economics
Bidenomics: the most irresponsible economy policy in 40 years?
University of Chicago
City University of New York
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Genesis
Response
Penultimate
Finale
May 3rd, 2021
Professor Uhlig asks if increased public spending will be worth it. This framing appropriately focuses attention on the benefits as well as the costs. Unlike him, I think the former will greatly outweigh the latter.
The coronavirus pandemic was an extraordinary emergency, and naturally has been the main focus of federal policy over the past year. But prior to 2020, there were already good reasons for a major expansion of public spending. At the top of the list is the climate crisis; this, not the public debt, is the most urgent threat to our children and grandchildren. Second is ongoing weak demand since at least the 2007-2008 financial crisis, with the economy persistently falling short of full employment and robust wage growth. To this we could add a level of public services, especially in terms of access to health care and support for families, that falls far short of the standards of other rich countries.
These problems were temporarily overshadowed by the acute emergency of the pandemic, but they have not gone away. The fact that the newly proposed spending bills go beyond pandemic relief is simply a recognition of the scale of the challenges facing us.
The focus of the current proposals is on areas where a role for the public sector is widely accepted. People who regard public education as a good thing will welcome its extension to pre-kindergarten. People who appreciate the retirement insurance provided by Social Security will see the logic in offering similar insurance against the costs of raising children. People who believe that access to health care is a reasonable expectation for residents of a modern country will be glad to see larger subsidies under the Affordable Care Act. People who use highways and public transit will not object to them being modernized. You may, of course, disagree on some or all of these. But they are not radical departures from what we already expect from government.
More fundamentally, it is wrong to think of public spending as borrowing from the future. Think about unemployment benefits during the pandemic. The food, housing and other essentials they purchased were not borrowed from the future, they were produced in the present. Groceries and apartments cannot travel in time.
If a business is idle in 2020 because no one can buy its services, those services are not saved for the next year. They never come into existence. In the kind of economy we live in, goods and services are not produced because they would be useful for someone. They are produced if they can be sold. It is true that government cannot magically produce goods and services. But it can produce them in the same nonmagical way as anyone else, by paying for them.
To be sure, this has limits. But the limit is not how much money the government can spend. Nor is it the need to pay back the debt; with the interest rate on public debt firmly under the control of the Federal Reserve, there is no need to ever pay off today’s borrowing. We can simply grow out of it, just as we grew out of, rather than paid off, the debt the federal government incurred to fight World War II. The real limit is the productive capacity of the economy.
The question then becomes, how much unused capacity is there? There is good reason to think that even in 2019, there was far more slack in the economy than conventional measures suggested.
Immediately before the pandemic, real GDP was over 10 percent below where it would have been based on forecasts in 2007. Among prime-age adults (25-54), employment rates were 1.5 points below the rates reached in 2000, suggesting space for several more years of strong employment growth. Employment rates for Black Americans remained several points below that of white people of a similar age. Since this gap obviously does not reflect an inability or unwillingness to work, it implies additional slack in the labor market.
Wage growth in the years immediately before the pandemic was up somewhat from the truly anemic levels of 2010-2013, but still well below what we saw in the late 1990s — the last truly hot labor market in US history. Labor productivity growth continued to lag, at least in part because with labor abundant there is little incentive to boost it. All of these measures suggest an economy that had substantial slack even before the pandemic hit.
In an economy with significant slack, the danger is not spending too much, but spending too little. Leaving labor and other productive resources unused does not save them up for the future. They just go to waste.
On the other side, we have the ongoing climate emergency, and a level of inequality and economic insecurity that calls into question the basic legitimacy of our political institutions. Our children will not thank us if we pass these problems on to them, while depriving them of good schools and other public services. Indeed, if we squander this unique opportunity to deal with the problems that only government is capable of addressing, that could fairly be called the most irresponsible federal policy in 40 years.
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