Other ships used the good years to caulk their hulls and clear up their rigging – in other words, to pay off debt – but you used the good years to raise borrowing yet further. As a consequence, under your captaincy, our hull is pressed deep into the water line, under the accumulated weight of your debt.
Daniel Hannan’s speech to the European Parliament, 26 March 2009
What was true in 2009 is equally more so in 2020. Many ‘developed’ nation-states are nearing bankruptcy.
Public debt to GDP for many Western countries was at an unsustainable point even prior to the crisis: 279% in Japan, 217% in Greece, 156% in Italy and 154% in Portugal. Other countries whose public debt is over a year’s gross domestic product, include the United Kingdom, France, Canada, Belgium and Spain. The sheer size of the United States’ $24 trillion national debt defies comprehension.
Both sides of the ratio are about to be run up as governments issue new debt to fund the spendemic, while GDP craters as a result of the shutdown of large parts of national economies.
A vicious cycle could see debt financing costs rise sharply adding further to national debt loads, and placing a further drag on GDP.
Furthermore, there is an important point to be made about the GDP side of the Public Debt to GDP ratio: the largest part of the additional spending will not be directed towards greater productivity, but simply to attempting to restore a state of affairs that existed in the economy prior to the pandemic. Unlike, say, infrastructure spending, the spendemic is negative for productivity.
So where is the cash going?
Three bills were passed in March in the United States, the most significant of which was the $2 trillion CARES Act.
The first was the ‘sticking plaster’ Coronavirus Preparedness and Response Supplemental Appropriations Act 2020, which was passed on 6 March 2020 and provided $8.3 billion in emergency funding for federal agencies responding to the crisis. This bill responded to the COVID-19 outbreak by providing paid sick leave, tax credits, and free testing; expanding food assistance and unemployment benefits; and increasing Medicaid funding.
It was followed on the 18 March 2020 by the Families First Coronavirus Response Act (FFCRA), which provided for emergency spending to the Department of Agriculture for food and nutrition programs; the Defense Health Program, the Department of Health and Human Services and Department of Veterans Affairs for COVID-19 testing and services: and to the IRS for tax credits.
The FFCRA also places burdens on businesses mandating that employers of fewer than 500 workers must provide up to 12 weeks paid leave to employees who cannot work because “a public health emergency” related school closure that they must look after their children at home.1 Furthermore, employers are expected to provide 80 hours of paid sick time to employees subject to government quarantines or isolation orders, who have been advised by a health-case provider to self-quarantine, who are caring for an individual in such a position, is caring for the employee’s child because the child’s school or daycare is closed, or is experiencing “a substantially similar circumstance related to COVID-19”.2 Employers who violate the emergency paid sick time requirements are subject to fines and imprisonment. While employers do gain tax credits for paid sick, and paid family and medical leave, the credits will come down the line, while the obligations to employees kick in immediately.
Of course, it is worth noting that very businesses that the government is turning to to cover for sick employees themselves are facing unprecedented hardship. While it is early days, analysts are expecting a wave of bankruptcies to hit the United States shortly. Among the businesses at risk are shale oil producers who are having to cope with plummeting demand, record full storage capacity, and prices below $20 dollars a barrel. The oil and natural gas industry in the United States supports 10.3 million jobs in the United States and nearly eight percent of the country’s Gross Domestic Product, according to an industry association.3
The granddaddy of them all is the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which became law on 27 March 2020. According to the legislation summary, the Act provides supplemental appropriations for federal agencies to respond to the COVID-19 outbreak, while also funding “various loans, grants, and other forms of assistance for businesses, industries, states, local governments, and hospitals”; providing “tax rebates of up to $1,200 per individual and an additional $500 per child, subject to limits based on adjusted gross income”; temporarily expanding unemployment benefits; and suspending “payments and interest on federal student loans”.4
Underscoring the state of fiscal conservatism in the United States today, 96 senators voted for, and none voted against. (Senators Lee, Romney, Paul and Thune did not vote.) Senator Cruz, who had criticised previous omnibus spending bills, explained why he was making an exception this time.
“Two trillion dollars is a crap ton of money,” Cruz underscored. “That’s 10% of our national debt — not of our deficit, 10% of our national debt. In over two centuries, we just spent 10% of it tonight… It’s worth pausing to think that was unanimous. That means Bernie Sanders voted for it, I voted for it, everybody in between voted for it. And what I would say is the reason is: these are not normal times.”5
Altogether at this point, spending commitments total around $2.4 trillion, but if the full package of bills before Congress to respond to the crisis are passed, then total pandemic-related spending will be around $5 trillion, which as Fox points out is roughly five times the amount spent on the New Deal.
On 7 April 2020, the Prime Minister of Japan, Shinzo Abe announced 108.2 trillion yen (£800 billion, US $998 billion, HK $7.74 trillion) in additional spending, with Finance Minister Taro Aso specifically stating that the Japanese Government’s priority was reviving the economy rather than restoring public finances, according to Reuters. This came after an initial package worth 430.8 billion yen and aimed at providing emergency financing to small and micro businesses, and improving medical facilities, was passed on 10 March 2020.
China faces specific challenges, but also will have certain opportunities from the crisis. For one thing, it appears as though China together with other east Asian economies will be among the first to be able to restore production levels in manufacturing and light industry to pre-pandemic levels. On the other hand, with the global economy shuttering demand for many categories of Chinese goods will have taken a knock. There is also growing realisation in Western capitals of the need to repatriate productive capacity to the West in order to bolster national economic security.
On 27 March 2020, China announced that it was planning to widen the fiscal deficit and sell sovereign debt, according to a report from Bloomberg. Further measures announced on 31 March 2020 included a one trillion yuan credit line to small lenders, and providing income support to poor families.
In New Zealand, the Government has announced a NZ$12.1 billion stimulus which includes “wage subsidies, bolstering the healthcare sector’s response to the virus, more money for low-income families and those on social welfare, and changes to business tax,” according to the Guardian.
Spending in the United Kingdom amounts to £30 billion thus far, which is being spent largely the health service response and on payments to the labour market.
Not all governments have responded to the crisis with fiscal profligacy. Dubai (UAE) has told government agencies to reduce general and administrative expenses by 20% in response to the crisis, while in the United States, states with balanced budget requirements will have to cut spending, in some cases drastically, in response to reduced revenues.
While these may not be normal times, the laws of economics remain unchanged. There will be a price to be paid by the United States. The assumption is that this will not be structural, but the biggest cost of all could well be in the reserve currency status of the dollar. If that goes, the United States’ ability to print its way out of trouble will be once and for all undermined. Should the United States lose its status as the global hegemon, bipartisan fiscal profligacy must surely take a major part of the blame.