I’ve lost count how many times I’ve heard or read this false narrative over the past week, usually accompanied by the administration’s rallying cry to “Go big!” and a warning that the risk of doing too much is less than the risk of doing too little. There’s nothing like message discipline to cover up exaggeration, misconception and faulty economic logic.
In reality, the $1.9 trillion figure that has taken on totemic importance in the liberal bubble has less to do with economics than with the political necessity to placate the Democratic base and avenge more than a decade of Republican obstructionism.
Don’t get me wrong: There are lots of good ideas in Biden’s rescue plan. Some are even urgent, such as the funds for coronavirus testing and vaccination, extending unemployment benefits and the eviction ban, and getting cash to restaurants and other genuinely small “small businesses.” Indeed, they are so good and so urgent that they could pass the Congress this week with bipartisan support. The only reason it’s not happening is that Democrats would rather hold them hostage, packaging them with less-urgent and more-controversial policy initiatives unlikely to pass on their own.
That’s not to say that increasing the minimum wage and expanding the earned income, child and child-care tax credits shouldn’t be a top priority for a new Democratic president and Congress. Lifting the working poor out of poverty is a most worthy goal, and these proposals already have bipartisan backing. But if the aim is to permanently expand the economic safety net — which it clearly is — then these initiatives should be subject to extensive hearings and thoughtful debate. Ramming them through on a party-line vote as part of a relief package not only undermines the claim of urgency but raises the risk that Republicans will respond in kind by trying to undo them when they get back in power.
The White House and its allies also undermined their credibility by characterizing the bill as desperately needed relief for Americans who have lost their jobs, can’t feed their children, have lost their health care and are about to be evicted from their homes — and then offering $1,400 per person tax “refunds” to households with incomes as high as $300,000 (on top of $1,800 in earlier checks from the Treasury). This is a transparently partisan gambit to placate the populist left and make good on a campaign promise made by Biden and the two new Democratic senators from Georgia. But it’s never been clear how Democrats came up with these must-have numbers. Why $1,400 and not $2,800? Or how about $5,600? To suggest this provision is scientifically calibrated or targeted to those in need is, as Biden might put it, malarkey. That’s why the administration is already working to revise it.
One plausible reason for insisting on $1.9 trillion is that a package that large is needed to replace the sharp drop in household income and private spending caused by the pandemic. But as Lawrence Summers, who served key roles in both the Clinton and Obama administrations, points out in a recent column, the $3.5 trillion in fiscal stimulus that has already been provided is enough to replace the lost household income many times over. In fact, much of the money has wound up in household bank accounts, which are now at least $1.6 trillion higher than they were at the start of the pandemic. The problem isn’t so much that households in the aggregate don’t have enough money to spend or are too scared to spend it. It’s that because of the pandemic, they can’t spend it on many of the things they’d like to. Another big slug of fiscal stimulus won’t change that.
Moreover, once the pandemic is brought under control later this year and life can return to something closer to normal, those savings, combined with a whole lot of pent-up demand, is likely to trigger a surge in spending that, according to the Congressional Budget Office, will bring economic output above where it was before the pandemic, with the unemployment rate dropping to 5.3 percent by the end of the year.
That doesn’t mean that we shouldn’t spend what it takes to end the pandemic while providing financial support to the minority of households that have lost jobs and income. Another relief bill is necessary. But it does mean that the economy can recover and grow at pre-pandemic rates by borrowing and spending something less than $1.9 trillion.
So if $1.9 trillion is too big, what is the right number? That’s as much a political question as an economic one, but my back-of-the-envelope calculation shows that something on the order of $900 billion would do the trick. That would be enough to get the pandemic under control, extend unemployment benefits without cutting them, provide support for small businesses and even send $1,000-per-person checks to working-class households to help those struggling to pay for food, rent, health insurance and child care.
In addition, Congress could create a revolving fund of several hundred billion dollars to lend to cash-strapped states to deal with revenue shortfalls and the added expenses associated with the pandemic, including whatever is needed to safely reopen schools. The loans could be at zero interest for 20 years, with no payments due for five years. States, in turn, could make those funds available to cash-strapped cities, counties and transit systems.
Making these loans rather than grants would make them more palatable to Republicans who have resisted giving more aid to state and local governments. The program would be voluntary, so states that didn’t need or want the loans — and there are some — wouldn’t have to borrow. The numbers Democrats are proposing ($170 billion for schools and universities, $350 billion for state and local aid) look to be way more than what would be needed to deal with problems that will be largely be resolved in the coming months as the pandemic recedes. That sum — over $500 billion — is more than the annual discretionary spending of the Departments of Agriculture, Commerce, Education, Energy, Housing and Urban Development, Justice, Labor and Transportation combined. When I asked the White House to explain how it came up with those numbers, officials couldn’t provide an explanation.
The Democrats’ rationale for a $1.9 trillion package — and not a penny less — also reflects a fundamental misconception about the economy and economic policy. Too many have come to believe that government, can control the course of the economy by cleverly turning a handful of dials that have been installed in the basement of key agencies in Washington. This mechanistic conception is a dangerous conceit. Economics is not a hard science, and economies are too complex and subject to too many random events for anyone to say with confidence that anything less than $1.9 trillion would invite economic disaster.
It is also a measure of the polarization of our politics that the message of every political campaign is that American society will cease to exist as we know it if the other party wins. We are constantly being told that we are only one election away from woke multicultural socialism without God or guns, or a Christian white-nationalist plutocracy.
This scaremongering has proved wildly successful in turning out the base on Election Day. But when it spills over from campaigning to governing, any compromise becomes a crushing defeat and morally unacceptable. That’s long been true of the tea party right, and I’m afraid it is where too many Democrats are now.
The greatest threat to the American economy won’t come from a government that fails to go big on the next coronavirus relief package. It will come from a government that is unable to solve big problems and respond to challenges because warring political factions refuse to negotiate and compromise.