Following days and nights of intense wheeling, dealing, and negotiating, Sens. Mitch McConnell and Chuck Schumer announced this morning that a deal on an economic rescue package had been struck. Congress and the White House have agreed on a $2 trillion deal that would stimulate the coronavirus-plagued economy and perhaps take us to the next promised land.
Much remains up in the air, but one thing is absolutely clear: It is impossible for the government to spend $2 trillion without making something big happen.
While all the agreement’s details are yet to be revealed, we are told that it will provide for $250 billion to be distributed to individuals and families, $350 billion for small businesses, and $500 billion for distressed firms and industries, such as airlines, operators of cruise ships, and hotel firms. Along with this, the package will provide for enlarged unemployment and healthcare benefits for people who lost their jobs due to coronavirus-induced shutdowns. And, with some income-based limits, each adult will receive $1,200, plus $500 for each child. The agreement is being touted by some as the largest stimulus in our nation’s history.
Even once the spending begins, it will be impossible to know the extent to which the spending actually kick-starts the slowing economy and gets the great American bread machine working again. But we can still try to put some dimensions on the deal.
Just how large is $2 trillion? After all, this isn’t manna from heaven.
First off, a trillion is one followed by 12 zeroes, or a million million. It’s about equal to the total amount of commercial and industrial loans on the books of the entire U.S. banking system. It’s one-fourth the value of all wages and salaries paid annually in the United States. It’s almost eight times the value of the entire stock of new autos and trucks in America, about eight times more than all hospital expenses incurred in the country last year, and roughly four times larger than last year’s operating costs for all U.S. colleges and universities, both private and public. It’s also in the ballpark with the $3.5 trillion spent annually to operate the entire federal government.
Put simply, $2 trillion is a lot of money. And now the next question: Where will the money come from?
Our government has basically three ways to fund these new expenditures: It can raise taxes, borrow from savers, or just print money. There are no new taxes in the stimulus plan, so that leaves printing and borrowing. The Federal Reserve has already announced plans to print some money, called quantitative easing, but we do not know the extent to which this will occur. The rest of the spending will be paid for with borrowed money. Our federal government will sell bonds to people and governments worldwide. Included in the borrowers will be some of our largest creditors. China and Japan are two of the largest. Others include the United Kingdom, Brazil, and Ireland.
Sooner or later, of course, the borrowing will have to be paid off. Thus, the dream is that, by juicing the economy, we will arrive again on the yellow brick road that leads to higher incomes and more federal tax revenue to fund the new debt.
Just for the sake of looking, how much will each adult, on average, owe, assuming the stimulus is funded with debt spread equally across the U.S. population? Two trillion divided by 253 million people over the age of 18 yields $8,000.
In theory, each of us just agreed to pay that in future taxes to fund the stimulus. Obviously, all of these calculations are rough. But, staying with the example, we must remember that each adult will have received $1,200 from the stimulus they will pay for at some future date. Some may also keep a job that the crisis put at risk.
Now, let me return to printing money, which is also part of the stimulus program. With helicopters figuratively flying over us and dropping money on households, and with the Fed printing new bills to provide to troubled financial institutions, what will happen to inflation? Will we lose some purchasing power from this all-time great stimulus program? There are lots of moving parts to consider, but the simple answer is yes. It just seems impossible for spending of this magnitude to take place in a short period of time without generating higher overall prices that diminish the value of our money, at least somewhat.
Other back-of-envelope calculations suggest the economy is now in recessionary mode, which means there will be more than one quarter of this year with negative GDP growth, and that the recession will end before this year’s final quarter. The new deal should soften the harder effects of the recession but will leave the nation with more debt to be paid and with dollars that will no longer buy what they once could.
This said, the “Great Stimulus” may help us avoid the next Great Recession — but it’s not free.
Bruce Yandle is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a distinguished adjunct fellow with the Mercatus Center at George Mason University and dean emeritus of the Clemson University College of Business & Behavioral Science. He developed the “Bootleggers and Baptists” political model.