Last week, President Biden introduced a $2.2 trillion infrastructure plan, calling it “a once-in-a-generation investment in America.” In a speech, he outlined many of the package’s details, including how to “pay for” it. A close look at those so-called pay-fors, however, shows Democrats are thinking about fiscal responsibility the wrong way. They could be on the verge of sparking some unpleasant short-term overheating of the economy, in which price increases accelerate and the purchasing power of our dollars falls somewhat. And if the final legislation were to grow much larger — toward the $10 trillion level many progressives in Congress are pushing — it could send such inflation soaring.
In an interview on MSNBC last week, Representative Alexandria Ocasio-Cortez of New York explained her mixed feelings about the president’s proposal, saying she has “serious concerns that it’s not enough to realize the very inspiring vision that Mr. Biden has advanced.” Rather than spending roughly $2 trillion over eight years, Ms. Ocasio Cortez and many of her Progressive Caucus colleagues would prefer “to go way higher” and on a shorter timeline.
She’s right that it is possible for Congress and the Biden administration to go bigger, faster — but only by shifting to a completely different budgeting framework: Instead of passing legislation that leans on taxing corporations and the rich to keep spending from increasing the deficit, they would have to develop a robust plan with a focus on containing inflationary pressures as that heightened government spending hits the real economy.
The president called his plan “fiscally responsible” during his speech simply because it will raise more revenue than what he’s proposing to spend. On paper, and according to conventional wisdom, this a balanced policy. It may satisfy the scorekeepers at the Congressional Budget Office or even earn high marks from deficit hawks. But because these proposed hikes fall exclusively on corporations and more affluent Americans — who have a relatively high marginal propensity to save rather than spend — the taxes may not diminish enough private sector spending to prevent the government’s own increased outlays from igniting some inflationary overheating, especially if Congress does “go way higher.”
The key to responsibly spending vast sums of money lies in carefully managing the economy’s real productive limitations. Just as my son’s Lego projects are limited by the amount of bricks we have bought for him, we can’t squeeze more goods and services out of our economy once we’ve made use of all available resources.
It’s easy to ramp up spending when there are millions of unemployed people who can be hired and plenty of domestic companies eager to supply the government with solar panels and electric vehicles. But what happens when it gets harder to find the idle things and people — construction workers, architects, machinery, raw materials and so on — needed to keep pace with an enormous revamp of our nation’s infrastructure? With the U.S. economy now improving, it would be irresponsible not to develop a rollout plan for those contingencies.
Many of Mr. Biden’s proposed tax increases should be defended, and even lauded, for they will promote greater fairness and curb inequality somewhat, but it must be recognized that they will do relatively little to offset spending pressures.
Depending on how big Congress ultimately decides to go on infrastructure, and how quickly, it may need to unleash a whole suite of inflation-dampening policies along the way — all of it unrelated to deficit neutrality.
These nontax inflation offsets could include industrial policies, like much more aggressively increasing our domestic manufacturing capacity by steering investment back to U.S. shores, using even more “carrot” incentives like direct federal procurement, grants and loans, as well as more “sticks” like levying new taxes to discourage the offshoring of plants. Reforming trade policies is another option: Repealing tariffs would make it easier and cheaper for American businesses to buy supplies manufactured abroad and easier for consumers to spend more of their income on products made outside of our borders, draining off some domestic demand pressures.
The Biden team could also consider loosening its legal-immigration policies, so that even once America nears full employment there would still be an adequate labor pool to meet the increased demand for workers. Putting aside the obvious climate benefits of tightening environmental regulations, banning fracking on federal lands and offshore drilling in federal waters could free up people and materials for other activities. Health care reform could have a role too. (Significantly lowering the Medicare eligibility age would sharply reduce aggregate spending in the health care industry, a major source of price pressures in the economy.)
Over time, the Biden plan’s investments in our physical and human infrastructure will enhance our economy’s productive capacity, leaving us with a better educated and more productive work force, more efficient railways, less congested roadways, improved technologies and much else. But this can’t happen overnight. It will take years, and it might mean that we start to run out of available capacity as we go — especially if the House Progressive Caucus wins the addition of trillions more dollars. No one can predict exactly when, or across which industries, serious bottlenecks and other shortages might emerge.
That’s why to avoid short-run constraints like supply bottlenecks, the U.S. government can look elsewhere for capacity. American businesses can make use of depressed conditions abroad, buying from countries with economies that might be struggling to fully recover from the economic downturn and that will be more than happy to mutually benefit from our boom. There will be no lack of eager foreign producers if we need to relieve some demand pressure on the domestic front.
So it was unfortunate that in his long-awaited infrastructure speech, President Biden promised “not a contract will go out, that I control” that isn’t for “a company that is an American company with American products, all the way down the line, and American workers.”
This “buy American” philosophy is well intentioned but could lead to counterproductive trouble, particularly since the president has promised that “no one making under $400,000 will see their federal taxes go up” — a pledge that takes raising taxes on the middle class, which has a higher marginal propensity to spend, off the table as a potential inflation offset.
A Biden-led plan that is overly protectionist is a much greater inflation threat than a plan that isn’t paid for in the traditional deficit-neutral budgetary sense. This framework — based on the principles of Modern Monetary Theory — redefines fiscal responsibility by flipping the age-old question “How will you pay for it?” The real challenge is “How will you resource it?”
Senator Bernie Sanders of Vermont recently hinted at this approach when he told Politico: “You don’t start off by coming up with a sum and working down. You start out by looking at the needs that need to be addressed and adding them up.” The next step is to figure out how to budget your available real resources to deliver on those priorities.
Modern Monetary Theory is not alone here. For a historical outlook, we can revisit what John Maynard Keynes proposed in “How to Pay for the War: A Radical Plan for the Chancellor of the Exchequer,” a lesser-known work of his. To the contemporary ear, the title suggests that Keynes was trying to figure out how to come up with the money to finance World War II spending. He wasn’t.
Keynes understood that the British government, which controlled its national currency, could create all the money needed. The purpose of the book was to show the government how to scale up and sustain higher levels of spending while containing inflationary pressures along the way. It noted the soldiers, bombers, tanks, combat gear and more that would be needed to prosecute the war and how the entire economy would need to be reoriented, quickly, to supply those things.
We’ve all grown accustomed to thinking about taxes as an important source of revenue for the federal government. That’s in part because it’s easy to think of the federal government as being like state and local governments, which without sufficient revenue — from income taxes, property taxes, sales taxes and more — could not finance their operations. Yet these entities don’t have the federal government’s currency-issuing powers, which greatly changes the spending capacity of government.
In 1945, a man named Beardsley Ruml delivered a fiery speech before the American Bar Association titled “Taxes for Revenue Are Obsolete.” He wasn’t a crank. He was the chairman of the New York Federal Reserve Bank. As Mr. Ruml explained in that speech, taxes first and foremost help to avoid a situation where too much money chases after too few goods: “The dollars the government spends become purchasing power in the hands of the people who have received them,” he said, while “the dollars the government takes by taxes cannot be spent by the people.”
More recently, economists like L. Randall Wray and Yeva Nersisyan have begun to think about how to pay for a Green New Deal using Keynes’s earlier “radical” framework. And even if one were to accept the terms of the old deficit-oriented budgeting currently favored in Washington, going even bigger on infrastructure, if executed carefully, is still doable: Larry Summers, the former Obama White House senior economist, admitted in 2014 that “public infrastructure investments can pay for themselves” and that “by increasing the economy’s capacity, infrastructure investment increases the ability to handle any given level of debt.”
We face enormous intersecting crises: a climate crisis, jobs crisis, health crisis and housing crisis, among others. It is going to require a lot of money to do what is necessary. As Kate Aronoff recently wrote in The New Republic, “To meet the emissions targets outlined in the Paris Agreement, experts estimate the United States government will need to spend at least $1 trillion annually.” And the White House’s infrastructure proposal, while historically ambitious, still falls far short of the scale of the problem.
Ms. Ocasio-Cortez pointed out, for instance, that Mr. Biden’s plan has a $40 billion investment in public housing for the entire nation but New York alone may have that level of need.
By focusing on how much revenue they think they can raise from a broad array of tax increases on the well-off, Democrats risk allowing the scope of their ambitions to be governed by the dated framework of fiscal responsibility in Washington and the political appetite for tax increases, rather than what is truly possible based on logistics in the real economy.
The Bureau of Labor Statistics, the Federal Reserve, the Treasury Department and other agencies that track labor force participation, price increases and supply shortages can be tasked with developing a specific dashboard of blinkers and warnings to alert to problems.
If Congress and the White House want to be responsible stewards of both society and the U.S. dollar’s value, then rather than focusing on taxation of the rich, they should prioritize and supply exactly what it would take, in terms of real resources, to electrify the nation’s power grid, repair every deficient bridge, give caretakers a living wage, upgrade our railways, and deliver clean drinking water and high-speed broadband to every home. How many people will it take to do all of that work? How much steel, concrete and fiber optic cable? How many tower cranes and other kinds of building equipment will be needed? The list goes on.
These are the questions we should ask our leaders, and the ones they should be asking themselves — not “How will we pay for it?”
In case you were wondering, Prof Stephanie Kelton penned that op-ed.
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