The last time the US budget deficit as a percentage of gross domestic product was in double digits for more than a year was during the second world war. Joe Biden was just an infant. Few had heard of Harry Truman. As Biden approaches his first 100 days as president, the sheer size of his throw of the dice is starting to sink in. As a share of the US economy, Biden’s fiscal expansion is many times larger than Lyndon Johnson’s “guns and butter” spending, which ushered in the nation’s most recent era of high inflation.
Nobody can be sure whether Biden’s roughly $5tn in new spending will lead to runaway inflation. Lawrence Summers, the former US Treasury secretary, puts the risk of inflation at about a third. He gives the same odds to the prospect that America will continue to enjoy non-inflationary growth. For what it is worth, the US bond market’s inflation expectations have leapt in the past few weeks. But neither the bond markets nor most economists foresaw the era of inflation that began in the late 1960s or the “great moderation” that replaced it in the 1980s.
The fact that Biden is taking a risk is not in doubt. It is the composition of his gamble that is open to question. Biden put most of his fiscal chips on the $1.9tn American Rescue Plan that was passed last month. That was a stimulative bill for an economy that did not need much more aggregate demand. It came on top of more than $3tn of stimulus last year.
By comparison, his proposed $2.3tn American Jobs Plan, better known as the infrastructure bill, which he proposed last week, is small. The spending, at least half of which has little to do with infrastructure, will be spread out over eight years, which means it will add less than $300bn a year in federal investments. Given that Biden’s “build back better” plan was the centrepiece of his campaign, the end result is surprisingly modest.
Which leads to the odd situation where both the centrist Summers and the socialist Bernie Sanders are saying almost the same thing. Sanders believes Biden’s infrastructure bill is far too small. Summers believes the stimulus was far too big. Both may be right at the same time. It is worth stressing that investment spending is less inflationary than stimulus as, in principle, it boosts long-term productivity growth.
What is the political risk? Biden’s logic was that it was better to make the first bill as large as possible as he may not get a second chance. That may turn out to be true. It is still unclear what price moderate Democrats, such as Senator Joe Manchin of West Virginia, will demand for supporting his infrastructure bill. The deal could unravel over the proposed corporate tax increases that would partly fund it. It could also come unstuck over demands that state income tax rebates be restored to wealthy taxpayers in Democratic states such as New York (Donald Trump removed most of them in his 2017 tax bill).
Even without the tax increases, Republicans would probably unanimously oppose it. The plan includes $80bn in extra funding for Amtrak, the US rail system, which conservatives revile as a form of socialist transport. To give a sense of its size, that sum is roughly a third higher than Britain’s annual defence budget.
The bill, nevertheless, would go a long way to correcting decades of under-investment in US roads, bridges, broadband and public housing. Biden’s expected $1tn-$2tn “caring economy” bill, which he is expected to unveil soon, would also make education and worker training more affordable, and would bring US parental leave rights into line with other wealthy nations. All of which is badly needed. None of which will necessarily happen.
The risk is that Biden is over-interpreting the times. The pandemic has undoubtedly changed the political weather in the US. It helped defeat Trump. But did coronavirus herald what many observers insist is the demise of neoliberalism? That remains to be seen.
If Biden has overshot and the US Federal Reserve is forced to apply the brakes to control inflation, or new spending leads to a string of white elephant projects that lessen trust in government, Republicans would reap the downside. In which case Biden’s new era could turn into a one-term blip. His gamble is noble and could pay off. But it is a gamble nevertheless.