February 18, 2021

The monnth’s this week is dominated by the struggle over the next Covid relief stimulus.

It’s $1.9 Trillion from Biden vs $600 Billion from the Republicans. A $1.3 Trillion gap.

Here’s what the Republicans oppose:

• $220 Billion more for unemployment insurance
• $245 Billion more for direct payments to individuals
• $350 Billion additional aid to states
• $145 Billion more for schools
• $15 Billion more for small business
• $30 Billion more for rental assistance
• $5 Billion more for homeless
• $20 Billion more for veterans’ health
• $20 Billion more for public transit
• $20 Billion more for American Indian tribes
• $10 Billion more for cyber defense programs

For most of us, there is no reasonable way to judge this gap between Democrats and Republicans. There are too many categories, too many localities involved, with different levels of need. Too many details of distribution to understand.

We can easily imagine that rental assistance is needed for workers losing their jobs, and that states need help with all the support they are trying to provide. In fact, all of the areas Republicans wish to deny are in need. But how great is the need for each? And how do we know the money will be disbursed carefully, to avoid the waste that occurred in the Trump Covid stimulus, due to poor management and fraud?

We can’t know the answers. So, how can we judge where to place our support—for the Democrats and $1.9 Trillion, or for the Republicans and $600 Billion? Does it turn on whether one has a strong sympathy for something in the gap—such as wanting more help for schools? Or perhaps resistance to something there—such as aid to states? Will public opinion will revolve around individual sensitivity to one segment of the gap—if people even look?

For my brother and for many conservatives, opinion will turn on the impact on our national debt. It’s out of control, but not only because of the pandemic. It has been increasing for years. The Trump administration’s tax cut, objected to by most economists, added more than $2 Trillion in debt. Covid has already added $3.7 Trillion. So now our national debt has topped $27 Trillion. And, of course, the pandemic has shrunk the economy and ability to repay. Our 2020 GDP was $21 Trillion.

Debt is indeed a problem. When interest rates rise again, servicing the debt will constrain us. That means risk to health care for our aging population and also for the entire safety net for those in need. Education, infrastructure, even military and (all) other needs may be constrained.

Yet, Covid driven needs must be addressed. Janet Yellen argues for a big relief package. Trump wanted a big one. The Center on Budget and Policy Priorities, a non-partisan think tank, argues for a big stimulus. They point out that the stimulus will speed recovery and thus reduce the debt/gdp ratio over time. No relief would have the opposite effect.

This illustrates a key fact. The absolute level of debt is irrelevant. The debt/gdp ratio is the key determinant of overall economic health in regard to debt. There are two ways to improve that ratio: By reducing the rate of increase in debt (no more Covid relief, for example); or, by increasing the growth rate of the economy. And, to add to the complexity of the debate, these two are interrelated. Sometimes spending more and adding to the debt grows the economy. Sometimes not.

The key question is how much debt can we tolerate? The World Bank says that when the debt exceeds 77% of gdp, growth of the economy may be slowed. When growth is slowed, the ratio increases, so this is an important factor to consider.

But if this were the only key number, a lot of countries are in trouble. Here are a few comparisons:
USA 1.3
Japan 2.6
UK 1.1
France 1.2
Germany .7
Greece 2.1
Canada 1.1
Russia .2

Greece is in trouble, but Japan has survived above 2:1 for many years. This illustrates the fact that even this ratio, taken alone, cannot provide a definite limit.

Most economists think the future gdp growth rate of an advanced economy like ours will be around 3%, not more than 4%. So, to keep our debt to gdp ratio constant, we need to limit increases in debt to a similar percentage, and our debt trajectory is far above 3-4% annual growth.

Is this all just too complex to digest? Maybe. In our highly partisan time, most of us will simply trust our leaders: “Believe what your Party leaders say they believe.”

I vote for a big stimulus because (a) it is desperately needed; and (b) it will be spent and will grow the economy. The alternative is worse—for the people and for the future debt/gdp ratio.

But I don’t mind if President Biden chooses to compromise with Republicans–for the sake of unity and for the sake of debt limitation and space for infrastructure and other critical expenditures ahead. When the pandemic is behind us, Congress needs to set a limit to the maximum annual rate of debt growth and/or to the ratio of debt to GDP.