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John Hood: Debt incurred now only delays when bill is due

By John Hood

RALEIGH — Set aside for the moment how quickly and to what extent North Carolina and other states should reopen our economies. Set aside partisan wrangling ahead of the 2020 elections. Set aside the sweeping ideological claims about how COVID-19 “proves” everyone’s preexisting beliefs about the proper size and scope of government.

Perhaps then we can all agree that the costs of the pandemic are staggering and that asking the “federal government” to pay for them, so that “we” don’t have to, is meaningless babble.

Going into the crisis, Washington was already running massive deficits, adding a trillion dollars a year to the national debt. That is, what Congress and the president wanted to spend at the moment significantly exceeded the taxes they were willing to impose at that moment to pay for them.

Unfortunately, that was only the easily recognized tip of the preexisting debt iceberg. By the early 2030s, annual federal deficits were projected to climb to $2 trillion or more because of unfunded liabilities for Social Security, Medicare, and other entitlements.

Now, we must layer the current cost of COVID-19 on top. Here are the projections from the Congressional Budget Office just for 2020. Start with the preexisting $1 trillion operating deficit. Add $2.2 trillion for the business loans, unemployment-insurance expansions, and other kinds of federal relief already enacted. Then add another $500 billion for direct effects on the federal budget such as higher Medicaid utilization and lower tax collections.

That takes the deficit for this year alone to $3.7 trillion. Brian Riedl, a fiscal analyst for the Manhattan Institute, is more pessimistic about the budgetary effect and projects a $4.2 trillion deficit for 2020.

Furthermore, all analysts agree that COVID-19 will dampen revenue and heighten spending beyond this year. Riedl’s estimate is that the effects of the Great Suppression will translate into $8 trillion in deficits over the decade. The national debt would rise to $41 trillion by 2030, or 128% of the gross domestic product projected for that year. “This would exceed the national debt at the height of World War II,” he observes.

It’s a staggering bill. And we are all going to pay a chunk of it, directly or indirectly. Forget the fanciful notion that politicians can make “the wealthy” and “big corporations” pay the bill. You can steal every penny from the mega-rich and not get anywhere close to that.

It gets worse, though, because politicians — and in fairness, we the public in our panicked state — don’t seem to be finished with COVID-19 relief. There is talk of still more grants and loans for distressed businesses and still more massive bailouts of state and local governments.

North Carolina’s budget deficit alone may exceed $4 billion this year, according to some estimates. The state has wisely set aside a rainy day fund and other reserves, but those cannot fully bridge such a gap.

“Let’s get Washington to pay for it!” many insist. Many in the rest of the country are saying the same. Essentially, they dream of filling up their side of the bathtub by scooping water from the other side. There will be lots of splashing around. But the math doesn’t work. State taxpayers are also federal taxpayers.

Facing the post-COVID fiscal realities in North Carolina and the rest of the country will mean accepting some hard truths. For the foreseeable future, there won’t be any more large-scale tax relief. We aren’t going to expand entitlements, and indeed they will have to be trimmed and means-tested.

Boosting federal debt is not an alternative to paying our bills. It merely delays when the bill is due, while increasing the size of that bill at least a little — and perhaps more than a little if our abnormally low interest rates rise closer to normal levels over the coming decade.

Saving lives and shielding households and businesses from immediate ruin may well be objectives worthy of the money we are spending. But that’s the point: we the taxpayers are incurring the expense, not “the government.”

John Hood is chairman of the John Locke Foundation.

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