The era of “big government” is just getting started. Or so the Biden administration hopes.
Weeks after enacting a $1.9 trillion COVID-relief law, the president unveiled the first of two comparably prodigious plans for rebuilding the U.S. economy. A forthcoming bill will focus on expanding the social safety net, while the newly released American Jobs Plan upgrades the nation’s infrastructure, broadly defined.
Judged by its adequacy to the problems it purports to solve, the proposal is slender (for one thing, the plan cites $1 trillion in infrastructure repairs, but spends far less than that on the problem). Judged by the standard of the past four decades of public investment in the U.S., however, it is gargantuan.
The wide-ranging proposal doesn’t lend itself to succinct summary. But the spending can be divided into four buckets: $621 billion on conventional infrastructure (roads, bridges, public transit, etc.); $650 billion on “infrastructure at home” (building and retrofitting homes, universal broadband, replacing lead pipes); $400 billion on the care economy (expanding access to at-home and community-based care for the elderly); $580 billion on research, development, and manufacturing (investing in clean energy innovation, expanding the domestic semiconductor industry); and $400 billion worth of clean-energy tax credits.
All this spending would be offset over a 15-year period by raising taxes on corporations.
This isn’t a remotely comprehensive synopsis of the plan. You can find a more detailed one here. But if you’re in the market for three (somewhat random) big-picture takes on the policy, I’ve got you covered:
1. Democrats believe deficits still matter — at least politically.
With its $1.9 trillion American Rescue Plan, the White House bucked macroeconomic orthodoxy (and the caterwauling of some center-left economists), so as to prioritize cash relief and full employment over “fiscal responsibility” and inflation preemption. More concretely, the administration engaged in more deficit spending than conventional economic models deemed commensurate with price stability. It justified this stance by arguing that the risks of spending too little outweighed those of spending too much. To the extent that White House economists acknowledged fiscal constraints, they typically did so with reference to inflation: Instead of suggesting that deficits were tragic necessities, or that the bill would pay for itself through higher growth, they insisted that the “inflationary risks” of injecting $1.9 trillion into the economy were wildly overstated.
All this seemed to suggest that Biden & Co. had embraced a “functional finance” (or even, MMT) perspective on government spending: In a nation that can print its own currency, the true constraint on public investment is not the national debt, but rather the economy’s real resources. Which is to say, if you increase demand through spending — without offsetting any of that demand through taxation or other means — then there will eventually be too many dollars chasing too few goods and services, and destabilizing price increases will ensue.
But the American Jobs Plan reflects a more conventional calculus. The proposal purports to offset every dollar of spending with one dollar in new revenue. It does this in a somewhat odd fashion (and one that bespeaks a modicum of comfort with short-run deficits). While the plan’s spending is spaced out over eight years, it does not produce revenue equal to that spending for 15. The justification for this discrepancy is that the spending provisions are overwhelmingly one-off expenditures, while the tax measures are permanent. So the spending really will be fully offset, if you just wait long enough.
This doesn’t make a ton of sense from a functional finance perspective. Spending $2 trillion over eight years may present some inflationary risk. But imposing higher taxes for seven years after that spending has expired can’t be justified on demand-management grounds (i.e., you aren’t going to avert inflation in 2025 by reducing the disposable income of corporate shareholders in 2032). It’s unclear whether the White House’s emphasis on fully “paying for” its program is rooted primarily in economic or political concerns. Earlier this week, the Washington Post reported that the administration’s economists were worried that a “large gap between spending and revenue would widen the deficit by such a large degree that it could risk triggering a spike in interest rates, which could in turn cause federal debt payments to skyrocket.” Meanwhile, several centrist Democrats in the Senate have signaled a limited appetite for further deficit spending. Regardless, progressives are liable to find Bidenomics more objectionable in theory than in practice. After all, whatever the rationale behind them, the president’s tax proposals would mitigate income inequality.
But the precedent is a bit concerning nevertheless. In functional finance terms, it’s much easier to justify deficit-financing infrastructure investment than permanent social-welfare programs, since the former are a one-time expense while the latter are a perennial one. By all appearances, congressional Democrats’ tolerance for tax hikes is a limited resource. Already, Biden has jeopardized the extension of his relief bill’s child allowance and ACA subsidies by putting them in a separate bill. If he uses $2 trillion worth of pay-fors on infrastructure — which moderate Democrats generally support more avidly than safety-net expansion — then getting a permanent (or semi-permanent) child allowance across the finish line will be even more difficult.
2) The climate spending should probably be weighted more heavily toward research and development.
Biden’s infrastructure bill doubles as his climate bill. Add up the cost of every provision that is at least tangentially related to promoting clean energy, reducing carbon emissions, and increasing sustainability and you get a number larger than the price tag of Barack Obama’s entire stimulus in 2009. Which is impressive in historical context, but still rather small considering that we will be exponentially better off erring on the side of doing too much to keep the planet fit for decent civilization.
Even if we stipulate that increasing the package’s price tag by a dollar is politically infeasible, it seems to my (inexpert) eyes like the bill would be improved by directing a higher percentage of its climate funding toward research and development. At present, the bill allocates $35 billion for “technology breakthroughs that address the climate crisis,” $15 billion for “demonstration projects for climate R&D priorities, including utility-scale energy storage, carbon capture and storage, hydrogen, advanced nuclear, rare-earth element separations, floating offshore wind, biofuel/bio-products, quantum computing, and electric vehicles,” and another $5 billion for miscellaneous climate research. This isn’t shabby exactly. But it also represents a small fraction of the bill’s overall climate spending. And that seems misguided. Ultimately, the fight against climate change will be won or lost in the developing world. The U.S. accounts for 15 percent of global CO2 emissions, and barring a world-historic catastrophe in China and/or India, our share of that pie is going to decline in the coming decades. Either these countries are going to gain access to the technology necessary for achieving sustainable prosperity or they are going to pursue the unsustainable kind. No Chinese or Indian leader is going to endorse degrowth or radically higher energy prices unless they want their government toppled. Breakthroughs in green technology are our best hope. We should spend as much as we can on trying to discover them.
3) The package (wisely) includes a mini–Gray New Deal.
Finally, the $400 billion investment in expanding access to at-home care for the elderly — and increasing wages for those who provide that care — seems excellent as a matter of both politics and policy. Owing in part to gains in life expectancy among the elderly, an American turning 65 today has somewhere between a 50 and 70 percent chance of eventually requiring long-term support by the end of his or her life. And yet, the U.S. is nearly alone among wealthy nations in lacking a universal long-term-care benefit. What’s more, as James Medlock and Colin McAuliffe of Data for Progress note, the U.S. spends far less on long-term care (as a percentage of its GDP) than the vast majority of OECD countries.
The Biden proposal would not end that sorry state of affairs, as $400 billion is inadequate to make long-term care a universal entitlement. But it would at least significantly mitigate the problem. And it might well win Democrats some votes in the process.
In a 2019 survey, Tufts University and Data for Progress (DFP) told respondents, “Some Democrats have proposed spending $120 billion per year to provide seniors with comprehensive long-term-care benefits through Medicare”; that this policy would require raising payroll taxes by 1.5 percent; and that Republicans said “American workers are already taxed too much and that increasing government spending is irresponsible.” The pollsters then asked respondents whether they supported the proposal. Remarkably, despite the inclusion of an explicit partisan framing, middle-class tax hike, and Republican counterargument, 60 percent of registered voters endorsed the proposal, while only 27 opposed it.
Given the GOP’s profound unpopularity with millennials and zoomers, it can ill-afford to lose much ground with older Americans. The more Democrats can do to ease the burdens of the boomer generation’s golden years, the better their odds of keeping America blue.