With Pandemic Over, Focus Must Shift From Physical to Fiscal Health
Friday, April 14th, 2023
On April 10th, 2023, President Joe Biden signed a bill officially ending the three-year national emergency for Covid-19. The White House intends to continue the “public health emergency” until May 11th. Perhaps then, we can consider the pandemic officially over.
For too many in Washington, the perpetuation of this once very real crisis had the motivation of John Belushi’s character Bluto in the 1970’s film “Animal House” with his famous lines of, “Over? Did you say ‘over’? Nothing is over until we decide it is! Was it over when the German’s bombed Pearl Harbor?...” This is of course fitting as the epilogue slides at the movie’s end noted that John “Bluto” Blutarsky had become a U.S. Senator.
Three years later the human costs of the pandemic are now very real statistics, with very real and personal meanings to most of us. The focus of this piece, however, is the economic consequences of where we are, and the financial challenges we as a nation must face going forward.
Federal Government expenditures for fiscal year 2019, the year before the pandemic began, totaled just over $4.4 trillion. The emergency spending that coincided with the Spring 2020 economic shutdown saw spending swell to $6.6 trillion, increasing to $7.2 trillion for FY 2021. 2022 saw federal spending reduced to $6.4 trillion, with the CBO estimating current year spending of $6.2 trillion.
The Federal Government will spend about as much this year as it did during the initial response to Covid, which included the massive healthcare mobilization and stimulus relief programs for individuals and businesses. This represents a 40% increase over pre-Covid expenses. For those who wanted to increase the size and cost of government, this is a crisis that did not go to waste.
The number of fiscal problems here grow deeper the more we look into what lies ahead of us. With interest rates continuing to increase, deficit spending creates even larger deficits. The Federal Reserve kept interest rates near zero for almost two years, hiding the cost of government borrowing. Most federal debt owed in short term treasury bills, so the cost of ballooning obligations caused little initial pain.
According to the Peter G Peterson Foundation, interest on the debt a decade from now will total 14% of all US government spending – an amount more than we will spend on National Defense or on Medicaid. We borrowed our way through the pandemic, but the bills are coming due.
The direct cost of the pandemic has already reached consumers in the form of stubbornly high inflation. While the rate of inflation is down from its peak last summer, this does not mean costs are coming down. Prices are still rising, just not as fast.
Cruel to this scenario is that the cost of government goes up with inflation. Many programs have cost of living adjustments, such as Social Security. Other programs just become more expensive as the cost of labor and raw materials increase for the government just like they do for the rest of us. As the government tries to contain costs, we’ll likely pay even more yet receive less in government services.
The government response to our current fiscal situation is even more baffling when you observe any testimony of Federal Reserve Chairman Jay Powell before Congress. Despite deficit spending being by definition simulative, and thus feeding the inflation he is trying to fight, Powell by his own policy refuses to comment on Congressional or the White House’s fiscal policies. A truly independent Fed Chair that wasn’t worried about public criticism or a potential reappointment would and should be noting that Congress and the President are making the job of fighting inflation harder.
Republicans in Congress and the President are already positioning for a fight over raising the debt ceiling. Both are more interested at the moment in finger pointing and blame shifting rather than stating the obvious: The current situation, created by both parties over time, has created unsustainable expectations for the long term costs of current programs, much less the wish list of future additions of new burdens.
The stalemate will likely, at a minimum, curtail the growth of federal spending if not produce outright cuts. This will be yet another drag on the economy in the short term, as the growth in GDP over the last years can be directly tied to the sugar highs of stimulus and rapid government expansion.
Animal House provided a country of much needed laughs at the end of a decade that saw economic stagnation combined with rapid inflation. Hopefully our leaders in Washington will decide to get real with each other and with their constituents to correct the spending problem before we embark on a decade of malaise and lowered expectations.