Policies That Will Help U.S. Dig Out of Massive Debt

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When government forces businesses to close (even if it is for a pandemic), it’s a “taking” in the legal sense.  And we can think about $3 trillion in federal bailout spending as “just compensation” to businesses and employees for that taking.  Basically, we have decided to borrow from future generations in an attempt to stop a virus and save the economy.

Federal borrowing already equals over 100% of GDP, and politicians are now debating how much more money to borrow as shutdowns drag on.  Some of this potential borrowing, up to $1 trillion, is for direct state bailouts.  And it appears that some of that borrowing is to bail out states for problems that already existed.  For example, unfunded pension obligations in Illinois were roughly $200 billion before COVID hit.  Politicians there are not letting a crisis go to waste and want to get bailout money now.

Those who worry about this federal spending and the “moral hazard” of rewarding bad financial behavior by states look at this next bailout as a huge mistake.  The question is: Could anything positive come from this?  What policies could the U.S. put in place to limit the damage to future generations from all this borrowing?  If we are asking our children and grandchildren to pay for this, are there things we can do that boost growth and limit the odds of more bailouts ahead?

I think there are.

First, the Treasury should issue 50- and 100-year Treasury bonds to finance coronavirus debt.  While the virus will pass, the economic costs will not and should be financed over a long period of time.

One of the reasons this has not happened already is that, in the normal budget process, issuing longer-term debt at higher rates than short-term borrowing rates increases debt costs and therefore total government spending.  This takes away budget dollars that politicians hope to spend on other things, so they don’t like it.  These days, nobody in Washington cares about adding to spending.  So, lock in the financing costs for decades to come.  After all, in realistic terms that’s how long it will take to pay it back.

Second, if taxpayers are going to bail out states, we should force states to change policies so that these bailouts are less likely in the future.  This means the president and Congress should ask for three changes in the way state and local governments manage their affairs

Taxpayers should demand that states immediately shift to defined-contribution pension plans — like 401(k)s — instead of defined benefit plans.  The private sector has already done this, so states should too.  It limits the liabilities of state and local governments and pushes government workers to think more about funding their own retirement rather than putting the burden on taxpayers.  If taxpayers are going to bail out Illinois for running up $200 billion of unfunded pension debt, they deserve to know it won’t happen again.

Taxpayers should require any states getting a bailout to provide universal state-wide school vouchers so that families with children can choose where those kids go to school with the property taxes they already pay.  Right now, private schools in many states are open for in-person education, while public schools are not.  The incentives are all wrong and vouchers will adjust those incentives.

Any state that receives a bailout should be forced to pass a right-to-work law and follow Wisconsin’s example of making union dues voluntary.  Unions support more pay and bigger pensions for government workers by making campaign donations to government officials.  This helped create the budget problems that state and local government currently have today, and government workers have not been hit as hard by shutdowns as private sector workers.

If taxpayers need to spend $1 trillion to bail out state and local government for decisions made prior to, and during COVID, and these states are unwilling to open up their economies today, they should be willing to make changes that will make these problems less likely in the future.

And if Washington, D.C., made these changes a requirement to receive bailouts, it would help offset the financial burden that federal taxpayers are being asked to shoulder.  Any bailouts should come with conditions.  Every bailout of banks in 2008-09 came with conditions. Why wouldn’t states be required to do the same?

Brian Wesbury is chief economist at First Trust Advisors L.P.





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