San Antonio Express-News (Sunday)
BIDEN’S BIG PLANS
Smart Money S.A.: Do the laws of financial physics apply when it comes to deficit spending?
President Joe Biden is pitching a pair of federal spending and taxation bills intended to have transformative effects on the economy and the role of government in the economy.
The $2 trillion American Jobs Plan aims to rebuild physical infrastructure such as roads and bridges and provide federal boosts to workforce development, in-home care and domestic manufacturing. The $1.8 trillion American Families Plan includes targeted tax credits and education spending to benefit middle- and lower-income earners, as well as a plan to raise revenue through higher corporate taxes and taxes on higher earners and holders of wealth.
If the twin proposals pass with narrow Democratic majorities in the House and Senate, it would herald changes on a scale with Lyndon B. Johnson’s Great Society.
I’m asking myself three questions about these plans. I figure I’m unlikely to sway your fixed opinions either way, but here goes. My three questions are:
Is massive federal government stimulus spending on infrastructure a good idea right now?
Are higher taxes on corporations and wealthy households, combined with targeted tax breaks for lower earners, a good idea right now?
Is increasing the federal debt by an additional $4 trillion a good idea right now?
Each of these questions can be considered on economic, political and moral terms. As a citizen, I’m interested in all these questions, on all three terms.
Let’s start with the plan for massive infrastructure spending at this moment in the economic cycle. It’s surprising.
What I mean is that in a sluggish, ailing economy — with above 10 percent unemployment like the Great Depression or even the Great Recession after 2008 — a massive government stimulus push makes tremendous sense. That’s basic Keynesian economics.
We’re not in that zone right now. The March 2021 unemployment rate was 6 percent. Yes, that unemployment rate is still worse than pre-COVID levels (3.5 percent February 2020), but we haven’t yet fully reopened the economy.
Vaccinations, herd immunity and resumption of economic normalcy may naturally get us back to the relatively roaring economy of pre-pandemic February 2020 without any further federal stimulus. The stock market is hitting new highs every week. (Yes, I know the stock market is not the economy, but it is a highly visible leading indicator, which is why we refer to it.) Real estate prices are, in general, on fire. (Yes, housing is also not the economy, but it is an important and visible subsector of it.) And the latest GDP number showed 6.4 percent annual growth, higher than the normal trend. A massive stimulus bill right now feels, at the very least, unprecedented. I harbor strong doubts about the size and timing of this one.
What about the American Family Plan for higher taxes on corporations, higher earners and capital gains taxes? I am for it. I mean this more as a moral statement than an economic statement, because inequality is a leading problem of our time. But I also think this plan is OK economically. First, that’s because we need the additional revenue. Second, because the tax changes merely roll us back to times when the economy also grew strongly under higher corporate and upper income rates. Third, because tax rates and tax policy should alleviate, not exacerbate, inequality.
And the child and family support measures? I believe in expanded pre-K and community college access both morally and as an economic measure. Poverty alleviation similarly has both moral and economic benefits, and we need to do more of those as well. We’ll be a richer and a better society for it.
Finally, what about expanding federal debt by $4 trillion more right now? Phew. This is the craziest part of the conversation. And it’s a conversation we’re kind of not even having. Republicans blew their authority and credibility on the issue of fiscal responsibility long ago.
If Biden gets this passed, it will mark a wholly different direction than the Clinton and Obama presidencies. Despite what critics said at the time and after, the Clinton administration prided itself on shrinking government. It actually balanced the federal
budget and set a course for retiring federal debt. That seems forever ago, but it was merely the year 2000. In that same spirit, Obama politically hamstrung his signature health care legislation by requiring that it pay for itself and not increase the federal deficit. In hindsight, this lack of generosity probably doomed it in the eyes of the many Americans who needed it most.
After a career in Congress built on being a deficit hawk, Paul Ryan shepherded a unified Republican Congress and executive branch to pass a $1.5 trillion tax cut in 2017, a cut that overwhelmingly favored upper-income earners and corporations. This is opposite the move a real deficit
hawk would make, but Ryan sank his own reputation for those sweet tax cuts.
When the W. Bush and Trump administrations massively increased debt despite the Republican Party’s claim to favor fiscal responsibility and limited government, Democrats seemed to have internalized a whole different approach to government debt. Democrats are no longer willing to self-limit. They are daring the cowards and hypocrites in the Republican Party to stop them.
I honestly don’t know what to think about $4 trillion in additional deficit spending. It feels like the Washington version of lots of things I don’t understand about money in 2021, such as GameStop,
Bitcoin, SPACs and NFTs. The assumptions we long held about fundamentals and financial gravity don’t seem to hold anymore.
“It’s different this time” are frequently called the four most dangerous words in finance. It’s been different for a while when it comes to deficit spending, as the laws of financial physics are seemingly suspended. I don’t get it. I continue to worry about gravity.