Deficit numbers are massive. But at this point it's helping vs harming

The Congressional Budget Office gave its first official update on the outlook for the country's deficit and debt since COVID-19 broke out, and large amounts of Federal dollars were spent to deal with tens of millions of people put out of work.

Not surprisingly, the deficit has exploded in the last 6 months.

The pandemic and legislation enacted in response to it have caused the deficit to surge in the past few months. It was $741 billion through the end of March; CBO now anticipates that the deficit in the second half of the fiscal year will be roughly three and a half times that amount. The projected deficit in 2020—$3.3 trillion—is more than triple the shortfall recorded last year. Outlays, which are projected to increase from 21.0 percent of GDP in 2019 to 32.0 percent in 2020, primarily as a result of legislation enacted since March, account for nearly all of that increase...

None of this is too surprising, although I do find it intriguing that the CBO thinks the deficit will only rise by an average of $250 billion a month for August and September, when it went up by $1.26 BILLION in May and June of this year (based on the most recent Treasury Statement). Although given that $600-a-week unemployment payments aren't happening anymore (and any current supplement is being stolen from FEMA), and that September has corporate tax payments, I suppose it's plausible.

It's a huge number, but the CBO says that it is projected to go back down by 45% in the next Fiscal Year. More remarkably, that lower deficit is entirely due to a projected cut in spending of $1.6 trillion compared to FY 2020.

So what's behind that major cut in spending? It's the end of provisions in the CARES Act and other relief efforts that tried to keep people afloat in a time of unprecedented layoffs, as shown in this chart at a later point in CBO's report. FY 2019 is the first year listed, the big increases happen in FY 2020, and then go back down in FY 2021.

The CBO still assumes the large levels of unemployment and economic struggle that are happening in 2020 will eventually reduce over time, but still be above 5-6% throughout much of the first half of the 2020s without any support spending from DC. But that creates a catch-22, as a lot of these projected reductions in Federal spending would lead a large amount of government expenses that result from higher levels of unemployment and social services to get pushed down to the states.

I don't see how states come up with the funds in 2021 to pay for these items on their own (they can't print money like Uncle Sam can). This likely will lead to significant economic damage to people's lives as their support systems dry up, and limit the recovery that is supposed to happen. So I would think the deficit has to stay very high for 2021-22 if taxes aren't raised, either because of large-scale structural unemployment, or because of large-scale spending at the federal to prevent such unemployment.

But here's the kicker with this CBO report showing higher deficits and debt - it doesn't predict that the US will have the economic problems that might come with high levels of deficits and debt. In fact, the CBO says that the amount of interest taxpayers will have to pay for the debt will go down compared to what was predicted earlier this year.

Net Interest. The main factors that affect the federal government’s net interest costs are the amount of debt held by the public and interest rates on Treasury securities. In CBO’s projections, debt held by the public roughly doubles over the next 11 years (in nominal terms), but interest rates, which have declined in recent months, remain very low in the next few years before rising in the second half of the projection period. In 2019, the average interest rate on debt held by the public was 2.5 percent; that rate is estimated to fall to 1.2 percent by the middle of the decade.

Right now, richer people are more likely to have stayed employed in the COVID World, and they are using the lower interest rates from the Fed to borrow more money to pay for houses and cars, and are more likely to benefit from a pumped-up stock market. On the other side, enhanced unemployment benefits are ending, and the Trump Administration has made pre-election efforts to prevent evictions, those efforts don't have federal money behind them, and all of that deferred rent will be due in 4 months if there isn't further relief.

So we don't need to use "deficit reduction" as a reason to change policies and head toward austerity, if we don't want to. Instead, we should be concentrating on who is getting the benefits of our taxing and economic system. Seems like the next steps that need to be done is to reorder our priorities so that it isn't worth it for the rich and corporate to gamble on assets instead of having that money go toward more useful items. Such as higher taxes on those groups, and using that money to help out the tens of millions of Americans that have already been left behind, and the massive number of others that are at significant risk if the economy falls back into recession in the next few months as the artificially induced demand of the last few months dries up.

If that doesn't happen, the words "K-shaped recovery" will become commonplace in America, and things will get very ugly in a country that already has unsustainable levels of inequality.