President Biden has decisively answered one of the most critical early questions for his administration: Which is more important, continued stimulus spending in response to the coronavirus pandemic and the economic calamity it spawned, or addressing the government’s rising ocean of red ink?
Like other recent presidents who have faced national crises upon taking office, during the first six months of his tenure Biden’s stimulus and budget proposals have made plain that curbing the growth of the national debt will not be his priority.
Given the economic upheaval of the past year, most economists and even some Republicans agree with Biden’s fellow Democrats that spurring job creation needs to take precedence over reducing the debt — even though the amount the federal government owes its lenders is about to grow bigger than the size of the entire national economy.
Instead, the main political and economic disagreement is about whether the president’s program for stimulating the economy is too ambitious, threatening a spiral of inflation that might make matters worse, or not ambitious enough to spur sustained and substantial economic growth, reduce unemployment, and slow or even reverse debt accumulation.
Biden has been urging Congress to “go big” when considering his stimulus proposals, a reference that recalls the $800 billion President Barack Obama was allowed to spend to combat the Great Recession in 2009. While that was the largest stimulus package ever passed by Congress, at the time some progressive politicians and economists argued it would not jolt the economy enough. In hindsight, there’s evidence to support the criticism that an infusion of federal cash of that size was insufficient: The economy grew by a meager 2.2% annual average in the past decade — an unprecedentedly tepid pace, for such a sustained period, by recent standards. (The economy was hailed as on fire when average annual GDP growth was 4.4% in the seven years ending in 1989 and 4% in the seven years finishing in 2000.)
Those numbers, combined with Biden’s own economic projection in the budget he sent to Congress in May, suggest the days of roaring economic expansion may be elusive for the foreseeable future and that such modest GDP growth will be the new normal.
What should our debt target be?
Biden’s budget projects economic expansion of 2% for most of the next decade, after factoring in inflation — and that is even if all his ideas for stimulating job growth become law.
The proposed budget would not come close to allowing the country to grow its way out of any debt crisis threat, as we did after World War II. The dozen-year rebound after the postwar recession produced 6% average GDP growth. And debt as a percentage of GDP fell steadily from its peak of 106% in 1946 to 25% in 1981 even as federal spending increased just as steadily during this time.
At the end of 2020, as the Trump presidency wound down, the debt stood at $21 trillion, an increase of $3.2 trillion in just one year mainly due to the government’s COVID-19 relief spending. That meant the debt was 100.1% the size of the nation’s economy in 2020 — a debt-to-GDP ratio size not seen since a brief period after World War II. And, even without any of the new spending programs Biden envisions, the Congressional Budget Office forecasts the debt growing to 106% the economy’s size a decade from now.
While the government owing as much as or more than the nation’s total output of goods and services sounds dramatic, if not alarming, there’s no consensus view among economists and policymakers that it’s dangerous — or on when, if ever, the debt will get big enough to cripple the economy.
“There is no magic number,” says Maya MacGuineas, president of the Committee for a Responsible Federal Budget. The Committee is a deficit-reduction advocacy group (and a content partner of The American Leader) that has endorsed Biden’s short-term decision to focus on fiscal stimulus in the face of the post-COVID economy while pressing the administration to propose long-term debt control policies.
The vagaries of globalization, and an inability to predict what China and other economic powers will do, make it impossible to identify a clear point when the widening American debt-to-GDP ratio will become economically unsustainable, MacGuineas said, but “the bottom line is when you’re dealing with unknowns, you should not be marching to the cliff to figure out where that tipping point is.”
Back to an Uncertain Future?
Biden is betting that such a potential tipping point is not close at hand, and is willing to add to the debt burden that is falling to future generations.
In order to revitalize the economy now, he is pursuing an ambitious “Build Back Better” agenda that is generating concerns among Republicans and some economists not only about continued debt growth but also rapid inflation.
The president has called for spending $4.1 trillion throughout the next decade to expand the social safety net and modernize infrastructure. The plan looks to survive in the closely divided Congress only in much more modest form; negotiations with Senate Republicans this summer, for example, have made clear the public works part of the package will be no more than half its original size.
But, still, because of interest payments on the Treasury bonds needed to get the project off the ground, that part alone could add more than a trillion dollars to the debt.
Overall, Biden’s first comprehensive budget proposal to Congress sees total annual federal spending growing from the coming year’s $6 trillion to $8.2 trillion in a decade, in large measure because it envisions doing nothing to slow the pace of growth on Social Security, Medicare and Medicaid. These programs account for close to 50% of federal spending and their outlays are controlled entirely by the demands of beneficiaries, which are growing rapidly in large part because the Baby Boom generation is retiring and living longer.
The end result is a White House budget office projection of annual deficits above $1.3 trillion in each year of the coming decade — yielding a $39 trillion debt in 2031, or 117% of that year’s economy.
Moreover, since detailing his budget, Biden has sought to keep negotiations with congressional Republicans alive by suggesting he’s willing to trim or even forego some of the corporate tax increases he’s proposed to help pay for his ideas.
At the same time, plenty of economists continue to worry that spending trillions to get people back in the labor force — not only by repairing roads and creating green technology but by providing universal preschool, two years of free community college, and enhancing paid family leave on top of the past year’s $3 trillion federal pandemic relief — would boost inflation.
Larry Summers, a Treasury secretary in the Clinton administration and senior economic policy advisor in the Obama administration who, according to Politico, said during the 2009 spending debates that the government couldn’t spend too much money, is the most prominent advocate for this view. He has persistently called inflation “the primary risk” to the US economy and publicly pressed Biden to scale back his spending aspirations to prevent such an overheating.
Partisan Stakes at the Midterms
Biden’s choices may reverberate beyond the debate about fiscal responsibility. His decision to “go big” — gambling he can increase jobs and keep inflation in check — is a likely gift to GOP midterm candidates and presents a potential no-win scenario for Democrats. Unless they buttress their slim majorities in Congress in 2022, Democrats will have no shot at addressing voting rights, climate change, health care and other systemic problems that are among their top priorities.
Congressional Republicans are sure to make the debate over the budget, and their view that Biden is being reckless and wasteful, a top focus in their 2022 midterm campaigns. Their position would be bolstered, of course, if he wins some of the spending he wants but the results prior to the election are paltry job growth and rising inflation.
Of course, concern over fiscal responsibility in this political context is more about election posturing and should not be taken too seriously, as the Republican track record on controlling the debt is arguably worse than the Democrats’ record.
The real questions to consider over the next year are how effectively the Biden budget, or whatever budget emerges from negotiations, has achieved its goals; which goals are generally lauded by members of both parties; and which candidates are likely to support sensible adjustments that reflect a sustainable level of fiscal responsibility.
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