The largest "stimulus" in US history was just approved. Wells Fargo's economic team provides a nice overview of what's included (click here). Should we be reluctant about such massive a package because of how it will affect the budget deficit and national debt? After hitting a peak in 2009-10, the budget deficit declined steadily, but began to increase again, beginning in 2018, due to changes in policy. It would have been wise to continue to bring the budget deficit down during the good times to prepare for the bad times. Unfortunately, that's not what happened. Does that mean we should not have a large fiscal package right now? No way! Though there is a fair amount of pork in the package, the package as a whole is essential to prevent further devastation of the economy (support for the unemployed and small business, loan guarantees, ...). Though the headline figure implies that it will cost $2 to $2.5 trillion, the cost is likely to be lower since much of the loan guarantees probably won't ultimately result in actual expenditures. That said, the budget deficit (relative to the size of the economy) will be the highest since WW2. The bad news is that we will be paying the interest on the additional debt for decades to come (and there are already demographic issues putting upward pressure on the deficit independent of the pandemic). The good news is the interest rate on the new debt is under 1%.
Will it work? It depends on what one expects. The economy will take a devastating hit in the next few months with historic declines in GDP and increases in unemployment; this package will cushion the blow. Much of the financial support for individuals will replace lost income, thus keeping spending from declining as much as it may have. Also, given current conditions, don't expect a spending spree (except for perhaps on toilet paper, if available 😉). Facilitating access to credit will make a financial crisis less likely, but is unlikely to result in a near-term increase in borrowing and spending. Similar to 2009, this is more of a parachute than stimulus (slowing the downturn instead of causing an upturn). The hope is that it helps to minimize structural damage to the economy (and alleviate human suffering), so that when the recovery begins later this year, we can return to something closer to normal.
