Rushing Toward the Fiscal Cliff

Last week President Biden signed the $1.9 trillion COVID relief bill, which among other things will provide direct payments of $1,400 to many Americans, and extend a financial supplement to unemployment payments. It’s difficult to comprehend numbers as big as $1.9 trillion, but here are some ways to think about it.

The US population is about 330 million, so if $1.9 trillion was just divided up evenly and given to every American, each person could receive $5,758. A family of four would get $23,030. Given a choice, would most Americans prefer that everyone receive that much cash, or have the bill as it passed, where some get $1,400?

The bill doesn’t give that $1,400 to everyone. What if the $1.9 trillion were just divided up and given to the bottom 50% by income? A family of four would then get $46,060. What would do the most good, the current relief bill, or giving half of American families $46,060? And if the money were just divided among the bottom 25%, the most needy, each family of four would get $92,121. That could be truly life-changing for those people.

The national debt now stands at about $28 trillion, so this one piece of legislation alone adds about 6.8% to the already bloated national debt, and interest has to be paid on that debt. Twenty year government bonds currently pay a bit more than 2% interest, so the annual interest on that increment of government debt will be more than $38 billion. But interest rates are low today, and it is easy to picture, by historical standards, interest rates two or three times higher than that, which could push the annual interest cost of the bill beyond $100 billion.

So far, that interest cost hasn’t hit the federal government hard, because the Federal Reserve has been buying up those bonds and converting them into money. The monetary base, which is composed mostly of federal debt, has increased by $1.8 trillion over the past year, an increase of 52%.

Eventually, that monetary increase will turn into inflation, and one thing that comes with inflation is rising interest rates, which will impose those higher interest costs on the Treasury. Currently, interest payments are about 5.3% of federal spending. If interest rates triple, which they easily could, we’d be looking at interest taking up more than 16% of the federal budget.

That 5.3% figure doesn’t include payments on the recent COVID relief bill, so it’s not unreasonable to think that five years down the road interest payments might make up 20% or more of the federal budget. That’s money that could be spent on other things (including tax cuts).

The fiscal irresponsibility of our Congress and president has us rushing toward the fiscal cliff, bringing with it inflation, rising interest rates, increased government debt, and an increasing share of the federal budget going to interest payments rather than government programs. But, some will say, people are suffering because so many governments shut down their economies in response to the pandemic.

One answer to that defense of fiscal irresponsibility is that if the government really wanted to help those who need it the most, that amount of money is enough to give every family of four in the bottom 25% of the income distribution more than $92,000. Which do you think would help those in need more?

Randall G. Holcombe is a Senior Fellow at the Independent Institute, the DeVoe Moore Professor of Economics at Florida State University, and author of the Independent Institute book Liberty in Peril: Democracy and Power in American History.
Posts by Randall G. Holcombe | Full Biography and Publications
Comments
  • Catalyst
  • MyGovCost.org
  • FDAReview.org
  • OnPower.org
  • elindependent.org