Q&A: COVID Relief Programs Have Resulted in Skyrocketing Global Debt

A Discussion on Long-Term Economic Strategy with Global Health Economist A.K. Nandakumar

August 19, 2021

A.K. Nandakumar, professor of the practice and director of the MS Program in Global Health Policy and Management and the Institute for Global Health and Development, is an economist with deep experience navigating health financing issues at the national and international level. In addition to his leadership roles at the Heller School, Nandakumar has held chief economist positions at USAID and the Office of the Global AIDS Coordinator in the U.S. State Department.

Throughout the COVID-19 pandemic, Nandakumar has stressed the importance of saving lives without sacrificing livelihoods. As the U.S. and other countries issue ever-growing debt to stimulate economies and weather economic shutdowns, he cautions us to remember the long-term economic and geopolitical implications of high debt burdens. 

In a pandemic, how do you think about the balance between saving lives and saving livelihoods?

Pandemics kill in three ways. First, the virus itself. Second, the disruption to routine health care due to stresses on the health system. But the third is economic: people lose income, which they need to survive.

My view always has been that we focused heavily—and rightly so—on the virus itself and the public health response to it. We also know about some of the pandemic-related shortcomings of the routine health care system, which are serious. But we tend not to talk as much about the third killer—the impact of a damaged economy on our health—and what it means in the U.S. and globally going forward.

Is there one number, an economic figure, that you constantly keep tabs on?

One number I keep close tabs on is the debt-to-GDP ratio, which is the amount of debt compared to our GDP. In the U.S., we are approaching a debt-to-GDP ratio of 115 percent, which is unheard of. There seems to be a feeling that we can continue to take on debt, to print money and buy up bonds, and that there will be little or no consequences. All I can emphasize is, there is no free lunch. Somebody will have to pay for this. And it has significant ramifications on our economic well-being and global competitiveness.

What does the trajectory of the debt-to-GDP ratio look like, and what is it telling you?

Even before the pandemic, the world was awash in debt. Starting in 2013, debt began to grow far faster than GDP could keep up. The majority of the debt is held by private sources, but China recently emerged as a holder of huge amounts of debt in Africa, and also U.S. debt.

During the pandemic, the world took on $25 trillion in new debt. A recent report by the Institute of International Finance found that the world’s debt-to-GDP ratio was 356 percent in 2020, a 35 percent increase from 2019. The debt-to-GDP ratio of almost every single high-income country, including the United States, is well above 100 percent.

In the past, when a country’s debt-to-GDP ratio exceed 60 or 65 percent, the IMF and the World Bank would come down hard. But today, we don't talk about it. It's as if the debt vanishes. The people who are going to be held holding the tab are our children and grandchildren. And it is quite possible for the first time that their generation’s standard of living will be lower than ours. 

What happens when a country’s debt grows this quickly?

A significant portion of a country’s revenue would go to repay the debt, leaving very little to invest in anything else. The fiscal space that you have to invest in social programs and economic growth shrinks, which has huge ramifications on labor markets, on economic growth, on the cost and price of things. The Paris Club was established in 1956 to deal with this and subsequently the joint WB-IMF comprehensive approach to debt reduction meant that over 30 highly indebted poor countries saw over $75 billion in debt relief. What has changed is that a significant proportion of the debt is now privately owned, making it much harder for institutional players to tackle it. 

How does this relate to rising concerns about inflation?

I'm hoping that The Fed is correct in saying that inflation is purely temporary and things will get back to normal soon. A group of very eminent economists subscribe to this view. I tend to think that’s overly optimistic. We are starting to see inflation rates go up and a number of economists, including Larry Summers, now believe this is not a short-term phenomenon.

We are an incredibly globally interconnected economy, so labor and supply chain issues that take place in India or China, for example, impact the cost of commodities in the U.S. People now have a lot of money that they want to spend, but supply is not keeping up with demand, so prices go up. This disproportionately impacts the pocketbooks of marginalized and vulnerable populations. Groceries, rents, back to school supplies, home appliances are all costing a lot more. Used car prices are up 40 to 50 percent. These are essentials. In all probability the wage gains made by those in the lower income groups has been more than wiped out by inflation.

How do you think the Biden administration is approaching continued pandemic relief measures?

I think the Biden administration is absolutely correct in acknowledging that some of our social safety nets for those most in need have failed, or have serious deficiencies. The pandemic showed us this in spades. If you look at who was most likely to lose a job, have financial difficulties, or face food insecurity, it is people of color people with lower incomes, people who were already more vulnerable.

The real challenge facing the administration is how to get people back to work while simultaneously addressing  social safety net problems. Something the administration has done effectively is address the issue of child food insecurity and hunger. At the same time there are actions that provide a disincentive for people to get back into the labor market.

How does this impact those in need of continued relief?

We need to understand that this is not a class war or an issue of the haves and the have nots.

In terms of rentals, 77 percent of small units in the United States are owned by mom-and-pop landlords, not massive companies. Their median income is around $65,000. About 35 percent of them are over 65, and for many of them social security and rental income is all they have. So when the moratorium on evictions keeps getting extended, these people suffer.

In the U.S., 99 percent of businesses are classified as small business. They are the backbone of our economy, and they employ over 50 percent of the private workforce. Most run work on very small margins, and the average income of a small business owner is $70,000. In many cases, small business owners and landlords are lower middle-class and middle-class people.

Nearly nine million small businesses believe they won’t survive the pandemic. Nearly a third of restaurants in Massachusetts have either closed or expect to close. There are 10 million jobs available today, and roughly 8 million people on unemployment.

It is the role of the government to address these bottlenecks through policy interventions. We simply have to find a way to open up our schools, get people back to work, and make sure that small businesses can survive. If half of our small businesses close, many of those jobs will not come back. It would be hugely detrimental to the U.S. economy, and we would see economic powers on the rise—like China—step in.

What can the U.S. do to secure its economy and its global standing?

The U.S. is the largest economy in the world, but I feel that it has to start using its economic power more strategically on the global scene. We need to get inflation under control so that our manufacturing, our goods and commodities, are produced at a competitive global price.

But we also have the biggest vaccine supply in the world, and we run the biggest pandemic response program in the world. We have a great opportunity to meet the vaccine needs of low- and middle-income countries, to manufacture and supply vaccines in a bilateral way and to help them stabilize their economies and get out of the death spiral of the pandemic.

This is a tremendous opportunity, and we should not leave a vacuum for others—such as China—to fill. China has been using strategic diplomacy, information, military power and economic power for a long time to grow its economy and enhance their position globally.

The U.S. is already the biggest global health donor in the world, and we are donating to global mechanisms like COVAX, but taking a more proactive stance on global vaccine distribution would put us in a strong position in a number of ways. It would help other countries in need of vaccines, of course, but it’s also a diplomatic and economic win for us. Similarly, bilateral economic engagement for countries to deal with their debt crisis and grow their economies post-pandemic will greatly enhance our value and position.