By Greg Robb, MarketWatch , Jonathan Nicholson
The precarious fiscal position the U.S. finds itself in as a result of the coronavirus pandemic is now clear, as the Treasury Department makes plans to borrow trillions of dollars to pay for the relief measures.
The cost of not tackling the debt during the long economic expansion of the past eleven years now must be paid.
Before the coronavirus crisis, it would have taken $400 billion a year of spending cuts or tax increases — a seemingly insurmountable hurdle for a deeply divided Congress — just to keep the debt steady.
Now it will take roughly $900 billion each year, for 30 years, according to Bill Hoagland, a former budget staffer for Republicans on Capitol Hill before becoming senior vice president for the Bipartisan Policy Center.
“We didn’t fix the roof when the sun was shining,” Hoagland said. “Republicans helped contribute to the trillion dollar deficit prior to COVID, so we don’t have a lot to stand on going into this talking about reducing the deficit.”
Still, budget hawks like Hoagland said now is not the time for tackling the deficit.
“It was a time to worry about it before. It’s not a time to worry about it now,” he said. “The question is when do you actually do something about it and it’s not clear we can do anything until this passes.”
On Monday, the Treasury Department said it expected to sell a record $3 trillion in debt in the current quarter to finance the deficit. More details are likely Wednesday, when department debt managers hold their quarterly press conference.
So far, though, Treasury has had little problem selling the deluge of debt. For an auction of $17 billion in 30-year bonds in early April, the Treasury saw twice as much in bids as it had debt to sell. At the other end of the yield curve, $60 billion in three-month bills sold Monday attracted three times as much in bids.
“Federal budget deficits have famously not seemed to have an impact on Treasury borrowing rates over the last 10-15 years, but the next few years will present a stiff test of the hypothesis that ‘deficits don’t matter,’” said Stephen Stanley, chief economist with Amherst Pierpoint Securities in a research note.
Right now, interest-rates on U.S. government debt is “extraordinarily low,” noted Chicago Fed President Charles Evans on Tuesday. The yield on the 10-year Treasury note /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +0.19% is currently 0.644%, far below its highest rate of the year of 2.498% one year ago.
“I get the point that people look further to the future where it could be much more difficult, where interest rates would go up,” Evans said. “But that would likely be accompanied by a pickup in the global economic outlook and “an upside scenario.”
Hoagland is not alone among deficit hawks with a now-is-not-the-time view on the deficit.
“Even the toughest deficit hawk realizes what a real emergency this is. COVID is a real emergency,” said Rep. Jim Cooper (D, Tenn.). Cooper was the driving force to bring a deficit reducing budget resolution, based on the Simpson-Bowles bipartisan commission recommendations, to the House floor in 2013, where it received only 38 votes.
“There are times when you have to dig deep and make sure the nation as a whole recovers,” he said. “We should have saved up money when times were good. We didn’t.”