When Congress spends money, is that money borrowed for the citizenry
as he claims? I guess the bigger picture question I have is that if
the government spends $2 trillion, is the citizenry expected to
(eventually) pick up the tab? If not, is it essentially just a number
recorded somewhere with some math tied to it for interest because
that's how fiat currency works? A lot of the time it seems like
Congress has the power to wave a magic wand and money appears.
Not every man, woman and child individually has the same debt when there is deficit spending by the federal government.
Mostly the economic impact is a transfer of wealth from the affluent to those who receive government aid. But the analysis is complex and multifaceted, and it isn't entirely a zero sum game.
Government Spending Has Real Economic Effects
It is conceptually easier to think about what the money is spent upon, than where the money comes from.
When the government spends $2 trillion, real stuff gets purchased from the finite pool of stuff that the economy is capable of creating at the time that the money is spent. If that $2 trillion had not been spent by the government, the capacity of the economy to create stuff would have been utilized differently for the benefit of different people.
Economic Impact On Bond Purchasers
In the short run, affluent people and asset rich governments and companies buy government bonds instead of spending the money used to fund those bonds in some other fashion, such as investing the money in private businesses or land or consuming it.
In the long run, those bond purchasers will get their money back with interest that just barely covers inflation, but will have faced almost no risk of default on the bonds. Government bonds interests rates are called the risk free rate of return, and currently that is very low, so bond purchasers aren't having much wealth diverted to them through this process in the long run.
The economic cost of the additional spending in the long run is met in two ways. First, through taxes. Second, through inflation.
Economic Impact Of Taxation
The U.S. federal tax system imposes very modest burden on poor and working class people, although, due to excise taxes like gas taxes and tobacco and alcohol taxes, and due to Social Security and Medicare taxes, it isn't zero.
Everyone else ends up paying taxes at rates roughly proportionate to their income, although the very affluent and big businesses that are largely owned by them pay less than their proportionate share in light of recent tax code changes.
Still, most state and local tax codes are, collectively, more regressive than the federal tax system.
Economic Impact Of Inflation
Inflation is largely driven by increases in the money supply. This creates a little direct revenue for the federal government, and additional direct revenue for banking institutions that participate in the process.
Inflation reduces the real cost of repaying government debt denominated in dollars and not adjusted for inflation (which most, but not all, federal government debt is) and likewise benefits people whose dollar denominated nominal debts are greater than their dollar denominated nominal assets. If your credit cards and mortgages and student loans are greater than your bank account balances and money you've lent to other people, you benefit, overall, from inflation if your income continues to grow with inflation.
Inflation hurts people who lend money or have long term dollar denominated obligations owed to them like landlords in leases not adjusted for inflation, or leases subject to rent controls in places like New York City.
These days, most lenders are risk averse affluent individuals who invest in bonds, and financial institutions like banks. The gains that banks make from increasing the money supply is more than offset by the losses that they suffer from inflation. But it is rare that inflation exceeds the interest rates that are paid to lenders (something that almost by definition only happens for long term fixed rate debts like fixed rate mortgages), even on an after tax basis (since taxable income from interest and capital gains isn't adjusted for inflation in the U.S.).
Interest rates usually can be dissected into a predicted rate of inflation for the long period and a risk free rate of return (which, combined are reflected in federal government bond interest rates), and a risk premium based upon the predicted likelihood of defaults and losses on the loan. Short term interest rates pass on inflation effectively to borrowers, while long term interest rates can be significantly eroded by inflation.
Thus, middle class working people and operating businesses and the federal government, who borrow large sums of money, benefit from inflation, the working class is indifferent to it, retirees and other poor people on fixed incomes are hurt by inflation, and financial institutions and rich people are hurt by inflation.
You Can't Get Blood From A Stone
Stepping away from the trees to see the forest, it is obviously true, that when you spend money on people who don't have much money, as the latest COVID relief bill does to a great extent, and the capacity of the economy of provide goods and services is spent on non-affluent people who otherwise wouldn't have had those resources, that the economic impact of that spending falls on people who are affluent and would have been able to use their wealth to have the economy provide them with goods and services it would have had the capacity to produce for them if it hadn't spend it on COVID relief bill beneficiaries instead.
This is ultimately going to be true no matter how the government spending is financed (i.e. with current taxes, or with government borrowing).
Arcane and detailed federal tax laws and economic analysis go into figuring out just who gains and loses, but that is the economic picture.
A Legal As Opposed To Economic Analysis
Legally, in contrast, when the federal government borrows money, that money has to be repaid in money with interest (modest though it is) at stated times (although it can be refinanced with new debt from possibly different government bond purchasers). Ultimately, that money has to come from taxes.
But this is an obligation of the federal government, not individual citizens.
It is not actually true that every man, woman and child will end up repaying the money borrowed.
In the long run, the taxes that the federal government collects to service and sometimes even pay off part of its debt comes mostly from upper middle class and rich people, directly, or indirectly through businesses that they own, with middle class and less affluent people repaying only a trivial share of the total debt serving and principal paying obligation.
Rhetoric about every man, woman and child owing federal debt is largely calculated to hide the fact that federal spending is redistributing societal wealth from rich people to poor people, even though poor people are not completely spared any impact of federal spending, as discussed below.
Federal Debt Service Viewed As Opportunity Costs
The day of reckoning when the principal of the debt is actually repaid can be deferred a long time, even indefinitely. But as the total amount of the national debt grows, and as interest rates on government bonds increases (which inflation as well as an increased real rate of risk free return will do), the total share of tax collections that go towards interest payments, rather than towards government purchased goods and services, rises.
The portion of the burden of current government spending that is shared by everyone (although not equally) is in the opportunity costs involved in the government not being able to spend money on desirable public goods and services given the tax revenues available to it, because it spends some of its taxes on interest payments to government bond holders instead. This opportunity cost hits the poor the hardest.
The middle class, which pays little in federal taxes, but receives little in direct government spending benefits, is hurt the least by deficit spending for COVID aid, and may receive a significant share of the proceeds of this bill.
The current poor benefit now at the expense of the future poor (who overlap but are not the same). But it is also at the expense of government spending that doesn't directly benefit anyone except the people paid to do that rather than something else, like money that would have been used for military spending, which goes to interest payments instead.
The rich are less well off, but they still more affluent than everyone else in society even after paying a big share of the ultimate economic burden.
The Impact On the Size Of The Pie
The decision to spend money on the goods and services that the COVID relief bill pays for rather than on the good and services that the capacity of the economy to produce goods and services would otherwise be used for in non-obvious, but does have effect on the total amount of goods and services produced in the economy in the short term and in the long term.
Utilizing Idle Resources
If COVID spending causes economic resources that would otherwise have been idle to be utilized, then it increases current GDP.
For example, if COVID funds allow people to buy more school supplies, and the school supplies factory otherwise would have been idle with laid off workers collecting unemployment and its owners losing money because they had fewer sales, it could increase GDP.
This effect is sometimes known as Keynesian economic policy.
Shifting Funds From Investment To Consumption
In general, COVID funding shifts resources to people likely to immediately consume from people more likely to invest their funds. If there are lots of great investments that aren't getting funded that could hurt GDP growth. But if big businesses are holding all their resources in foreign bank accounts because they can't find any opportunities worth investing in at the moment, as reflected in low interest rates (which reflect the supply and demand for investment funds) then more consumption and less investment helps GDP growth.
Different Sectors Of The Economy Are Impacted Differently
The shift in funds is also not neutral. Even if both people bearing the economic burden of COVID bill spending and people who receive it would both consume 100% of those funds immediately, it means that fewer luxury goods and services are produced (hurting everyone involved in that part of the economy) and that more good and services for working class and middle class people are produced (helping everyone involved in that part of the economy). In terms of GPD impact and economic growth, there are always going to be sectors that are winners and sectors that are losers.
Some Government Spending Is Investment Spending
Government spending in the COVID bill, and government spending, in general, is also not all just transfer payments, even though the $1,400 relief checks receive a lot of attention.
Money spent to produce and distribute vaccines could make it possible to put the pandemic behind us and make the whole economy more productive again after a short term, Great Depression scale hit.
For example, the tourism industry will benefit greatly from the production and distribution of vaccines even though the firms in that industry couldn't individually make that kind of collectively health care investment. It is still a form of investment spending that benefits their industry. Ditto bars and restaurants and commercial landlords.
It is entirely possible and even plausible that spending money on producing and distributing vaccines is the most valuable investment in terms of rate of return available in the economy at the moment.