Coronavirus provides a warning shot on our unsustainable debt
Months before the coronavirus shut down the country, economists sounded the warning bell on our impending debt crisis. Thanks to multitrillion-dollar deficits, our national debt ticked up to $22 trillion, reaching the highest debt-to-GDP ratio since the aftermath of World War II. In a little more than a decade, debt was expected to blow past the World War II peak.
It’s expected that during times of crisis, the government steps in and deficits go up. But what has been unique is that we’ve racked up deficits in recent years despite living in an era of the lowest unemployment level in 50 years and in which the nation has been at relative peace. Now that an actual rainy day has come our way, we’re forced to expedite our debt crisis, compounding necessary emergency spending on top of decades of frivolously begotten debt.
At the end of last year, the nonpartisan Congressional Budget Office found that it had once again lowballed the extent of our deficit. It both overshot its revenue projections and underestimated its federal outlays, pushing our 2019 deficit past the $1 trillion mark. Then in January, the CBO determined that the federal debt held by the public will reach 180% of GDP within 30 years, 30 points higher than what the agency had predicted half a year prior.
And all of this was while the word “coronavirus” was nothing but a footnote in the history of the SARS virus from decades past.
Unlike any recent crisis of the past, the nation’s survival depends on people sabotaging their own livelihoods. The nation is asking people to stay at home and willingly forgo their paychecks in the interest of public health, even as bills keep on coming. Businesses have been ordered to shut down or have been decimated by government restrictions.
In response, Congress is considering a relief package that is now expected to top $2 trillion. On top of this, we can expect an increase in dependence on the existing social safety net programs. And with fewer people working, revenues will fall. Given that the 2020 deficit was already expected to top $1 trillion at a time when unemployment was expected to be under 4% and the economy was expected to grow, it could easily exceed $3 trillion and possibly approach $4 trillion when all is said and done.
In the short term, the United States will still likely get away with it. With the Federal Reserve slashing the federal funds rate to historic lows and investors spooked, interest rates are near zero. U.S. debt, for now, is still perceived as a safe investment in a volatile market. We can borrow our way out of a crisis for the meantime, but the ballooning debt could compromise any subsequent relief measures should the coronavirus problem persist.
Even if we get past this crisis, however, the swift shutdown of the global economy due to a virus that came out of nowhere should be seen as a reminder of how unexpected events can happen that drastically change the fiscal outlook. Should the U.S. continue to run massive structural deficits in perpetuity, lawmakers will inevitably be confronting a future crisis with a much more limited toolbox.