This is a continuation of our series on the Covid-19 pandemic.

In response to the coronavirus pandemic, Congress is pumping trillions of dollars into the U.S. economy. Some analysts have expressed concerns about what this means for the national debt. But in the midst of crisis, calls for austerity may be misguided.

It’s been nearly thirty years since billionaire Ross Perot ran for president on a platform that emphasized the dangers of the growing national debt. Today, the government continues to operate at a budget deficit, increasing the size of the debt to over $24 trillion. Despite few signs of impending peril, the issue remains one of the most prominent in our political discourse.

On Tuesday, the Senate approved a $500 billion coronavirus stimulus bill with funding for small businesses, hospitals, and disease testing. This package, dubbed “Phase 3.5”, comes on the heels of the $2 trillion CARES Act which Debtly has covered in depth. With the economy struggling, demand for additional aid is unlikely to let up. Predictably, some politicians have begun to express concerns about how this spending will impact the national debt. Media commentators have also started pushing the ever-familiar austerity narrative. These voices will only grow in strength as the crisis progresses.

Unfortunately, the conversation around budget deficits often rests on a poor understanding of how the national debt functions. First, one must understand the basics: The national debt measures how much the U.S. government owes its creditors, and it grows each year the government spends more than it brings in. The majority of the debt is issued in the form of government bonds, known as Treasuries. Some worry that excessive debt destabilizes the economy with ramifications for the strength of the currency, economic growth, and unemployment. Others believe the national debt is manageable.

The biggest criticism of the national debt arises from the notion that, like any other debt, one day the government’s bill will come due. In reality, however, sovereign debt does not function in this way — instead, it is typically rolled over indefinitely. After all, the U.S. government borrows in the world’s reserve currency which it can print at will. Even at the height of World War II, when the debt-to-GDP ratio was higher than it is today, a tipping point was never reached. The debt was rolled over, and the economy grew fast enough that the debt-to-GDP ratio shrunk.

An increasingly fashionable idea called Modern Monetary Theory holds that, given certain protections, there are basically no limits to the amount the U.S. government can spend. The only real concern of deficit spending is the risk of inflation, which is minimal in our current economy (and America’s last inflation crisis was not caused by over-borrowing). But even if you don’t buy that theory, a global pandemic is not the time for austerity.

The Takeaway

If the government doesn’t commit to rescuing our economy, we could be stuck with the same mass unemployment and low growth rates experienced for years after the Great Recession. If done properly, stimulus injections will mitigate these effects. Most famously, John Maynard Kaynes urged deficit spending during economic contractions. By preventing damage to the economy, borrowing during a recession can pay for itself.

Fixation on the national debt often comes at the expense of meaningful policy discussions about the personal debt held by individuals. Americans now owe over $1.6 trillion in student loans, making important financial achievements like homeownership and retirement saving increasingly difficult. Unlike the government, nearly forty percent of borrowers are expected to default on their student loans by 2023. When the bubble bursts, we should expect disastrous economic consequences.

The economic fallout from the coronavirus pandemic will be significant. Already, Congress has provided trillions of dollars in relief, with more likely to be on the way. But if these efforts cease too early, recovery will be difficult, and more Americans will suffer. For these reasons, it’s important to push back against the narrative of austerity. Misguided panic about the national debt helps no one.

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