Can We Afford the Economic Costs of COVID-19?

A crisis is a point in time when unforeseen circumstances force us to make decisions that will fundamentally affect our future, for either better or worse. We are in a time of crisis. I was shocked when I heard that governors confronted with the COVID-19 pandemic were being forced to bid against other governors, and against the federal government, for ventilators and personal protective equipment to prepare hospitals for projected peaks in healthcare demands. How can anyone think it somehow makes sense in a time of crisis for the health and life of anyone to depend on the willingness and ability of their governor to win an economic competition? Only recently has the U.S. government been forced by public pressure to quit relying solely on economic incentives for U.S. corporations to ramp up production of essential medical equipment and supplies. On the question of shutting down the economy, one state public official recently suggested that old people should ask if they would rather risk dying than to and jeopardize the economic future of their grandchildren. Why don’t they ask the grandchildren if they want to risk the lives of their grandparents for an opportunity to make more money—someday? Most kids have enough common sense to know that such questions involve values far more important than the value of money.

A public health crisis is a stark revelation of a “market failure,” or more accurately a “non-market” responsibility. Markets will not ensure access to adequate health care, and individual health cannot be isolated from public health or societal health. There will always be people in any society who are not capable of producing enough “economic value” to earning enough money to afford adequate health care, including the preventative health care necessary to prevent an epidemic or pandemic. There will never be adequate economic incentives for the government of any society to adequately prepare for a pandemic or other public health crisis. Even the virtual certainty of another pandemic in some distant future has very impact on today’s economic decisions. Markets prioritize the present and discount the future. These are not matters of markets failing to do things markets are capable of doing. These are simply things that markets can’t do and thus should never be expected to do. These are government responsibilities. The future of our nation could well depend on accepting this economic reality.

Now that the public health impacts of the coronavirus appears to be reaching its peak, there will be increasing pressure, particularly from government officials, to reopen the economy to prevent further deterioration. I have already heard advocates try to avoid the “life versus money” question by arguing that economic impacts of the shutdown also are affecting public health and threatening people’s lives. If so, the economic threats to public health are preventable and unnecessary; the public health threat of COVID-19 is not. There is plenty of money in the U.S. to ensure that no individual suffers economically for doing something that is in the interest of the nation as a whole. Admittedly, there may be short run challenges in distributing financial compensation. However, the emotional stress of the economic aspects of the shutdown would not exist if people were confident economic compensation would be provided for anyone who loses their job or whose business is adversely affected by the shutdown. The people pushing to open the economy prematurely are not motivated by public health concerns. Their motivations are economic.

Those of us who are unaffected, or less affected, economically by the crisis can easily afford to pay the economic costs of protecting public health. The discretionary wealth in this nation, much of it superfluous wealth, is not held by those who work in or manage the small businesses that are suffering most from the economic shutdown. It’s the investor class, meaning those who make money from having money, who have prospered from recent growth in the U.S. economy. Whenever they have stumbled into financial trouble, the working taxpayers have bailed them out. It’s time for those who have grown wealthy from the efforts of an under-rewarded working class to begin paying the overhead cost of the economy that has allowed them to gain and retain their wealth—including the costs of public health. Even many of us in the so called middle class, including some retirees like myself, could easily afford to pay more to ensure the collective health and well-being of the society that we depend on for so many public benefits.

That being said, in the current situation we are not being asked to pay the economic cost of dealing with the coronavirus crisis. The government programs being put in place are not being accompanied by tax increases but instead are being funding through increased government borrowing and spending. To the extent the government borrows by selling government securities, those who buy those securities are funding government’s coronavirus economic response. However, the $2.2 trillion dollar coronavirus response bills are being funded largely by the U.S. Treasury borrowing money from Federal Reserve Banks that is backed by nothing more than the government’s promises of repayment. The government essentially is borrowing money from itself that it promises to repay to itself and is paying the Federal Reserve Banks a nominal interest rate for handling the transaction.

This is the way money is “created out of thin air”—as critics often put it. It’s not quite as magical as it might seem. Loans by the Fed to the U.S. government are essentially loans made by the American people to fund investments in American people. In cases where the recipients receive grants, rather than loans, the repayment will be in through future taxes on income that would not have been earned if the grants had not been made. In the meantime, the shortfall will add to the national debt, which may limit future government spending. In cases were government loans are repaid, with interest, the economic recovery will have been secured, and nothing will have been lost. In cases of defaults on government loans, money will have been put in circulation for which there is nothing to buy. The consequences will be felt by consumers through inflated prices, which means the things they buy will simply cost more.

The annual federal budget deficit had grown to a trillion dollars a year even before the recent $2.2 trillion dollar increases in authorized government spending. An additional economic recovery bill could add another trillion dollars to the deficit. Admittedly, $3.2 trillion dollars would be a lot of money—approaching $10,000 per person. However, the government budget is not like a household budget and government borrowing is not like individual borrowing. Individuals have a lifetime during which loans made must be repaid, or thereafter settled with their estates. Governments theoretically can live forever. Governments can operate with budget deficits for as long as people continue to accept and trust their promises of repayment, promises with are accepted as money. The only restraints are to avoid putting so much money in circulation that inflation in prices cause people to lose confidence in the economy and to avoid allowing interest costs to claim so much of the federal budget that people lose confidence in government. With record low interest rates and a looming economic recession, neither of these restraints seem of particular concern in the present situation.

My only real concerns about deficit government spending at this time is that people understand we are the ones who are actually making these grants and loans, we are making them for a worthy cause, and we can afford to make them. Nonetheless, these are financial obligations with significant economic and societal implications and should be made with great care and consideration for the common good. This is not “free money” to be handed out at the discretion of individuals, including those at the highest levels of government. We can afford the economic costs of the COVID-19 crisis. We can’t afford continued corruption in government.

John Ikerd