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Potential long-term economic consequences of the federal response to the COVID-19 lockdowns

Norbert J. Michel, PhD, Paul Winfree, and Doug Badger

The Heritage Foundation, June 4, 2020
SOURCES: Bureau of Economic Analysis, “National Income and Product Accounts,” Tables 1.1.5 and 3.2, https://apps.bea.gov/iTable/index_nipa.cfm (accessedMay 28, 2020) and authors’ calculations. See Appendix Table 1 for details.
Senate leaders are hard at work on another coronavirus relief package, and Majority Leader Mitch McConnell said this week “kids in school, jobs and health care are likely to be the focus of the bill.”

House Speaker Nancy Pelosi says a developing coronavirus relief bill will cost at least $1.3 trillion but concludes “That’s not enough.”

Galen Senior Fellow Doug Badger has taken a deep dive, with Heritage Foundation colleagues Norbert Michel and Paul Winfree, into the impact of this burgeoning spending on the current and future economic health of the country.

Their paper, “Potential long-term economic consequences of the federal response to the COVID-19 lockdowns,” shows how “Lockdown orders and actions already taken by Congress have raised federal spending to more than twice revenue, increased deficits to historical high rates, and at least temporarily raised debt held by the public to more than 100 percent of GDP.”

Pelosi and McConnell need to resolve key issues, including how to help the unemployed without further damaging the economy, how to help schools reopen safely, and demands for relief to state and local governments.

Pelosi is demanding, for example, that the $600 federal unemployment bonus, due to expire July 31, be extended to the end of the year.  Badger, Brian Blase, and Casey Mulligan explain the damage the bonus is doing to the recovery.  In a recent Galen paper, “Getting America Back to Work and Hastening the Recovery,” they estimate that if the bonus were extended, almost two-thirds of those receiving unemployment benefits would be out of work because of the bonus that pays millions of people more to stay home than to go back to work.

The numbers and charts in the Heritage paper are jolting—one after another showing the huge consequences of the pandemic to U.S. economic growth and fiscal and monetary stability.

“Before embarking on a new round of spending and borrowing, Congress should ensure that existing funds are producing their intended outcome. Congress should not assume that spending more will automatically produce beneficial results,” the Heritage paper explains.

Borrowing to finance the $3.7 trillion increase in the 2020 budget deficit “has put the federal government in fiscal circumstances that neither the U.S., nor most other highly developed countries, has ever experienced during peacetime,” Michel, Winfree, and Badger write.

Their analysis should alert lawmakers to be fiscally prudent in the next round of spending. They conclude with a series of recommendations, “calling on policymakers to re-examine the use of widespread and long-standing lockdown orders, urging Congress to examine the effects of COVID-19-related legislation it already has passed before requiring the federal government to take on more debt, recommending that the Federal Reserve normalize monetary policy, and recommending that Congress address federal indebtedness in a systematic way by reforming federal entitlement programs, especially health care entitlement programs.”

Their detailed descriptions and analysis of the federal debt, monetary policy, and the impact of the pandemic should be required reading before any legislator votes on the next bill.  The health of the nation requires it.
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