The Congressional Budget Office has warned that the government this year will run the largest budget deficit, as a share of the economy, since 1945, when World War II ended. Next year, the federal debt — the sum of the year-after-year gush of annual deficits — is forecast to exceed the size of the entire American economy for the first time since 1946. Within a few years, it’s on track to set a new high.
It might be surprising to hear that most economists consider the money well-spent — or at least necessary. Few think it’s wise to quibble with the amount of borrowing deemed necessary to sustain American households and businesses through the gravest public health crisis in more than 100 years. That’s especially true, economists say, when the government’s borrowing costs are super-low and investors still seem eager to buy its debt as fast as the Treasury issues it.
Here’s a closer look at the federal debt and the government’s use of it to combat the pandemic and the economic pain it’s inflicted.
Just how much money are we talking about?
The annual deficit — the gap between what the government spends and what it collects in taxes _ will hit $3.3 trillion in the budget year that ends Sept. 30, the CBO projects. That amounts to 16 per cent of America’s gross domestic product, which is the broadest measure of economic output. Not in 75 years has a deficit been that wide.
The federal debt, reflecting the accumulated deficits and the occasion surplus, is forecast to reach 100 per cent of GDP next year. Then it is predicted to keep climbing to $24.5 trillion — 107 per cent of GDP — in 2023. That would snap the record of 106 per cent of GDP set in 1946. (The percentage does not include debts that the government agencies owe one another, including the Social Security trust fund.)
Why is the budget so lopsided?
The U.S. government was already deeply in debt even before the virus struck in March. The budget had absorbed the expenses of the 2007-2009 Great Recession, the federal benefits for the retirements of the vast baby boom generation and the cost of President Donald Trump’s 2017 tax cut. Last year, the debt burden reached 79 per cent of GDP, the highest share since 1948.
Then came the pandemic. The economy tumbled into a sickening free-fall as businesses shut down and millions of Americans hunkered down at home to avoid infection. GDP collapsed at a 31.7 per cent annual rate from April through June, the worst three months on records dating to 1947. In March and April combined, employers slashed a record 22 million jobs.
To help Americans to endure the crisis, Congress passed a $2 trillion relief bill in March. Among other things, the package sent Americans one-time checks of up to $1,200 and temporarily offered the unemployed $600 a week on top of their state jobless benefits.
Economists say that the rescue probably helped keep the economy from sinking into a depression but also that much more assistance is needed.
Can the U.S. repay all that money?
After World War II, the United States paid down the federal debt with surprising speed. By 1961, the debt had dropped to 44 per cent of GDP, the same level as in the prewar year of 1940.
Behind that success was a fast-growing economy that delivered rising revenue to the government and erased the debt. From 1947 through 1961 the economy grew at a 3.3 per cent annual rate. The financial system was tightly regulated by the government. This allowed policymakers to keep interest rates artificially low and minimize the cost of repaying the debt.
Circumstances are somewhat different now. The economy doesn’t grow as fast as it did in the postwar boom years. Since 2010, GDP growth has averaged just 2.3 per cent, even excluding this year’s economic implosion. And the government doesn’t control interest rates as it used to, not after the financial deregulation of the 1980’s.
Still, the Federal Reserve is helping keep government borrowing rates ultra-low by buying up huge volumes of Treasury debt.
Does the debt carry economic consequences?
Economists have long warned that too much government borrowing risks hobbling the economy. When the government takes on excessive debt, the argument goes, it competes with businesses and consumers for loans, thereby forcing borrowing rates prohibitively high and imperilling growth.
Another concern is that investors will demand ever-higher interest rates for accepting the risk that governments could default on their debts.
Some economists and budget watchers still warn that a day of reckoning will come and that the United States will have to curb spending, raise taxes or both.
But after the Great Recession, many economists began to rethink their view of debt. The recovery in the United States and especially in Europe was sluggish in part because policymakers were too reluctant to stimulate growth with debt.
In the United States, rates didn’t rise even though government debts were high. Investors, it turned out, had a near-insatiable appetite for U.S. Treasurys, still considered the world’s safest investment. Their rush to buy federal debt helped keep rates low and limited the government’s borrowing costs. So did persistently low inflation.
In such a low-rate, low-inflation environment, the risk of piling on more debt seems more manageable, at least for countries like the United States and Japan that borrow in their own currencies.
In a speech last year, Olivier Blanchard, a former chief economist of the International Monetary Fund, declared:
“Put bluntly, public debt may have no fiscal cost … The probability that the U.S. government can do a debt rollover, that it can issue debt and achieve a decreasing debt-to-GDP ratio without ever having to raise taxes later, is high.”
Source:- Global News
Alberta cities warned 'fiscal reckoning' is ahead as COVID-19 shakes economy – Calgary Herald
Article content continued
In the UCP government’s fall budget that year, cities saw their capital transfers and grants slashed, with Edmonton and Calgary taking the largest reductions.
AUMA president Barry Morishita said Thursday that the organization is looking forward to “resetting” the relationship between the advocacy group and the minister. AUMA declared its relationship with Madu “broken” over the summer after he didn’t respond to concerns on changes to local election rules and passed amendments into law over its objections.
In prerecorded remarks, Premier Jason Kenney touted the province’s infrastructure stimulus plan — $500 million that will be doled out to cities for projects that will spur job creation. Calgary is submitting a list of projects for a total of $152.8 million in funding.
But the premier also scolded local governments that have not embraced pro-growth policies. He said he wouldn’t “name names” but revealed a manufacturer complained that a municipal noise bylaw is preventing it from setting up shop.
“In the depth of a crisis like this, those 400 jobs matter a lot more than a few noise complaints from local residents,” he said.
He added cities should focus on getting rid of “unnecessary rules, red tape and costs” that might stand in the way of job creation.
“When I speak to major business leaders about prospective investment in Alberta, very often a message that I hear back is the greatest impediments they’ve experienced are at the local level, at the municipal level,” he said.
Climate activists demanding quick transition to a green economy in Quebec – Global News
Two Okanagan families are in a financial and literal hole after a pool contractor allegedly took their money and skipped town.
“We hired a contractor back in late May, he came in and did all the excavation work,” said Steve Croxford, a Kelowna resident.
“He told us he had all the permits in place to get going.”
However, the contractor had no permits, according to the city.
It’s a case of buyer beware after Stephana Johnson and her neighbour Steve Croxford found what they thought was ‘a great deal’ after finding a pool contractor on Facebook.
They decided to hire the same contractor to build both of their pools in neighbouring yards.
What happened soon after construction began was a shock.
“That’s where he’s abandoned it basically, we paid him approximately half of the money for the pool,” said Croxford.
The two families said they hired a man who calls himself Jared or J-Hay and his company Pyramid Pools.
The pool contractor promised them two finished underground pools within four weeks — it’s now been almost four months.
Global News talked to multiple pool companies in Kelowna who say they’ve heard of this fly-by-night pool contractor who’s left multiple people high and dry.
Shortly after the alleged fraudster skipped out on the job, the city sent an inspector to their properties.
They issued a cease work order on Aug. 1st and the property owners say the city demanded a 71,000 dollar bond and ordered them to remove the massive dirt pile that was left on city property.
“We’re really hoping the city helps us as much as they can,” said Stephana Johnson, a Kelowna resident.
“As law-abiding citizens that we are, we want to do nothing but clean it up.”
RCMP had no comment about the possible fraud that has been reported to them and the city says it’s working to resolve the issue.
Power has now been restored to 3,900 customers in the Kelowna area following a powerful wind storm Wednesday night
© 2020 Global News, a division of Corus Entertainment Inc.
An economist explains what COVID-19 has done to the economy – World Economic Forum
- COVID-19 has caused an economic shock three times worse than the 2008 financial crisis.
- Europe and emerging markets have been hit hard economically, China has escaped a recession.
- But the worst could be behind us, and a greener economy could emerge after the pandemic, according to the Chief Economist at IHS Markit.
It has been a crisis like no other, shutting shops and schools, closing borders and putting half of humanity under some form of lockdown during the spring of 2020. And it’s not over, with cases continuing to mount worldwide as the death toll approaches one million.
To find out more about what the Coronavirus pandemic has done to the global economy so far, and what might lie ahead, I spoke to Nariman Behravesh, Chief Economist at the consulting firm IHS Markit.
Below is an edited transcript of the conversation.
In a nutshell, what has COVID-19 done to the world economy?
Nariman Behravesh: It has certainly plunged the world economy into a very deep but mercifully a short recession. Everybody’s been hurt. I don’t think anybody’s really been spared by this – it’s a combination of fear, uncertainty and the reaction to the lockdowns. Now, a lot of people blame this deep recession on the lockdowns, but I don’t think that’s a fair assessment. If you look at a country like Sweden, even though they didn’t do a lockdown, their economy still suffered pretty severely. It is mostly the uncertainty and the fear of catching the virus that is stopping consumers going to the places they normally would, and that’s hurting the economy.
Looking at historical precedents, it’s about three times as bad as the global financial crisis of 2008 in terms of GDP decline on an annual basis. It’s not quite as bad as the Great Depression in the 1930s, where the output drop was sustained over a three to four-year period, and the unemployment rate went up to 25% in the US. This time so far it only went up to 13% in the US, but it’s the worst downturn we’ve had globally since the 30s.
Do you think that, on a global level, the worst economic damage is behind us?
NB: Well, in some sense, the worst may be behind us. In many parts of the world, in many countries the numbers are coming down – although not everywhere. They’re going up in India, they’re going up in Brazil, they’re really not coming down much in the US. So I would say probably globally, the worst is behind us. But you can also argue that the easy part is behind us, because this thing is going to flare up again and again. We’re not out of the woods. So even when we think we’re done, as a number of countries have, we’re not. It probably won’t be as bad as it was last round, in part because the healthcare systems are prepared, but we’re not done with this.
If you look at 2020 to date, which regions have been the hardest hit, and which have weathered it well so far?
NB: Let’s look at countries first. Among the countries that have weathered it well is, of course, China. China technically did not have a recession. It had one quarter of negative growth and then it came right out the other side. Other countries that have done relatively well are South Korea and Taiwan, which did a lot of testing and tracing so they managed to keep things under wraps compared to the countries that have done the worst in terms of the virus, such as the US, Brazil and India. That judgement is based on the total number of deaths. But for the death rates, if you look at it on a per capita basis, the US is number 10 rather than one, which is lower than Belgium or Spain, so a lot depends on how you measure it.
In terms of economic performance, Europe has been hit quite hard – the European recession is quite a bit deeper than the US or Canadian or Japanese recession. So, Europe and the emerging world have been hit pretty hard.
As we go through autumn, how do you expect things to evolve?
NB: We’re coming out of a very deep recession, so we’ll get what we call a technical bounce. Growth in the US for example will look remarkably strong in the third quarter, but then it will fade. We’re looking at what we call a bounce and fade pattern of growth throughout the world. But the bounce is because it went so far it had to come up – but it won’t continue at that strong rate. Just to give you a sense of the US, GDP was down 32% in the second quarter, we think it’s going to be up 30% in the third quarter, but by the fourth quarter back down to 2.5%.
How optimistic are you for a global recovery and what kind of shape do you think that recovery will take?
NB: I think we will see global growth in the third, fourth quarters and into 2021. It will not be a robust growth rate and a lot of it will depend on a vaccine. Obviously, the sooner a vaccine is available and widely distributed, the better the chances of growth, but we don’t really see that happening until the second half of 2021. A vaccine may get developed, but in terms of its pervasive availability, it’s going to take a while.
There’s been a whole alphabet soup of shapes discussed. One could say that manufacturing is probably enjoying a V-shaped recovery, at least temporarily, but services, which were among the hardest hits – especially airlines, travel and entertainment – these are in U-shaped recoveries. People have talked about a W. You probably won’t get a W unless there’s a serious second wave, which I don’t think is likely but it’s possible.
Could you tell us more about the sectors that have been hardest hit, and the ones that are thriving?
NB: Well, the hardest hit are clearly any activities or any industries that depend on large groups of people coming together in a spot, so airlines are a perfect example of this. Air traffic is barely at 25% of what it was at the end of 2019 and it’s not really going to recover for at least another couple of years. Hotels are another example. And there are huge amounts of excess capacity on cruise ships. Anything to do with conferences has also been hard hit.
In terms of the industries that have done well, high tech is of course an example. Obviously, everybody’s ordering from Amazon rather than going to stores but beyond that a lot of industries are looking to accelerate the digital revolution. Ironically, healthcare is also benefiting in some sense, because of the demand.
Is there anything that surprises you, as an economist?
NB: One sector that I didn’t mention that’s done well, and that surprises me, is housing. Why would housing boom? It is in the US, maybe less so elsewhere. Basically, a lot of people are fleeing to suburbs. A lot of people are buying homes, building homes – in my neighbourhood in Boston we’ve seen two people come from New York. We’re seeing people who can afford it just kind of deciding, “Now I’m done with the urban life. I want more space between myself and my neighbours.”
COVID-19 has hit even the richest countries in the world hard. What is it doing to developing economies? And are there lessons from the emerging world that could be applied to wealthier places?
Taiwan and South Korea are notable for their testing and tracing. If there’s one lesson from the experience there, it’s that massive testing and massive back tracing of contacts is crucial to keeping this thing under control. So that’s a definite lesson. But the rest of the emerging world, from Latin America to Africa, are struggling, there’s no question. Aside from the virus itself, they’re being hurt by collapsing global growth and trade and for a while, the collapse in commodity prices. It’s not only the virus itself but events outside of their countries that are then coming back to hurt them.
Looking at the big picture, are we going to see a different kind of economy and a green recovery emerge from the pandemic?
I don’t think it’s going to be business as usual: I think there are going to be some big, big changes happening. We may not see them overnight. It may take some time. But let’s go through a few of them. I think this will accelerate the movement towards a green economy. This is a perfect opportunity for a lot of companies as they look at new, green technologies. I think that’s going to be very positive. But we are going to see a substitution of capital for labour. Skill and labour-intensive industries are very worried about the vulnerability to viruses of all kinds, so you’ll see greater emphasis on robotics, which creates its own challenges, of course. We think that the process of urbanization will slow. I don’t know if it will reverse, but it will definitely slow down. We’ve seen this so-called flight to suburbs occurring. Separately, in terms of the travel and tourism industry, one has to wonder what will come out the other end. Our best guess is that things like business travel will be curtailed quite dramatically. I think healthcare is another area where we will see some massive transformations as we go forward.
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