How is the COVID-19 pandemic going to impact our national debt?

Man in button up shirt holding open empty wallet
Photo via Jernej Furman/Flickr (CC BY 2.0)

Since the coronavirus pandemic brought the global economy to a standstill, the United States has issued three rounds of stimulus payments to the American public. The American Rescue Plan Act, signed into law by President Joe Biden in March 2021, included payments of $1,400 to most adults and children, extended unemployment benefits, and additional aid to cities and states. While necessary, the high expense of this bill is sparking concerns over how the COVID-19 pandemic is going to impact the U.S. national debt.

The Congressional Budget Office (CBO) calculated the price tag of Biden’s package at nearly $2 trillion over 10 years, all on its own. That number doesn’t include built-in tax credit expansions for children and dependents, which could cause the bill to top out over $3 trillion.

As a result, the COVID-19 pandemic has driven the U.S. national debt to its highest level since World War II. Recessions, wars, and domestic spending have been shown historically to drive up the national debt. On top of the pandemic, Biden’s proposals to overhaul infrastructure, invest in education and workforce development, and address climate change will likely set the economy back an additional $3 trillion.

These numbers sound alarming to the average American, pushing the national debt conversation to the forefront of political debates in 2021.

There is good news to be had, however.

Most leading economists don’t think the U.S. is headed into dangerous territory just yet. In fact, few economists have disagreed with the recent massive spending, which has been crucial to keeping the economy afloat and providing relief to those impacted most by the pandemic. 

According to James Pethokoukis, the American Enterprise Institute’s economic policy analyst, voters should only be alarmed when policymakers borrow and spend without considering risk and tradeoffs. In an op-ed for NBC News, Pethokoukis argued that during times of crisis, it’s OK to borrow big.

Additionally, when it comes to things the government is supposed to provide, like infrastructure, scientific research, defense, and a safety net, it’s considered responsible spending.

“But, there is no money tree,” Pethokoukis noted in his op-ed. “All that spending and borrowing comes at an eventual cost, both to taxpayers and the health of the economy overall. That was true before the pandemic, and it will be true long after.”

The market’s current low interest rates are expected to hold steady for several years, but, as noted by Newsweek, borrowing isn’t free. An increase in interest rates of just 1% could potentially cost the U.S. another $200 billion per year. To put that number into perspective, it is roughly three times the annual budget of the U.S. Department of Education.

The Committee for a Responsible Federal Budget, a fiscally conservative public policy non-profit organization, estimates that the American Rescue Plan Act will, all on its own, push the national debt to 108% of gross domestic product (GDP) in 2021. Analysts use the debt-to-GDP ratio as a way to determine if the U.S. can cover the debt it owes. The previous record of 106% was reached in the aftermath of World War II.

If the national interest rate holds steady at 1%, the debt will grow by approximately that amount annually. If GDP increases to 2%, however, the debt to-GDP-ratio will continue to decline gradually and eventually return to normal within a few decades.

It remains to be seen if the national debt will become a campaign issue going into midterm elections. As noted by Newsweek, these long-game changes are rarely a significant consideration in U.S. politics.

“Politicians have a short-term mentality and want to get re-elected every two, four, or six years,” Chris Rasmussen, an associate professor of history at Fairleigh Dickinson University, told Newsweek. “There isn’t much political will to do anything about the debt. Democrats don’t want to give up social spending and Republicans don’t want to raise taxes or cut the defense budget.”

Sources: NBC News, Newsweek, CRFB, New York Times

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