What should Joe Biden’s economic policy be if he wins (and Democrats take the Senate, so that he can actually pass legislation)? I’m pretty sure I know what his economists think he should do, but I’m not equally sure that everyone on his political team fully gets it, and I’m worried that the news media will experience sticker shock — that is, they may not be ready for the price tag on what he should and probably will propose.
So here’s what everyone should understand: Given the current and likely future state of the U.S. economy, it’s time to (a) spend a lot of money on the future and (b) not worry about where the money is coming from. For now, and for at least the next few years, large-scale deficit spending isn’t just OK, it’s the only responsible thing to do.
Today’s column will be about the economics; I’ll talk about the politics another day.
First things first: If Biden is inaugurated in January, he will inherit a nation still devastated by the coronavirus. Trump keeps saying that we’re “rounding the corner,” but the reality is that cases and hospitalizations are surging (and anyone expecting a lame-duck Trump administration to take effective action against the surge is living in a dream world). And we won’t be able to have a full economic recovery as long as the pandemic is still raging.
What this means is that it will be crucial to provide another round of large-scale fiscal relief, especially aid to the unemployed and to cash-strapped state and local governments. The main purpose of this relief will be humanitarian — helping families pay the rent and keep food on the table, helping cities and towns avoid devastating cuts in essential services. But it will also help avoid a downward economic spiral, by heading off a potential collapse in consumer and local government spending.
The need for big spending will not, however, end with the pandemic. We also need to invest in our future. After years of public underspending, America desperately needs to upgrade its infrastructure. In particular, we should be investing heavily in the transition to an environmentally sustainable economy. And we should also do much more to help children grow up to be healthy, productive adults; America spends shamefully little on aid to families compared with other wealthy countries.
But how can we pay for all this investment? Bad question.
You sometimes hear people saying that the government should be run like a business. That’s a poor analogy in many ways. But for what it’s worth, think of what smart businesses do when they face great investment opportunities and have access to cheap capital: they raise a lot of money.
We’ve just seen that the U.S. government needs to invest large sums in the future. What about access to capital? The answer is that there’s a global savings glut — the sums individuals want to save persistently exceed the sums businesses are willing to invest. And this situation — private savings all dressed up with nowhere to go — translates into extremely low government borrowing costs. In February, before the coronavirus sent us into recession, the average interest rate on long-term inflation-protected U.S. bonds was minus 0.12 percent. Yes, it was less than zero.
Under these conditions it would actually be irresponsible for the federal government not to engage in large-scale borrowing to invest in the future.
But shouldn’t we be worrying about running up more government debt? No.
When a government can borrow at low interest rates, and in particular when the interest rate on debt is well below the economy’s long-run growth rate, debt just isn’t a major problem. It doesn’t pose any threat to the government’s solvency; it doesn’t in any meaningful way compete with private investment.
And just to be clear, I’m not pushing a radical, heterodox view here. At this point arguing for large-scale deficit spending and a relaxed attitude toward debt is entirely mainstream. You hear arguments along these lines from the former chief economist of the International Monetary Fund, centrist top economists from the Obama administration, and (discreetly) Jerome Powell, the chairman of the Federal Reserve.
Nonpartisan private-sector analysts are also remarkably high on the economics of Biden’s spending proposals. Moody’s Analytics predicts that real GDP would be 4.5% higher under Biden’s plan than under a continuation of Trump policies; Goldman Sachs says 3.7%. Neither is worried about the effects on debt.
So there’s an overwhelming economic case for Biden — if he wins! — to go big on spending, first to get us through the pandemic he’ll inherit, then to build a better future. But will politics get in the way?
It’s a given that Republicans, who turned silent on deficits under Trump, will suddenly declare debt an existential threat with a Democrat in the White House. The real questions are whether centrists and the news media will buy into deficit hysteria, the way they did in the Obama years, and whether members of the Biden team will lose their nerve.
More on those risks in a future column.
Paul Krugman, winner of the Nobel Memorial Prize in Economic Science, is an Op-Ed columnist for The New York Times.