Opinion

At some point, discussions about managing the COVID debt should begin

By Leslee Kulba

The website usdebtclock.org keeps track of the national debt - as well as 3,000 other statistics - in realtime.
The website usdebtclock.org keeps track of the national debt – as well as 3,000 other statistics – in realtime.

Asheville – It was an Archimedean wager. Provided COVID-19 was not created in the lab, nobody knew if it was containable. If the virus were a hoax or innocuous, as many maintained late in the game, then letting Americans go about their business would be fine; but if it were the agent behind mass deaths reported in China and Italy, then the US had a moral responsibility to exert what powers it had to persuade its people to stay inside. 

People died, and their deaths are questioned as having been forced or fudged to score political points. Humanitarians who suffered something and resolved do not wish on anyone the same, now mere “anecdotes,” of having to take the rest of the day off after lifting a milk jug, being too dizzy to do basic filing or walk the driveway, running a fever so high recent events replay in living color on pillows, the insufferable chills, the brain fog, trying to eat KFC that presents itself as tasteless blubber. On the downside, we’ll never know if staying inside was necessary; on the bright side, most Americans lived to carry on the debate.

Americans were told at the time that the most important thing was saving lives; the economy could be sorted out later. Throughout the crisis, friends and neighbors looked after each other, helping with groceries and performing other, silent acts of charity. When government jumped in with an initial $349 billion, even fiscal conservative thinktanks supported the move; for the same reasons used for applying a tourniquet. 

Now that the crisis has stabilized with around 1,000 daily deaths in the country, it couldn’t hurt to start talking about economics. Going into the crisis, the federal government had been on-track for a $1.1 trillion budget gap this year; the crisis pushed projections to $3.3 trillion – and that’s just the difference between revenues and expenditures in the current-year budget. The debt load the country is carrying is now at $26.7 trillion (usdebtclock.org). Social Security is now expected to go bankrupt a year sooner, in 2031; Medicaid hospital insurance, two years earlier, in 2024 (cbo.gov/system/files/2020-09/56517-Budget-Outlook.pdf).

In addition to the $349 billion Paycheck Protection Program portion of the CARES Act, the federal government also approved $17 billion in Economic Injury Disaster Loans, which was met with applications totaling $383 billion before any money was delivered. The Brookings Institute (brookings.edu/research/fed-response-to-covid19/) published a dizzying spell of actions the federal government has taken to steady financial markets. Among these are expanding securities trading; increasing lending to banks and providing incentives for them to lend; purchasing corporate bonds; either beginning or expanding government lending to large corporations, nonprofits, households, and state and municipal governments; and swapping international currencies to collect interest.

It’s fair to ask how the US Treasury is paying for all this, and how citizens, who fund the Fed in turn, will make it whole. One popular response is that the banks, not government, are paying. The repeated claim that the Congressional authorization somehow made it legal to loan a greater share of deposits did not hold up to the perception that these loans would be forgiven. David Rabinovitz at Dig provided the story behind the myth: The banks actually did loan out their funds in exchange for a loan guarantee from the US Small Business Administration. 

The banks made the loans at 1% interest, the forgivable portion likely to be reimbursed by the SBA within about seven months, with the remainder generally payable over a period of two years. NPR reported back in April that banks had collectively gleaned around $10 billion in fees for administering the first-round COVID relief program. A follow-up article in Forbes, however, revealed a lot of the banks earning the most off the admin were also, in various ways, plowing those fees back into the community for COVID relief.

Back in 2011, the Cato Institute complained the SBA had had a loan failure rate of almost 20% for 10 years and had by then made taxpayers liable for $70 billion. That wasn’t with extra pandemic authorizations, and those loans weren’t supposed to be forgivable. Very few people are condemning the PPP loans, and those who do are complaining about wealthy political donors in red states getting easy access and banks funding big loans to big business in order to maximize loan origination fees for a program that would run dry in only 13 days. Overall, though, the program is viewed as having been a necessary evil, now in need of damage control.

So, the next question is, is the government going to reimburse the banks by printing fiat or taking out more debt; and, if the latter, who’s the lender? The notion that government can print money without consequence can be dismissed with basic supply-and-demand economics as well as case studies of what happened in Zimbabwe, Italy, and the Weimar Republic. 

If, instead, the government is borrowing, with interest, to fund the relief programs, now that the prospect of default within the next ten years no longer looks preposterous; citizens should be curious about the lenders. To balance its annual budget, the federal government sells securities. About ¼ of government debt is owed to other government agencies, and foreign governments and investors hold 1/3 of the rest. As of June 2020, the countries to which the US owed the most were, Japan ($1.26 trillion), China ($1.07 trillion), the United Kingdom ($446 billion), Ireland ($330 billion), and Luxembourg ($268 billion); the last two being popular tax havens (ticdata.treasury.gov/Publish/mfh.txt).

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