The Washington PostDemocracy Dies in Darkness

Do deficits matter anymore? Biden’s first budget signals they don’t.

The president’s budget predicts a $1.8 trillion deficit for 2022 and deficits of $1.3 trillion for years to come to fund big investments in education, infrastructure and the social safety net.

President Biden replaces the cap on his pen after signing the “Paycheck Protection Program Extension Act of 2021” into law on March 30. (Jonathan Ernst/Reuters)
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President Biden waited to release his first budget until Friday afternoon of a holiday weekend, a signal that the White House wasn’t looking for a lot of attention on its proposal to spend $6 trillion in 2022 — a roughly 35 percent increase from pre-pandemic-era federal government spending.

Many of the initiatives Biden wants to spend more on are popular with the public. He’s calling for more money for education, research, roads and bridges, high-speed Internet for all, universal pre-K, safety-net programs and expanded home health care for the elderly. All together, Biden is proposing the kind of massive expansion of the federal government’s role in the economy not seen since World War II. And, initially, it would be largely funded by borrowing money.

At heart, Biden’s budget is a clear statement that many Democrats no longer worry about deficits.

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The Biden administration predicts a $1.8 trillion deficit in fiscal year 2022 and roughly $1.3 trillion each year after that for the next decade. It’s a departure from the thinking of President Barack Obama’s administration, which made an effort to bring down the deficit significantly in his second term as the economy improved. Under Biden’s plan, much of the deficit reduction would come after he leaves office.

According to the White House, this additional spending will produce the economic equivalent of happily-ever-after. The nation will enjoy faster growth, full employment and modest inflation that never rises above 2.3 percent, a magic number that would not require the Federal Reserve to take any heavy-handed action. In short, there would be no negative side effects.

Economists, Wall Street investors and the broader public are weighing whether this happily-ever-after economics is believable. Former treasury secretary Larry Summers, a veteran of the Bill Clinton and Obama White Houses, is among those warning loudly that such a massive infusion of government spending so quickly could cause unwanted inflation, in which prices of everything from rent to food rise sharply. Sustained inflation is hard to get rid of and would require the Federal Reserve to try to stop it, probably by raising interest rates. That, in turn, usually triggers a recession.

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This first Biden budget also leaves out some core policy promises from the presidential campaign trail. Biden has called on Congress to find ways to raise the minimum wage to $15 an hour, forgive some student debt, lower the Medicare age to 60, reduce prescription drug costs and create a public-health-care option. But these policies are not included in the actual budget projections, and some of them would add substantial additional costs.

The key debate going forward is: Do large deficits still matter?

Old economic textbooks taught that running big deficits to fund government spending would lead to unwanted side effects such as overheating and inflation. But a growing number of economists say this is a unique moment in time to borrow cheaply and make investments in education and infrastructure that will pay off for years to come.

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What complicates this discussion is that the deficit picture is likely to look worse than the Biden team shows. The tax increases on corporations and the wealthy that Biden proposes to raise new revenue wouldn’t provide enough money to pay for the new spending until about 15 years out. And that’s the best-case scenario. Congress actually has to approve all the tax hikes, which appears unlikely. The rosy budget projections also include substantial savings from former president Donald Trump’s tax cuts expiring at the end of 2025 along with Biden’s expanded child tax credit sunsetting. Both would mean a big tax increase on the middle class, violating one of Biden’s campaign pledges.

Top White House officials are quick to emphasize that the time is right to make these big investments. Borrowing is cheap now, they argue, and thus won’t burden the nation with hefty debt service payments down the line. Biden’s key focus, they say, is getting millions of Americans back to work quickly and ensuring that the nation remains competitive with China.

“The president’s budget improves the long-term fiscal outlook because his policies are more than paid for over the long run,” acting budget director Shalanda Young told reporters Friday. “Failing to make these investments at a time of such low interest costs would be a historic missed opportunity that would leave future generations worse off.”

Part of the Biden administration’s shift in thinking on deficits is political. Democrats have a rare moment when they control both chambers of Congress and the White House, and they are eager to go big to get as many policy priorities accomplished ahead of the midterm elections as possible. Many Democrats also felt burned after they scaled back some spending in the early Obama years to try to appease Republicans, and the GOP still largely blocked Obama’s agenda. And they are angry that Trump ran up the deficit, adding to it each year he was in office.

But there is also an economic reality driving this new thinking on deficits. Interest rates are currently at zero, and the Federal Reserve has signaled rates are unlikely to move up before 2024. Investors around the world are also still eager to buy U.S. government debt. Oxford Economics analyst John Canavan noted especially high demand for 10-year government bonds, which allows the United States to lock in low rates for years to come.

This debate about what’s ahead will also be influenced by what’s happening right now. These are unprecedented times, and no one really knows how this will play out.

Not since the Great Depression was the economy in such a big hole as it was in the spring of 2020. And now, in the spring and summer of 2021, the economy is bouncing back at a rapid pace that’s unheard of. There were a record 8.1 million job openings in March, the Labor Department reported, and data from job-search sites indicates it could easily hit 10 million when data comes out for April and May. That kind of light-switch-back-on effect has never happened. Most recessions see much more gradual rebounds. Businesses are trying to adjust, including when determining what wages to pay and prices to charge.

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Already April inflation has come in higher than expected. The widespread expectation is that prices will continue to rise this summer as there’s a rush to travel, eat at restaurants and buy products again. The debate is whether prices keep climbing into next year and beyond.

Treasury Secretary Janet Yellen, a veteran of the Clinton administration and former Fed chair, has argued that any risk of inflation and overheating can be controlled.

In testimony before Congress this week, Yellen encouraged lawmakers and the public to focus on keeping debt service under control. As long as the U.S. government is not spending more money on debt service, there should still be plenty of funding for other priorities.

According to White House projections, debt service costs rise by just $31 billion in 2031 from the Biden agenda, a negligible amount. But analysts, especially on the right, point out those costs would rise significantly if interest rates move higher.

“This math only works if interest rates remain low,” said Brian Riedl, former chief economist to Sen. Rob Portman (R-Ohio). Riedl now is at the conservative Manhattan Institute. “If interest rates rise, interest costs will spike.”

Ultimately, Biden is asking for big, bold change driven by a substantial spending increase from a nation more accustomed to gradual policy tweaks. He wants America to ignore the deficit for a while. It’s a big ask.

Andrew Van Dam contributed to this analysis.