Recent Deficits as Wartime Finance, 5/15
a paper by Hall and Sargent
George J. Hall and Thomas J. Sargent point out the similarities between the COVID crisis and the two world wars.
Negative labor supply shocks, i.e., converting civilian workers to soldiers during the twentieth century world wars, and lockdown mandates that diverted workers into unemployment and voluntary withdrawals from the labor force during the COVID-19 pandemic
Extensive government restrictions on domestic and international travel and trade
Surges in federal government expenditures mostly financed by issuing interest-bearing debt and base money
Federal Reserve support of federal bond prices and an expanded Fed balance sheet
In their conclusion, they write,
As percentages of total revenues, sources were:
taxes bonds money World War I 20.8 74.6 7.0 World War II 30.2 46.0 10.1 COVID-19 3.5 67.0 18.5
It is striking how little of the War on COVID-19 has thus far been financed by explicit taxation, even compared to World Wars I and II.
Congress, Mr. Trump, and Mr. Biden have left a huge burden for future taxpayers. Some of that will be paid by the inflation tax. But I think much of it will be paid by budget austerity in the future. Social Security and Medicare cannot remain untouchable forever.