Big deficits are seen as needed for a recovery
Financial markets are warming to the idea that the U.S. economy could get a Biden bounce — but it hinges on a new government being able and willing to run big budget deficits.
Democratic presidential challenger Joe Biden is promising more than $3 trillion in extra spending over a four-year term if he beats President Donald Trump next month. On top of that, pandemic relief measures worth an additional couple of trillion — which got stalled in Congress for months — are likely to get pushed through, especially if Democrats win Congress as well as the White House.
“It should be foot flat on the fiscal policy accelerator until the economy is back to full employment,” says Mark Zandi, chief economist at Moody’s Analytics. “I’d wait to implement the tax increases. I’d just be reliant more on deficit financing.” That could turn into one of the key political and economic battles of 2021, whatever happens in the election.
Like other countries, the U.S. has run up historic budget shortfalls in the fight against COVID-19. It’s on track to post a deficit of about 16 percent of gross domestic product this year, the most since World War II. The full Biden agenda, plus another round of virus relief, could lead to a 2021 figure that’s in the same ballpark.
Yet there’s a growing consensus among economists, vocally backed by Federal Reserve Chair Jerome Powell last week, that the U.S. needs to keep spending to complete the recovery.
The Fed itself is short of room to juice the economy with lower interest rates. On financial mar
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kets, the main worry lately has been that politicians will hit the spending brakes too early, like they did after the 2008 financial crisis, making the recovery more drawn out than it needs to be.
Analysts who crunched numbers for the post-election U.S. economy mostly have concluded that a Democratic sweep would deliver the fastest growth — because it would enable the biggest deficits.
Moody’s found that shortfalls would average some $2.5 trillion a year through 2024 under that scenario — compared with about $2 trillion under any other White House-Congress combination — and the economy would grow 4.2 percent a year, versus somewhere between 3 percent and 3.5 percent.
Credit Suisse said larger deficits after a Democratic sweep would be “massively progrowth.” Goldman Sachs said the boost in fiscal spending would gin up enough economic activity that companies could earn more even after paying the higher taxes that Biden is proposing.
Biden’s agenda is modest when compared with primary season rivals, shunning ideas such as “Medicare for All” and wholesale student debt forgiveness. But it’s ambitious by the standards of recent history.
He proposes to reverse about half of Trump’s corporate tax cuts, raise income taxes for those earning more than $400,000, and channel cash into green energy, domestic manufacturing and care for children and the elderly. It adds up to roughly double the tax increases, and triple the new spending, that Hillary Clinton proposed in 2016.
Trump has provided less detail about his spending plans but says he’ll cut taxes in a second term like he did in the first. His 2017 bill delivered a deficit-financed bump in growth, although economists said the effect was limited because the benefits skewed to wealthier individuals less likely to spend their extra cash.
That legislation was passed when Republicans controlled the White House and Congress. In a split government, it’s harder to push through major tax or spending initiatives — as the current impasse over virus relief illustrates.
Biden was vice president when the Obama administration ran into the same roadblock after tea party-inspired Republicans won control of Congress in 2010. In the two years before that, pushback against deficit spending came from within Democratic ranks.
With the benefit of hindsight, many analysts see that caution as a mistake. Reed Hundt, who was a member of the Obama transition team, wrote a book about the episode titled “A Crisis Wasted.”
“The lesson learned from 2009 is this: Spend what it takes to jump-start the economy,” said Hundt, who’s now head of the Coalition for Green Capital. “Address long-term deficit and tax issues later.”
Biden has taken hawkish positions in the past, voting for constitutional amendments that would require the budget to balance and indicating willingness to trim spending on Social Security.
His longtime aide Ted Kaufman told the Wall Street Journal in August that a Biden administration might have to rein in its spending plans because “the pantry is bare,” a comment that alarmed progressives in the Democratic Party. Biden’s campaign says it’s committed to sound public finances in the long run but also recognizes the need for an urgent dose of government spending.
That reflects a shift in global economics over the past decade. There’s less concern about budget deficits and debt, which surged after 2008 without triggering higher inflation or interest rates.
In fact, it’s gotten steadily cheaper for governments to borrow, even as their debts mounted. The yield on 30-year U.S. Treasuries is around 1.5 percent. It’s a different environment from the one that prevailed for most of the former vice president’s 50year political career.
“Biden’s instincts are very moderate, that we need to worry about deficits and debt. He cut his teeth on that,” Zandi said. “But at the end of the day, if you’re given a check and you’re being told that we should cut this check, you’ll get over those instincts. You’ll figure out a way to say ‘OK, I’m going to cut that check.’”