The right answer is not to pivot to deficit reduction immediately. We had reservations about the size of the newly approved bill; the $350 billion allocated to state, local and tribal governments and U.S. territories, in particular, seems excessive given their strong recent tax revenue recovery. Nevertheless, there is a case for borrowing to meet a crisis as great as the one the pandemic imposed on public health and the U.S. economy. Though the recent rise in interest rates is a reminder that the market’s appetite for government bonds can still operate as a constraint, those costs remain modest by historical standards. The uptick is mostly an indication that the economy is strengthening — thanks in no small part to previous support from both Congress and the Federal Reserve.
As Mr. Biden and the Democratic Congress move to infrastructure, however, they should plan to offset some or all of the cost, through higher revenues, reduced spending on lower-priority items or a mix of the two. The latest Congressional Budget Office projections show the federal debt on course for exponential growth after this decade, reaching twice the size of the economy by 2051 — whereafter it continues to rise. This estimate does not include the covid bill, which had not yet passed when the CBO produced its report on March 4.
Debt that large and uncontrolled would be both unprecedented in U.S. history, and, the CBO notes, risky: “Debt that is high and rising as a percentage of GDP boosts federal and private borrowing costs, slows the growth of economic output, and increases interest payments abroad. A growing debt burden could increase the risk of a fiscal crisis and higher inflation as well as undermine confidence in the U.S. dollar, making it more costly to finance public and private activity in international markets.”
To pay for the next big spending bill would hardly qualify as austerity at a time when the government is on course to borrow more than 10 percent of gross domestic product in the current fiscal year and another 5 percent in the 12 months beginning Oct. 1. Rather, it would constitute a prudent hedge against the long-range risks of excessive debt, in part by reassuring financial markets that the U.S. government does not intend to meet all of its additional needs without exercising its power to tax. Paying for new spending would keep Mr. Biden’s own campaign promises, which included a number of proposals to raise more money through rolling back some of the tax cuts his predecessor, President Donald Trump, showered on wealthy individuals and corporations. Mr. Biden has already showed himself to be more decent than Mr. Trump; now he can set a better example of responsibility.