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Taxing & Spending: Will Fiscal Responsibility Survive COVID-19?

Posted on Mar. 26, 2020

Let’s talk stimulus. The Senate has agreed to a pandemic relief package that calls for unprecedented spending. And, at least as of the time I write this, we don’t know what spending priorities will be evident in the House of Representatives’ parallel bill.

The Senate bill hasn’t been officially scored yet, but back-of-the-napkin estimates are landing in the range of $2 trillion. None of it is paid for — that would defeat the point. We’re looking at the single most expensive piece of legislation in the nation’s history.

Meanwhile, the Federal Reserve has been busy as well. The Fed has lowered interest rates about as far as it can without crossing into negative territory. Quantitative easing has ramped up to bolster the market for treasuries. Acquisition of private bonds might be next. Larry Kudlow, director of the National Economic Council, recently estimated that the price tag on these maneuvers will be around $4 trillion.

Taken together, we’re looking at $6 trillion in federal stimulus. It’s tempting to conclude that our fiscal and monetary tools are being squeezed to their breaking point — but I’m no longer sure they have a breaking point. And this has implications for our fiscal future. The way Congress enacts taxing and spending bills might never be the same after COVID-19. Obviously, these economic issues pale in comparison with the related public health considerations, but they’re still worth our attention.

Here’s the deal: If the federal government can do all these things without triggering a whiff of inflationary pressure, policymakers may well conclude that the need for legislative revenue raisers is illusory — even when there’s no crisis at hand. Why should Congress ever pay for anything again? Is the “pay-for” becoming an obsolete concept right before our eyes?

Consider this scenario: Think back to the fall of 2017, when Congress was debating the Tax Cut and Jobs Act. Nobody on Capitol Hill was too worried about deficit spending. (Deficit hawks are so rare in Washington, D.C., that they should be on the endangered species list.) It was arbitrarily determined that the bill shouldn’t cost more than $1.5 trillion, spread across a 10-year budget window. Let’s ignore the fact that the cost ceiling was a contrived number; it still functioned as a meaningful restraint. Numerous GOP lawmakers were told by party leadership that their pet projects had to wait for another legislative vehicle because there was simply no room left in the TCJA’s budget.

Going forward, will those conversations still take place? The next time around, will groups of lawmakers push back, arguing that inflation is dead and deficits don’t matter, citing our pandemic response as exhibit A? Will all federal spending (or at least most of it) become deficit spending?

This inclination isn’t entirely new. Even before the pandemic hit, some lawmakers were already starting to think that way. For example, last year when a Medicare for All proposal was being discussed during a congressional hearing, GOP critics objected to the hefty price tag. Rep. Alexandria Ocasio Cortez, D-NY, offered an inquisitive reply that touched on what many were thinking. To paraphrase: “If we didn’t need to pay for the TCJA, why do we need to pay for healthcare reform?”

Lawmakers on both sides of the aisle are pondering the same question with their own spending priorities in the starring role. If we’re not paying for X, why bother paying for Y? Might Congress’s pandemic relief package be remembered as the last nail in the coffin of fiscal responsibility?

Cost criticism isn’t what it appears to be, and it never has been — it has always been contextual. Progressives object to GOP-backed tax cuts not because they truly care about deficits, but because they’d rather see the money spent on other things. Likewise, conservatives object to entitlement expansion not because they genuinely care about balanced budgets, but because they’d rather fund other priorities. Pleas for fiscal responsibility already fall on deaf ears. In the wake of COVID-19, will they be reduced to faint mumblings and go away completely?

Some commentators, including Tax Notes’ Lee A. Sheppard, have previously claimed that a country can’t go broke in its own currency — at least when that country controls the world’s functional reserve currency. 2020 might be the year we finally put that economic theory to the test.

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