Trillion-Dollar Deficits’ Harmful Impact on the Working Class

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Trillion-Dollar Deficits’ Harmful Impact on the Working Class

Published: Wednesday, May 13th, 2020 @ 9:30 am
By: John Locke Foundation ( More Entries )

Publisher's note: The author of this post is Mitch Kokai for the John Locke Foundation.

Willis Krumholz argues in a Federalist column that huge federal deficits "kill blue-collar America." The federal government's response to COVID-19 hasn't helped.

Coronavirus panic is hitting the global economy, and America is no exception. To patch over the shelter-in-place orders and compensate closed businesses, Congress has passed well more than $2.7 trillion in so-called stimulus, including subsidized loans to businesses, increased unemployment insurance, direct payments to Americans, and funding for hospitals and state and local governments.
Because of this, the federal deficit is now expected to be $3.7 trillion for fiscal year 2020. That's because we were already running a $1 trillion deficit before we added the $2.7 trillion in spending to fight the effects of the Wuhan virus. ...
... [H]igh debt may cause slower growth. Evidence points to a threshold at which indebtedness begins to sap the long-term growth of an economy, about 90 percent of debt to GDP. Growth at this point may fall by 1 percent, which doesn't seem like much, but at a growth rate of 3 percent versus 2 percent, GDP per person will double in only 23 years versus 35 years. That's a huge loss to American incomes.
For much of this country's history, growth rates have been at 3 percent in real terms, and only since the 2000s has U.S. growth structurally fallen. That 1 percent difference for much of America's history is a reason America has a world-beating economy, and higher growth also tends to be spread more evenly among the population. ...
... That brings us to the second problem caused by high debt: inequality. The increased concentration of power in the economy, along with U.S. trade policy, has worked with lower long-term investment in the U.S. economy to result in decades of flat real wages for many blue-collar jobs. That's because blue-collar workers are uniquely exposed to both foreign trade and industries where long-term capital expenditure is required for productivity gains.

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