firms has provided cover to the largest corporate subsidy program in U.S. history,” Amit Seru and Luigi Zingales warn. “This is the largest step toward a centrally planned economy the U.S. has ever taken. And it socializes only losses. Profits, when they come, remain private.”
Seru and Zingales see forgivable loans to smaller companies as a key part of the bill that can keep businesses alive and employing people, though they do worry how much more money will be needed to meet the borrowing needs of businesses. Companies could also save $210 billion in taxes with more deductibility for interest payments and business losses. Every state will receive at least $1.25 billion from a $150 billion Coronavirus Relief Fund to fill some of the gaps in state or and local budgets. Another $100 billion will support hospitals cover the cost of COVID-19 supplies and equipment and $27 billion for vaccine development.
The most important payments for most people will be the $1,200 tax credit per adult and $500 per child under the age of 17. A single parent with two children earning up to $75,000 would receive $2,200 in tax credits. A married couple with two children earning up to $150,000 would receive $3,400. Above those thresholds, payments would shrink with income. These payments are not federally taxable, and legislators should exempt them from state income taxes. For some reason, the $2 trillion bill could not find room to extend credits to adult dependents, such as 17-year-old high school students, college students, or dependent parents. With roughly 21 million people in this category, the price tag of between $1.1 billion and $25 billion would not even be a rounding error.
Phil Kerpen lists some of the other problems in the CARES Act at the Federalist. Foremost among them is the staggering $600 per week supplemental unemployment benefit for workers, the equivalent of working at $15 an hour for 40 hours. Workers in North Carolina already get half their weekly pay, up to $350. Combined, the standard unemployment check and the $600 additional amount would provide an unemployed person who had been working full time at $15 an hour with a 50% raise for not working, even though many businesses are still hiring. Companies that receive a loan through the CARES Act not only can’t buy back shares, but are not allowed to pay dividends, or even “oppose any union organizing campaign for the duration of a federal loan.” In another giveaway, “Employer-paid student loan payments are made tax-exempt,” Kerpen writes, “creating a tax preference for student loan payments over ordinary income.”
Paying for all of the new debt and more, the Federal Reserve has become the world’s lender of last resort. It is buying U.S. Treasuries from foreign central banks to keep them afloat and will receive $454 billion from Congress to lend $4.5 trillion to non-financial companies for the first time ever. This comes on top of the $5.25 trillion the Fed already has on its balance sheet. Before the last recession, the Fed had less than $1 trillion in government debt on its balance sheet. More may still be on the way, as Congress is already considering another multi-trillion stimulus bill.
When this is done, the Federal Reserve and the federal government will need to get their balance sheets back in order quickly. After World War II, the national debt shrank from a level 20% larger than the economy to one-fourth the size of the economy by 1974. Most of that was the result of lower spending and faster economic growth, not inflation. Spending then was not tied up in social programs the way it increasingly has been since 1965, but the economy’s ability to grow while government shrinks has been established. Maybe North Carolina’s example of setting aside money for a rainy day can guide Washington after this crisis, just as our tax reforms over the past decade did in 2017.