The End of Cost

The End of Cost

| May 04, 2020
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In the past five weeks the United States has thrown $3 trillion in new government spending at coronavirus-related bailouts, relief and economic stimulus. In total the US has already spent more on coronavirus-related actions than the rest of the world combined, tripled. Strangest of all, not one dime of it is backed up by new government revenue streams; every bit is deficit spending.
Nor is the United States likely to overly suffer from the expansion of its debt burden. Of that $3 trillion in new spending, the Federal Reserve’s total purchases of US debt is “only” $1.3 trillion. The rest of the debt bulk has been absorbed by other investors, mostly foreign investors. Such is the scare globally that many are eager to get a zero rate of return on an American government asset rather than risk their money at home.
Nor is the United States even remotely done. At least another $1.5 trillion is on deck for May, with another batch likely during the summer. None of this includes any of the monetary policy actions from the Federal Reserve, nor does it include likely inducements for American firms to relocate from China to literally anywhere else.

The feeling in the United States is that coronavirus is not only a crisis, but it is the type of crisis which necessitates heretofore unprecedented government action. And since government action isn’t free, everyone is willing to go along with big price tags. This feeling is strikingly bipartisan. In the first two week of the coronavirus crisis, Congress passed more legislation of substance than in the previous ten years. I’m not suggesting for a moment that American politics have entered a kumbaya moment, but instead that the very concept that price means anything has passed into myth. And if my broad forecasts for the future of Europe and China hold true, it will stay there for years to come.
There’s a political side to this willingness to throw a bottomless pot of money at the problem as well.

America’s political parties are in flux. Factions rise and fall in the hierarchies, and sometimes drop out of party structures or vanish altogether. Sometimes, leadership can move such transitions along much faster. In the case of America’s fiscal conservatives, Trump’s transformation of the Republican Party into his personal vehicle excised the fiscal conservatives (along with the business conservatives and national security conservatives) from the Republican coalition altogether. It is entirely reasonable to expect the fiscal conservatives to eventually find a new home, but for now the brake that they have institutionally imposed upon government spending is simply not present.
Which makes the next few years a time for big-ticket ideas. There are plenty of them bouncing around in the American political space. Many are near-and-dear to the Left, who at their core see the government as a change-agent which has the right and duty to uproot and remake society. Yet these days the Right is hardly aghast at big spending either. After all, America’s biggest (pre-COVID) budget deficits happened under the Trump administration. Let’s take a look at the most likely culprits:
Infrastructure spending:
This one is not only a perennial favorite, but its time has finally come. Typically, hang ups have included pork barrel politics, general ideological clashes over the nature and goals of this or that piece of infrastructure, state v federal decision-making authority and fund sourcing. But mostly it has been about cost. If you disagree with someone’s infrastructure plan on any non-cost point, you can always oppose it as being “wasteful”. That argument just vanished. And since everyone agrees in general that infrastructure spending is good (it’s just the other guys’ specific ideas that are kooky) expect a lot of it in the not-so-distant future.
Updating America’s interstate road, rail and water infrastructure would run a cool $3 trillion. A nationwide 5G effort would add another trillion. And that doesn’t even touch municipal infrastructure which could easily add another $2 trillion.
Universal basic income:
The concept of UBI is that government should provide every citizen with a monthly or weekly payment for “basic” expenses such as rent and food and power. As the argument goes, as automation erases more and more job categories, some sort of universal payout is the least disruptive and cheapest-to-administer method of wealth redistribution.
Many criticize the very concept because it would denigrate the work ethic. Others like the fact that it would introduce a sharp class distinction between earners who pay taxes and a loafing class that simply subsists (many of these folk in this second camp assume – probably correctly – that over time UBI would introduce different tiers of political rights, with those who do not pay into the system losing full voting rights).
One of the biggest reasons no one has really tried UBI is that it is expensive to attempt, and no one knows if it’ll work because no one has ever really tried it at scale. Well, as part of the coronavirus stimulus and bailout packages, most citizens received a $1200 check and anyone on unemployment gets another $600 per week on top of their standard benefits (meaning many on unemployment are now making more than they did while working). More cash payments are all but certain for the next couple of months, and an extension of unemployment benefits are pretty much baked in as well.
Functionally, the United States is trying UBI out right now. A few months from now we’ll finally have a real-world, at-scale example of how UBI works. And if it works well, expect a massive push to implement it on a permanent basis.
Defense expansion:
I’ve always found the process of deciding defense spending fascinating. Even in the days after the Sept 11 attacks, it was ridiculous to think that Islamic terror posed a more existential threat to the United States than the Soviet nuclear arsenal. And yet US defense spending today – with the Global War on Terror largely wound down – is higher than it ever was during the Cold War. Defense specialists are bracing for what they see as the inevitable spending drawdown. I simply don’t think it is going to happen.
Today the annual budget of the Defense Department is just shy of $750 billion, plus another $52 billion for Homeland Security and $63 billion for the intelligence agencies. If there is going to be a budget reduction, it will come from American forces being fully brought home. Although, honestly, closing America’s overseas bases means future deployments likely will cost more because the military will need to launch from the homeland rather from a foreign footprint closer to the action.
A partial solution to that imbroglio? Don’t cut funding at all. In fact, invest in more long-range deployment capacity.
Universal health care:
America’s health care system is the world’s most expensive, but from the quality of the care provided (not to mention the system more or less falling on its face during COVID) you wouldn’t guess it. The smart conversation would be how to institute real health care reform (as opposed to Obamacare which simply introduced health care payment reform), but that unfortunately isn’t the conversation that’s starting.
Instead, the passion from politicians such as Bernie Sanders is for free health care for all, based on the Medicare model, which is by far the least efficient, lowest quality, most expensive option possible. Leaving aside both the financial estimates of the Sanders crowd and their detractors, most independent estimates put the cost for Medicare for All at least $2 trillion. Per year. Normally, such proposals would founder on the rocks of cost. Not anymore.
Green New Deal:
Contrary to much rhetoric (which I guess is the case with all these ideas), the GND is less a well thought out plan and more an ideological grab bag of Green/socialist concepts. That has been enough of a deal killer to turn most moderate Democrats against it, as well as those within the Green movement who think that math needs to be part of the discussion (which would include me). Bottom line? There really isn’t a real plan yet, but with Americans shifting into a price-as-myth mindset, I bet there will be one soon.
Any meaningful GND would need to require the near-complete overhaul of nearly every economic sector ranging from automotive to construction to power to agriculture to raw materials. We haven’t even invented many of the technologies that would be required, which, at present, makes any brass-tacks budget proposal impossible. But suffice to say if it could be done for $10 trillion, that would be really, really cheap.
It doesn’t take much imagination to foresee a potential political alignment in Congress to dump a few supertankers of twenties on this or that Green-friendly policy. At a minimum, I expect much increased subsidies for this or that greentech, even if (especially if) they haven’t yet proven to be market ready.
Industry bailouts:
While I expect much of the country to be returned to work by mid-July, there is much about the coronavirus we do not yet know. For example, if it turns out that everyone who gets it can be re-infected a few weeks down the road, then the fundamental structure of the American economy will have to adapt to a fundamentally new reality. Such changes in circumstance will not impact all sectors or firms equally, generating scads of winners and losers. Without financial assistance, some sectors will shrivel and firms within those sectors will simply die.
But with a bottomless supply of funding available? Not so much.
Some of these are pretty obvious. Just off the top of my head, tourism, aerospace, child-care, education and restaurants look particularly endangered. The question is where to draw the line.
Consider air travel. Of course, we’ll bail out the airlines. What about airports? What about aircraft manufacturers like Boeing, or aircraft maintenance firms? Do we bail out all their hundreds of component manufacturers as well? What if key components are manufactured in other countries? Are those firms rescued? Normally, the fear of not knowing when to stop establishes a natural firebreak on bailouts. But that fear is rooted in the fear of cost. That fear no longer applies.
State and municipal bailouts:
Most American states have balanced budget amendments, and most gain their income from sales and income taxes which have pretty much gone to shit during the coronavirus crisis. Add in that many have wildly out-of-control pension funding issues and many states faced financial catastrophe before COVID. With COVID its more like financial Armageddon.

So far Congress has only extended the states and cities very limited assistance, with Senate Majority Leader Mitch McConnel (R-Ky) dead-set against any sort of broad-based bailout program. It isn’t simply about ideology. Some states are actually doing ok (all things considered), so rewarding states who have failed to reform their systems does bring up issues of fairness and moral hazard.
But the fact remains that the single biggest reason not to do some sort of federal bailout – cost – just doesn’t mean as much as it used to. (It is also worth mentioning that the sort of financial power and flexibility which enables the federal government to spend as much as it wants does not extend to the states and municipalities. They are not sovereign powers with their own currencies.) Some sort of federal fund designed to provide at least bridge funding is probably inevitable.
All these possible programs have multiple policy, strategic and cultural implications.

  • If the federal government bails out a firm, does the government take shares? If the bailouts are big enough and last long enough does that mean the US government becomes the majority owner? We have a word for that: nationalization. Can you nationalize a city? A state?
  • An America that doesn’t right-size its military for a new era, and expands its budget to make it very easy to reach out and slug someone, is a country that is perfectly willing to level any country anywhere for nearly any reason.
  • Massive infrastructure programs are not simply about building roads and bridges, they are designed to rewire economies for decades (my adopted home state of Colorado has a 100-year infrastructure plan). Decisions made now will guide the country’s development, literally for generations. There will be winners and losers.
  • An America on UBI is one that faces a wide array of utopian and dystopian futures. Consult Andrew Yang for the utopian, and the sci-fi series The Expanse for a good example of the other one.

There are those who would argue that none of these – let alone a few, much less all of these – would ever creak past the shrieks and performative rage of the Senate’s erstwhile fiscal hawks.
Ha! There are few things politicians of any political stripe care about more than getting reelected. And as the Trumplicans’ central rally cry – a booming national economy – crumbles, you can be sure that if not Senate Majority Leader Mitch McConnell, then President Trump’s survival instincts are going to go into overdrive.
Trump’s populist tendencies coupled with the very real economic pain being felt across broad swathes of the American electorate provides the current administration with an obvious path forward to electoral success: absolutely massive social spending.

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