'Deep Dive: Coronavirus' — Where Does All That Federal Stimulus Money Come From?

May 17, 2020

The coronavirus pandemic is affecting many people's lives. To minimize those effects, Congress has appropriated trillions of dollars of spending to aid Americans. That money is going to have to be borrowed by a government already running huge deficits. How will that be possible? And what will it mean for the country in the long term? 

Charles Wheelan teaches public policy and economics at Dartmouth College in New Hampshire. He's the author of the book "Naked Economics," and he spoke with Maine Public's Irwin Gratz.

This interview has been edited for clarity.

Gratz: The federal government said recently it plans to issue $3 trillion in bonds in this quarter. Who's going to buy those?

Wheelan: Lots of investors who are scared of everything else are going to buy those. They're worried about the stock market, they're worried about investing in other countries. It is the best horse in the glue factory, at present. The federal government isn't even actually having to pay very high interest rates, so we're getting a good deal on our borrowing. There is demand for now.

And I understand the Federal Reserve is going to buy some of these as well.

The Federal Reserve has a unique capacity to buy bonds of any duration. And when they do that, they create demand for that borrowing. And it's one source of borrowing for the federal government. It's a dangerous game. You can look around the world historically, and when federal reserves or central banks get in the business of buying the debt issued by governments, often hyperinflation is around the corner. I don't see that now. But as I said, it is a dangerous game to be playing.

So if we're going to count on other investors to invest, how much more could the federal government actually borrow this way?

Charles Wheelan
Credit dartmouth.edu

That depends entirely on whether there is a plan for repaying it. The last time that I can think that we borrowed on this scale so quickly, would have been World War II. It was obvious that we should spend that money and I would say, very importantly now, it is important that we send out checks to keep businesses and households afloat. The key, though, is when it's over, do you have a plan in place to pay down that debt. We did it very effectively after World War II. Unfortunately, now we're in a climate where the two political parties cannot agree on a fiscal plan.

What's really the option for Congress? I mean, at the moment, if they don't do all of this spending, the country is continuing to experience conditions it hasn't seen since the Great Depression.

There is no option in the present. We ought to be spending heavily to keep businesses and households afloat and we should absolutely, positively not raise taxes because that's giving money with one hand, taking it away with the other. There's really nobody, save a few billionaires, who's in a position to be paying higher taxes, and that's not going to pay off the level of debt that we're seeing here. But there's nothing precluding us from thinking more long term, and there are really only two options. You can bring in more money, or you can spend less, or I guess the third is you can do a little bit of each. Any economists across the ideological spectrum looks at where we are, says you're going to have to use all the tools. We're going to have to raise revenue. And we're also going to have to curtail the rate of growth in entitlement spending. And most of that, of course, is health care costs. When you look at government spending, it is not funding for the National Endowment for the Arts. It is not the space program. It's not foreign aid. Those things are increasingly chump change. It is all health care, Medicare, Medicaid and the like. Until we restrain the rate of growth in health care, we're never going to get our fiscal books in order.

You mentioned one other thing, too, when you were writing "Naked Economics." The other factor that could help the country in the long term is actually inflation.

Well it depends on how you use the word "help." So inflation can clearly help ameliorate your debts. But yes, if I owe you $1,000, that's a lot of my income. Another thing I can do, if I happen to control the value of my currency, is inflate away the value of that currency. So yes, I pay you back $1,000 on paper, but it only buys a half of what it used to buy. So in effect that cancelled half of my debt to you, even though I have honored my legal obligation.

Well, that may not be a good strategy, kind of in the short-term, but even before this happened, the Fed was aiming for an inflation rate of about 2 percent. So, clearly, over the long-term that could have some effect on the borrowing.

A steady and predictable inflation rate of something like 2 percent is, as you said, the target for the Federal Reserve. That's actually quite healthy. But the Federal Reserve has been very explicit. They're saying we are aiming, we're telling you investors that we're trying to get 2 percent, which means when I loan you money, and we calculate an interest rate, I am anticipating a 2 percent inflation rate. It's an unexpected and much higher inflation rate that distorts that borrowing-lending agreement between you and I.

You were mentioning, before, about how the U.S. did succeed in repaying its debt after World War II. As it eventually plans to do the same here, is there a time factor? How quickly does it need to pay off a debt?

I don't think it has to be done quickly at all. As long as you can see runway, that seems like it's going to solve the problem. So for example, if you were my banker, I got in trouble on a business loan, and I came in said, 'Look, I'm going to make good on this loan.' You wouldn't say, 'I need it by next Monday,' you'd say, 'All right, let me see your business plan. And let me see your results. And if I'm persuaded over the next couple of years that your road to profitability is going to allow you to pay this back,' you'll give me as much time as I need. But it all depends on having a plan in place that is credible, and starts to show results.

So to summarize, you think we should be borrowing right now because we need to, and the key is to make sure that we have a plan in place to repay that borrowing over time.

At the risk of sounding like I'm pounding nails in the barnyard door after the horses are out, we should have been more fiscally responsible in the past. We should not have arrived at this point, in such a fiscally perilous state. We've just come through a stretch, before coronavirus, where we had the lowest unemployment rate in recent history. And that's usually a time when you run surpluses. If we were a household, that would be a time when we were at our peak earnings and should presumably be saving for retirement and college tuition, those kinds of things. And instead, we were borrowing heavily. So then we come into this period, when we really do have a reason to borrow, and we're just not in the good shape that we would like to be in.

This interview is part of our series "Deep Dive: Coronavirus." For more in the series, visit mainepublic.org/coronavirus.