As part of President Biden’s Build Back Better, another $3 trillion is reportedly now in the works on top of the $1.9 trillion that was just approved earlier this month with the American Rescue Plan. The $3 trillion would come in two parts; one for infrastructure and a second focus on childcare and education. Officially, White House Press Secretary Jen Psaki said, “”Those conversations are ongoing, so any speculation about future economic proposals is premature and not a reflection of the White House’s thinking.”
It is unclear how much an appetite Republicans and many Democrats have for additional spending over what is part of the regular budget and the $6 trillion extra spending that has been allocated in the name of COVID relief. This extra spending allocated so far comes to about $37,000 per federal income tax paying American on top of the regular budget for the federal government.
The $3 trillion plan is still in its early phases of development and could change if it ever makes it to President Biden’s desk for signature. One part of the plan would help pay for roads, bridges, and public transportation in addition to 5G telecommunications and rural broadband. Part two of the plan deals with social welfare programs such as government run pre-K plans, community college support and to help pay childcare costs for parents.
It is unclear how federal taxpayers would pay for the $9 trillion in new spending on top of the $32 trillion federal debt we will have by the close of the year, or the unfunded liabilities of $83 trillion. The entire U.S. gross domestic product is only $21.6 trillion, so by the close of this year, the United States will probably run at least 140 percent of the country’s GDP (currently 130%). When you add in total debt owed by all U.S. governments (federal, state, and local), we are currently at 145.31 percent of GDP. As for spending, the federal deficit is now running over $4.5 trillion.
As most economists will tell you, although governments can run the debt that high for a very temporary time, it must be made up quickly either by paying down that debt, reducing spending, dramatically raising the GDP or a combination of both quickly in order to not default on the U.S. debt. We have seen the federal debt as an issue that most politicians have not wanted to address and continue to “kick the can down the road” in hopes it will fix itself. The Congressional Budget Office (CBO) has warned that a “large and continuously growing federal debt would… increase the likelihood of a fiscal crisis in the United States.” Experience shows that high levels of government debt reduce growth and increase financial fragility. In their study of financial crises in history, Carmen Reinhart and Ken Rogoff concluded, “again and again, countries, banks, individuals, and firms take on excessive debt in good times without enough awareness of the risks that will follow when the inevitable recession hits.” Government debt, they found, “is certainly the most problematic, for it can accumulate massively and for long periods without being put in check by markets.”
We are at the highest level of federal debt to GDP in the United States’ history since 1940. For comparison, the level was at 34.55 percent in 1980 and 58.67 percent in 2000.