Beware the COVID-19 Debt Hangover
After the rush, brace yourself for the hangover. That’s the warning from experts with the University of Pennsylvania’s Wharton Business School, who caution that plans for massive “stimulus” spending by the Biden administration will administer only a brief boost to the country followed by a nasty and prolonged comedown.
The White House objects to the forecast, but it squares with earlier predictions from the Congressional Budget Office that accumulated debt, worsened by heavy pandemic-related spending, will hobble the economy for years to come.
President Joe Biden’s proposed $1.9 trillion relief package would increase economic growth by 0.6 percent in 2021, according to analyses by the Penn Wharton Budget Model (PWBM). After that, though, it would start to slow the economy, decreasing GDP by 0.2 percent in 2022 and by 0.3 percent as late as 2040, showing lingering negative effects after the initial spending.
The big problem for the longer-term outlook is “the large amount of additional money that we’re adding to our already very large debt,” according to Efraim Berkovich, PWBM’s director of computational analysis. “The existence of the debt saps the rest of the economy. When the government is running budget deficits, the money that could have gone to productive investment is redirected.”
U.S. government debt is already sky-high, having increased by $7 trillion dollars in the last four years alone to reach 100 percent of GDP at the end of 2020. That burden threatens to act as a dead weight on economic growth.
Unsurprisingly, the Biden White House takes exception to Wharton’s gloomy forecast. Press Secretary Jen Psaki insists the prediction is “way out of step with the majority of studies on this plan.” In particular, she complains “the analysis concludes that our economy is near capacity, which would be news to the millions of Americans who are out of work or facing reduced hours and reduced paychecks.”
In response, the Wharton analysts point to ongoing recovery in many sectors. They also point out that continuing lockdowns prevent some production and employment that would otherwise occur.
“[R]ecovery in the affected sectors is limited by pandemic-related shutdowns and individual behavior,” they wrote. “There is no mechanism by which additional household spending will stimulate those sectors until pandemic-related restrictions ease.”
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