When all is said and done, the economic downturn caused by the COVID-19 pandemic may prove to be the federal government’s greatest fiscal challenge of our lifetime.
Before the virus struck, unemployment was at an all-time low, wages were ticking upward, and economic growth remained strong after a decade of expansion. But instead of taking advantage of a decade of growth to get deficits and the debt under control, lawmakers bypassed spending caps, evaded pay-as-you-go rules, and enacted huge new spending initiatives and a massive tax cut package.
The wasted years and ill-advised actions led the Congressional Budget Office to project annual deficits at or above $1 trillion this year and into the future. And that was before the pandemic hit.
Today’s health and economic crisis finds households and businesses in dire need, and just as in the 2008-09 “Great Recession,” a federal response is required. Yet, with our national debt set to exceed levels not seen since just after World War II, we are not in a strong fiscal position.
The reason to maintain fiscal order during a strong economy is to make room for a robust fiscal response during times of crisis.
Looking back, it’s easy to see how federal funds could have been better allocated to leave Congress with more flexibility to address this new national emergency. However, shoddy budgeting in years past, while frustrating, doesn’t mean we can pull back and leave health care workers, households and businesses to fend for themselves.
The severity of the pandemic and the economic downturn meant we had to funnel federal aid into the economy in a fast but prudent manner. To its credit, Congress has largely done that, up to this point.
The biggest piece of legislation to combat the pandemic thus far, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, was assembled in a matter of weeks. It came with a staggering $1.7 trillion in borrowing, and some expenditures were not perfectly crafted. Nonetheless, most of the funds were appropriately targeted through direct aid to small businesses and in support of specific health care necessities.
The CARES Act had wide bipartisan support. Now, sadly, that bipartisan spirit is eroding. As a result, lawmakers from both parties are beginning to advance policy goals that have little or nothing to do with the COVID-19 response.
For instance, the latest legislative proposal from House Democrats would repeal the cap on state and local tax deductions for 2020 and 2021. A large majority of this tax break would actually go to households with incomes of $1 million or more. This tax proposal does nothing to address the health crisis or assist families most in need.
On the Republican side, the Trump administration has advocated $2 trillion in deficit financed infrastructure spending. Many roads and bridges across America are clearly in need of repair. Fixing them, though, doesn’t help address the current health or economic crisis.
As with previous national emergencies, government borrowing is unavoidable. But especially in circumstances such as this, the borrowing must be purposeful and should adhere to these principles: timely, targeted and temporary.
Superfluous borrowing today will do more harm than good in the long run by increasing the odds that our outsized national debt will deter future economic growth. Once the pandemic is behind us and economic growth returns, we also need to demand that our leaders make fiscal decisions that leave us better prepared for the next crisis.
Tim Penny is co-chair of the board of the Committee for a Responsible Federal Budget in Washington, D.C. He represented Minnesota’s First Congressional District in the U.S. House from 1983-1995.