Over the last dozen years, there has been a sea change in how economists view many crucial questions related to deficits, public debt and the long-term payoffs of social spending.
Most Democratic elected officials have embraced this new thinking, and it permeates the Biden domestic agenda. But a handful of Democrats are unpersuaded, holding to a view that was more widespread in the early Obama years, focusing on the risks of debt and spending.
That tension, and how it resolves itself — or doesn’t — will be central to the evolution of the Biden presidency and American economic policy for years to come. On the surface, there is a clash between lawmakers with different political instincts. But there is also a clash over whether a more traditional view will prevail over a newer approach that has become mainstream among economists — especially those who lean left, but with some acceptance among center-right thinkers.
In the older view, it is irresponsible to increase long-term budget deficits because it will curtail private investment and risk a fiscal crisis. Social policies should be seen as a zero-sum trade-off between alleviating poverty and encouraging work. And any major new spending should be coupled with enough revenue-raising measures that the number-crunchers at the Congressional Budget Office conclude the numbers will balance over the next 10 years.
This was the approach that the Obama administration and congressional Democrats took in passing the Affordable Care Act, a process made lengthier and more complex by these self-imposed constraints.
But since those days, the intellectual ground has shifted in important ways.
For one, long-term interest rates have fallen precipitously, even as very large budget deficits have become the norm. That implies the United States can maintain higher public debt than once seemed possible without excessively constraining private investment or facing excessive interest costs.
“The long-term downward move in interest rates is the most important macroeconomic development that has occurred over the last couple of decades,” said Karen Dynan, a former official at the Federal Reserve and at the Obama Treasury Department who now teaches at Harvard. (One of her classes is on the economic crises of the 21st century, including a unit on the evolution in thinking they have prompted.)
“Lower rates make deficit-financed spending less costly in budget terms and lowers the economic cost, because you can think of lower rates as a signal that the private sector has less demand for that money,” Professor Dynan sad.
During the early Obama years, there was extensive discussion, including from some Democrats, that a loss of confidence in America’s debts could cause a fiscal crisis. The experience of the last decade has offered reassurance that in a nation like the United States, with a credible and competent central bank, such an event is unlikely.
“I would have worried 10 years ago that as debt rose to 100 percent or more of G.D.P., folks lending to the U.S. government would start to feel differently about it, and the answer is that they don’t,” said Wendy Edelberg, a former chief economist of the C.B.O. who is now director of the Hamilton Project at the Brookings Institution. “I personally feel like I’ve learned a lot more in the last decade about how monetary and fiscal policy interact, especially in a crisis.”
As evidence: The federal government, with extensive help from the Federal Reserve, launched a multitrillion dollar response to the pandemic despite coming into the crisis with an elevated public debt. Rather than spur a crisis of confidence in U.S. government bonds, their values have surged.
The evolution in thinking is hardly universal, with some more conservative economists pointing to the risks that conditions could change.
“Any economic policy that begins with the premise, ‘Let’s just assume interest rates stay below 2008 levels forever,’ is extraordinarily hubristic and naïve,” said Brian Riedl, a senior fellow at the Manhattan Institute. “Particularly because there is no backup plan if they are wrong and rates ever do revert to pre-2008 levels. At that point, the policies driving the debt will be nearly impossible to reverse, and we could face a severe fiscal crisis.”
That is very much the argument that Senator Joe Manchin has made in holding up 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 will disagree, I believe that spending trillions more dollars not only ignores present economic reality, but makes it certain that America will be fiscally weakened when it faces a future recession or national emergency,” Senator Manchin wrote in a commentary for The Wall Street Journal last month.
A similar shift has taken place in how many economists view the potential long-term economic benefits of certain forms of social welfare spending.
Not long ago, research into the trade-offs of welfare spending tended to focus on narrow questions like how much a given benefit might discourage people from working. In the last few decades, researchers have used novel statistical techniques (including those that won a Nobel Prize last week) and rich new sources of data to try to determine what long-term benefits they might offer to the overall economy.
Take, for example, spending that keeps children well-fed and out of poverty, such as school lunch programs and assistance payments to low-income parents. These appear to have long-lasting benefits for future employment and earning power — creating supply-side benefits, or increasing the economy’s overall potential.
“If we give people more resources when they’re young, they can eat better and do better in school, and this could have lasting impacts,” said Hilary Hoynes, a professor at the University of California, Berkeley, and an author of extensive research along these lines. “It doesn’t seem like such a crazy thing to assert, but we had no evidence on that 15 years ago.”
This is part of the thinking beneath major elements of Democratic legislation under consideration, including universal preschool and an extension of a child tax credit. Professor Hoynes said she had received many calls from congressional staff members in the last few years seeking to understand the emerging evidence.
Senator Manchin, meanwhile, has said, “I just don’t want our society to move to an entitlement society,” suggesting he is focused on the ways these benefits might create a near-term disincentive to work.
Beyond the intraparty divide over the risk of deficits and the benefits of social spending, there is a simmering debate over how the costs of the bill should be offset. Centrist Democrats insist upon provisions that raise money so as to keep the programs from raising the deficit, but it’s less clear what that means in practice.
During the passage of the Affordable Care Act, that meant a very specific thing — achieving a “score” from the C.B.O. attesting that by its best estimates, the legislation would have a neutral to positive effect on cumulative deficits.
This scoring incentivizes an odd gaming of the system, including programs that phase in or out, and revenue-raising measures that are backloaded to avoid near-term pain while making the numbers balance. It also inserts a false precision into the legislative process — as if anyone knows what economic growth and federal revenue will be a decade down the road.
“I very much worry that there’s going to be some absurd emphasis on the C.B.O. 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. Aiming for deficit neutrality is arbitrary — it’s arbitrariness on top of arbitrariness.”
The Biden agenda, in other words, could depend on just how much the entire range of Democrats in Congress view the strategies and instincts of the Obama years as a model to follow or a cautionary tale.