Over the past twelve years, there has been a dramatic shift in the way economists view many critical issues related to deficits, public debt, and the long-term benefits of social spending.
Most elected Democrats have embraced this new thinking, and it permeates Biden’s national agenda. But a handful of Democrats are not convinced, sticking to an opinion that was more prevalent in the early Obama years, focusing on the risks of debt and spending.
This tension, and how it resolves – or not – will be central to the evolution of the Biden presidency and US economic policy for years to come. On the surface, there is a clash between legislators with different political instincts. But there is also conflict over whether a more traditional view will prevail over a more recent approach that has become common among economists – especially those who lean to the left, but with some acceptance among center thinkers. law.
In the older view, it is irresponsible to increase long-term budget deficits as it would reduce private investment and risk a budget crisis. Social policies must be seen as a zero-sum compromise between reducing poverty and encouraging work. And any major new spending should be paired with enough revenue-raising measures for Congressional Budget Office figures to conclude that the numbers will level out over the next 10 years.
This is the approach the Obama administration and the Democrats in Congress took in passing the Affordable Care Act, a process made longer and more complex by these self-imposed constraints.
But since those days, the intellectual terrain has changed dramatically.
On the one hand, long-term interest rates have fallen precipitously, even as very large budget deficits have become the norm. This implies that the United States can maintain a higher public debt than previously seemed possible without excessively restricting private investment or facing excessive interest costs.
“The long-term cut in interest rates is the most important macroeconomic development that has occurred over the past two decades,” said Karen Dynan, former head of the Federal Reserve and Obama’s Treasury Department who now teaches at Harvard. (One of her courses focuses on the economic crises of the 21st century, including a unit on the evolution of thought to them.)
“Lower rates make deficit-financed spending less costly in fiscal terms and lower the economic cost, because you can take lower rates as a signal that the private sector has less demand for that money,” the Minister said. Professor Dynan.
During Obama’s early years, there was a lot of talk, including from some Democrats, that a loss of confidence in US debt could cause a budget crisis. The experience of the past decade has reassured that in a nation like the United States, with a credible and competent central bank, such an event is unlikely.
“I would have feared 10 years ago that as debt rose to 100% or more of GDP, people who lend to the US government would start to think differently about it, and the answer is they don’t. don’t, ”said Wendy Edelberg, a former CBO chief economist who is now director of the Hamilton Project at the Brookings Institution. “Personally, I feel like I’ve learned a lot more over the past decade about how monetary and fiscal policies interact, especially during a crisis.”
As proof: the federal government, with considerable help from the Federal Reserve, launched a multibillion-dollar response to the pandemic despite entering the crisis with high public debt. Rather than causing a crisis of confidence in US government bonds, their values surged.
The evolution of thought is hardly universal, with some more conservative economists pointing out the risks rather than the conditions. could change.
“Any economic policy that begins with the premise ‘Let’s just assume that interest rates stay below 2008 levels indefinitely’ is extraordinarily proud and naive,” said Brian Riedl, senior researcher at the Manhattan Institute. “Particularly because there is no back-up plan if they are wrong and tariffs return to pre-2008 levels. At this point, the policies behind the debt will be almost impossible to remove. reverse and we could face a serious fiscal crisis. “
This is largely the argument Senator Joe Manchin made in delaying the party’s social spending bill, seeking to lower its total cost and seek offsetting revenue increases that would reduce the deficit.
“While my fellow Democrats disagree, I think spending billions more dollars not only ignores current economic reality, but also ensures that America will be fiscally weakened when it faces a future recession or to a national emergency, “Senator Manchin wrote in a commentary for The Wall Street Journal last month.
A similar shift has taken place in the way many economists view the potential long-term economic benefits of some forms of social protection spending.
Not so long ago, research on trade-offs between social spending tended to focus on narrow questions such as to what extent a given benefit could discourage people from working. Over the past decades, researchers have used new statistical techniques (including those that won a Nobel Prize last week) and rich new data sources to try to determine the long-term benefits they could offer to the global economy.
Take, for example, expenses that keep children well nourished and out of poverty, such as school lunch programs and low-income parent assistance payments. These appear to have lasting benefits for future employment and earning capacity – creating supply-side advantages or increasing the overall potential of the economy.
“If we give people more resources when they are young, they can eat better and do better in school, and that could have lasting effects,” said Hilary Hoynes, professor at the University of California at Berkeley and author of numerous works researching in this direction. “It doesn’t sound so crazy to say, but we didn’t have any evidence for this 15 years ago.”
This is part of the thinking behind the main pieces of Democratic legislation under consideration, including universal preschool education and the extension of a child tax credit. Professor Hoynes said she has received numerous calls from Congressional staff over the past few years seeking to understand the emerging evidence.
Senator Manchin, meanwhile, said: “I just don’t want our society to move towards a society of rights”, suggesting that he focus on how these benefits could create a short-term deterrent at work. .
Beyond the intra-party divide over the risk of deficits and the benefits of social spending, the debate is brewing over how the costs of the bill should be offset. Centrist Democrats insist on fundraising arrangements to prevent programs from increasing the deficit, but what this means in practice is less clear.
When the Affordable Care Act was passed, that meant one very specific thing – getting a “score” from the CBO that according to its best estimate the legislation would have a neutral to positive effect on cumulative deficits.
This scoring prompts a strange play of the system, including programs that are gradually introduced or phased out, and income generation metrics that are recharged to avoid short-term pain while balancing the numbers. It also inserts a false precision into the legislative process – as if someone knows what economic growth and federal revenues will be like a decade from now.
“I am very concerned that there is an absurd emphasis on the CBO score, whether it is slightly on one side of zero or the other side of zero,” Ms. Edelberg said. “This is a really important package that will change people’s lives, and that should be the guiding principle. The 10-year window is arbitrary. Striving for deficit neutrality is arbitrary – it is arbitrary in addition to arbitrariness. “
Biden’s agenda, in other words, might hinge on the extent to which all Congressional Democrats view the strategies and instincts of the Obama years as a role model or a warning.