The economy and COVID-19, Part 2

Americans are struggling to adjust to a pandemic whose future progression is uncertain. They have not seen an economic downturn of quite such scale or scope, and people are unsure about how the United States can pull out of the crisis.

Righting the economic ship will require a delicate balance of managing debt and encouraging growth. A large infrastructure investment program that includes private contributions is a feasible way to achieve that goal.

Governments are struggling to prop up economies while confronting the serious and immediate public health challenges of COVID-19, resulting in unprecedented emergency spending and huge budget deficits throughout the world. In the United States, Congress has passed huge spending bills to help businesses and households that have swollen the national debt by about $2.4 trillion. The Congressional Budget Office numbers for its Doctor Doom scenario recently projected a budget deficit of more than $3.7 trillion for the current fiscal year.

Outstanding national debt now exceeds $25 trillion. Additional outlays in response to a second wave of COVID-19 outbreaks could further increase the debt and add to sovereign risk. Even in a low interest rate environment, higher debt service costs will crowd out other government spending. Trying to explain to the average politician that debt is a drag on future growth is a waste of time. Spending today and making a suitcase of promises is what helps them get reelected tomorrow. The future is someone else’s concern.

The Federal Reserve Bank has taken emergency measures to make credit easier to obtain with a bigger money supply and lower interest rates. Additionally, the Fed is lending more than $2 trillion to businesses and state and local governments. There is concern that the Fed’s actions risk future price inflation which would decrease the purchasing power of the dollar. The era of the dollar as the world’s primary reserve currency may also come to an end. In that case the U.S. would no longer benefit from the typical safe-haven demand from foreign investors as the value of the dollar collapses.

Policymakers note that these concerns must take a backseat to addressing the immediate crisis. The present commands their attention, but they may insufficiently appreciate that the future may be more of the present.

Going forward, the U.S. will have to manage the debt, deficits, and debt service payments, and at the same time find ways to support economic recovery to grow its way out of all this debt. While fiscal consolidation—raising taxes, cutting spending, or both—is the tried and true method for tackling debt challenges, it is likely to encounter some major tactical problems.

Raising taxes is politically difficult given the perception among many in Congress that voting for tax increases is tantamount to announcing your retirement from elective politics. Similarly, cutting high-dollar payment programs like Social Security, and Medicare is bound to be strongly opposed by legions of elderly voters.

Another approach is to focus and allocate resources to areas that create the most jobs. The time is long overdue for a bipartisan infrastructure investment package that rebuilds America’s crumbling roads and bridges, invests in future industries, and promotes increased productivity while immediately employing people whose income would give the American economy a shot in the arm. There is a broad consensus among mainstream economists that infrastructure investment has a large multiplier effect through the economy.

The problem is where the actual dollars can come from to fund such an ambitious program. One solution is to recruit private firms to help start, fund, and run as many of these infrastructure projects as possible. If properly structured, such public-private partnerships could tap into the billions of dollars in private capital hungering for low-risk investment opportunities able to offer decent rates of return.

COVID-19 has introduced a host of new economic challenges. A robust infrastructure program that includes private participation would be an effective way to begin to address them.

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