Biden goes big on the deficit

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“Reagan proved deficits don’t matter,” Dick Cheney is said to have told Paul O’Neill when they were serving as vice president and treasury secretary, respectively. President Joe Biden is testing this theory all over again.

The massive $6 trillion Biden budget proposal projects an eye-popping $1.8 trillion annual deficit even as the pandemic recedes and the economy recovers as people head back to work following the lockdowns. At the center of this blueprint is $4 trillion in new spending Biden has already proposed, even as he promises to scale back his opening infrastructure bill potentially to strike a deal with Republicans. Biden also proposes the biggest tax increases in decades, but they are not sufficient to cover all the spending.

“I’m not willing to deficit spend,” Biden insisted last month. He also said his American Families Plan doesn’t “add a single penny to our deficit.” The numbers say otherwise.

Biden isn’t the first president to gamble that voters will turn a blind eye to red ink. Deficits topped $1 trillion early under President Barack Obama and were poised to return under President Donald Trump even when the economy was humming and unemployment was low. Once the pandemic upended this boom and put millions out of work, necessitating massive new federal spending, the deficit roared past $3 trillion, bigger than the whole federal budget as recently as 2008.

That was a temporary blip in a crisis. Biden’s budget plans would amount to a large, permanent increase in federal spending that will push the debt as a percentage of GDP to its highest level since World War II within a decade. The Manhattan Institute’s budget expert Brian Riedl describes it as “a historic spending and borrowing binge fueled by low interest rates,” noting that even Biden’s budget sells short the new expenditures in the pipeline.

Based on recent history, it is hard to argue that when borrowing costs are relatively low, so is the political price for running big deficits. The deficit-centric candidacies of Ross Perot and Paul Tsongas are now decades in the past. The Tea Party has given way to economic populism. Polling has consistently shown most voters hold contradictory views on spending, taxes, and deficits, favoring more of the first and less of the last two. Even some Republicans concede the deficits of the Trump years make it harder to push back against Biden’s budget. “It looks opportunistic,” said a GOP strategist. “But it has to be done.”

If interest rates rise and the economy overheats, the political repercussions could look different. “Low interest rates have mitigated the costs of borrowing to finance the pandemic response, but an overheated economy would likely cause interest rates to rise higher and faster than expected, which would make new debt much more expensive to service,” the Concord Coalition’s Bob Bixby warned earlier this year. “Given the uncertainties and downside risks, I think a little more caution would be in order for the upcoming proposals.”

Biden has so far thrown caution to the wind, although some members of his party in Congress see his $4 trillion in new spending and raise him $10 trillion. The president did have a call with former Treasury Secretary Larry Summers, one of the most prominent Democratic economists warning that the current approach could lead to inflation and overheating. These economic conditions, combined with slow growth, doomed big-spending liberal Democrats politically for a generation.

Biden has visions of reviving that tradition, even to a greater degree than Obama, the man he served as vice president. He has huddled in the East Room with liberal historians who have regaled him with the lessons of Franklin Roosevelt and Lyndon Johnson. The descendants of Roosevelt and his left-wing Vice President Henry Wallace are openly lobbying Biden to eschew infrastructure spending compromise with the Republicans. Wallace’s grandson described the original American Jobs Plan in a statement as “New Deal-ish in its boldness, scope, and urgency.” Sen. Bernie Sanders pledged to help Biden deliver the “most progressive administration” since Roosevelt.

If the middle class starts picking up the tab in the form of higher taxes, inflation, rising interest rates, or stagnant growth, Democrats could pay a corresponding price at the ballot box comparable to what retired this form of politics and economics in the first place. If Ronald Reagan’s two terms can be used to argue deficits don’t matter, the stagflation that put him in the White House certainly did.

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