The Case Mitch McConnell Needs to Make on Covid Spending
(Bloomberg Opinion) -- Mitch McConnell is in a tough spot. Many of his fellow Senate Republicans are balking at the additional spending and debt required by the HEALS Act, the pandemic relief bill that is the successor to last spring’s CARES Act. He could appeal to some Democrats for support, but that would require more spending, further eroding GOP support and possibly triggering a showdown with the White House. And all of this is before negotiations with House Speaker Nancy Pelosi.
So what’s a Senate majority leader to do? The only way to bridge this divide may be to bolster the bill with pro-growth proposals that can win over Senate Republicans without any spending cuts that will make it impossible to reach a deal with House Democrats.
It’s not just smart politics — it also makes economic sense. A key driver of GOP fears is the exploding debt-to-GDP ratio, which has already reached heights not seen since World War II. That ratio is sure to go higher as the pandemic continues to drag on the economy and more spending is authorized by Congress.
The only way to bring down that ratio is to increase economic growth — not just now, but over the long term. Efforts to bring down the debt-to-GDP ratio by cutting off relief completely could potentially backfire, especially among businesses and workers in the Sun Belt. A wave of bankruptcies and permanent closings would turn the virus-induced slowdown into a longer, self-sustaining recession.
Instead, senators worried about the debt should insist that any new spending be accompanied by pro-growth policies that will alleviate the debt burden going forward. Tacking on a set of tax reforms that are deliberately chosen to have the most bang for the buck could not only spur economic growth, but shrink the long-term debt-to-GDP ratio.
To be clear, these tax reforms would not pay for themselves in the sense that they would cause the deficit to shrink. If Congress were to adopt a full cost-recovery agenda, it could cost about $400 billion over the next 10 years. Yet it would increase total economic growth by more than 3% over the same period.
The CBO’s latest forecast, from January, was for the debt to grow to roughly $32 trillion by 2030. That’s likely to be an underestimate. The Committee for a Responsible Federal Budget puts the number at more than $37 trillion. Assuming the latter number is correct, an additional $400 billion of borrowing would increase the size of the debt by a little more than 1%. That’s less than third of the projected increase in growth.
The result is a debt-to-GDP ratio of 117% in 2030, slightly lower than the 121% CRFB is already projecting. That’s not much of a reduction, but it’s a start. Moreover, because those reforms are long-term, they would continue to contribute to economic growth beyond 10 years, increasing wages by more than 4% and creating 1 million new jobs.
At some point the U.S. will have to turn toward paying down the debt from this pandemic, either by reducing spending or increasing taxes. In either case, a stronger economy with higher-paying jobs will make the process easier.
That’s the case McConnell can make to his Republican colleagues: If they are truly concerned about debt, the answer is not to simply refuse to support any new relief. Rather, it is to insist that any relief efforts include long-term pro-growth measures.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Karl W. Smith, a former assistant professor of economics at the University of North Carolina and founder of the blog Modeled Behavior, is vice president for federal policy at the Tax Foundation.
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