President Biden enters office facing both the worst economic downturn since the Great Depression and the largest debt burden since World War II.
Biden has already made clear his intention to go big on government spending to resuscitate the coronavirus-battered economy, a move backed by mainstream economists who say debt concerns should be addressed after a recovery has taken hold.
But Republicans are starting to sound deficit alarms, and economists are split over how deep into the red the U.S. can go before the economy begins buckling.
Much of the GOP’s ire is focused on Biden’s $1.9 trillion coronavirus relief proposal, which he has said is his top legislative priority. It comes on the heels of a $900 billion COVID-19 relief bill that former President Trump signed into law last month.
Treasury Secretary nominee Janet Yellen defended Biden’s proposal during her confirmation hearing Tuesday, arguing that both the economy and the federal debt will be in worse shape without continued fiscal support from Congress.
“Neither [Biden], nor I, propose this relief package without an appreciation for the country’s debt burden,” she said. “But right now, with interest rates at historic lows, the smartest thing we can do is act big. In the long run, I believe the benefits will far outweigh the costs, especially if we care about helping people who have been struggling for a very long time.”
Those arguments received a chilly reception from Republicans such as Sen. Pat Toomey (Pa.), who is not seeking reelection.
“The ink is barely dry on the second-largest stimulus package in American history, nearly a trillion dollars, after nearly $3 trillion earlier in the year, and we’re looking at another spending blowout,” he said, calling the proposal “poorly targeted.”
“The only organizing principle that I can discern is it seems to spend as much money as possible, seemingly for the sake of spending it,” he said.
Sen. John Thune (R-S.D.) lamented “that nobody seems to be talking about” the debt anymore and that it was “a huge warning sign on the horizon.”
Those warning signs started flashing before Biden took office Wednesday. In the past four years alone, the nation’s debt level has risen to $21.6 trillion, a 50 percent increase from when Trump began his presidency.
Washington’s response to the coronavirus pandemic helped dig the 2020 deficit into a $3.1 trillion hole.
But the debt was growing even before the pandemic, with the 2019 deficit closing in on $1 trillion, fueled by increased spending on both the defense and domestic sides of the ledger, unfunded tax cuts, increasing health costs and an aging population.
Still, the fact that Biden is expected to unveil a multitrillion-dollar package focused on a long-term recovery in the coming weeks, likely focused on infrastructure, is raising some concerns among budget watchdog groups that growing debt levels will set up future problems.
Marc Goldwein, head of policy at the nonpartisan Committee for a Responsible Federal Budget, said cutting off crucial stimulus funds would be unwise, but that Biden’s proposals are likely larger than what the economy needs to stabilize.
“If you look at what the output gap is likely to be in the coming years, and the needs in these specific areas that shouldn’t be paid for, we’re not looking at anything close to $5 trillion or $4 trillion,” he said.
Biden said he wants to pass his $1.9 trillion relief bill with bipartisan support, meaning the price tag is being viewed by some as an opening bid. Indeed, the $350 billion set aside for state and local aid in the package is more than double what Democrats wanted to include in last month’s $900 billion measure.
The conservative group Americans for Prosperity singled out the state and local aid as “bailouts for state and local governments for decades of reckless spending by irresponsible politicians” and called for excising the provision from Biden’s bill.
The infrastructure package, on the other hand, is likely to sidestep a GOP filibuster by using budget reconciliation and is also likely to include some level of tax increases to pay for it.
Federal Reserve Chairman Jerome Powell has repeatedly told Congress that the risk of going too small is greater than the risk of going too big, but he also hasn’t specified dollar amounts for those thresholds.
Pumping too much into the economy at once would risk inflation and other economic challenges that would likely raise interest rates. But moving too slowly could prolong the recovery.
Just paying off the debt’s interest is becoming increasingly burdensome. In the coming decades, servicing the debt is projected to cost more than Social Security or the entire defense budget. That leaves less room for spending on other priorities without raising taxes.
At a certain point, it also affects decisions by investors. In a worst-case scenario, markets could lose faith in the federal government’s ability to pay back the debt, sparking a sell-off that could lead to a full-blown financial crisis.
“If we wait until the check engine light is flashing or the car is out of gas, it’s probably too late,” said Goldwein.
Still, he said, that shouldn’t stop Congress from approving some sort of stimulus now.
“We’re still in a pandemic. We should spend what is needed to secure people’s income,” he said.