Democrats have long had a self-defeating desire to prove that they are America’s real party of fiscal responsibility, a pathology that has occasionally shined through as they’ve negotiated with Republicans over a potential infrastructure bill. Last month, for instance, a couple of GOP senators cracked the door open to paying for at least some of a bill with deficit spending—”is it something that is on the table? I think that’s probably accurate to say,” Alaska’s Lisa Murkowski said—only for Democrats to slam it back shut because they’d prefer to raise taxes on corporations and the rich. President Joe Biden, meanwhile, has himself said flatly that he’s “not willing to deficit spend.”
It will be a pity if Biden and the Democrats stick to that position. Whether they strike a deal with the GOP or decide to go it alone, insisting that every dollar of new road, bridge, or climate spending be paid is exactly the kind of self-torture that they ought to be avoiding. Moderates have already said they won’t go along with some of the tax hikes the White House has proposed to finance its broader agenda, which means that the way for Biden to avoid having to downsize his ambitions (what goes between pre-K and health care?) is to avoid promising to pay for everything in the first place.
Despite its supposed unpopularity, using deficit spending to fund big, one-time expenses like infrastructure upgrades and decarbonization actually makes economic sense. Even if you are a deficit hawk inclined to worry about the long-term impact of government debt, this is a completely reasonable instance to break out the nation’s credit card.
Part of the reason why is simply that interest rates are very low these days, which makes it a particularly good moment for the government to borrow and invest in projects that will spur the economy to grow faster in the long term (and, ideally, help the planet avoid climate catastrophe). The world’s investors are offering America a cheap line of credit if we want to make some much-needed upgrades to our roads, trains, and electric grid, and there’s no real reason to turn them down. Thanks to those rock bottom interest rates, the U.S. could add a trillion dollars or so to the debt right now without it making a massive difference to the longterm shape of the federal budget, which is mostly going to be determined by the costs of health care and Social Security. The federal debt held by the public is already around $22 trillion; bumping it up by 4 or 5 percent now won’t make or break anything. (Plus, the experience of heavy-borrowing Japan suggests the U.S. could possibly carry much higher debt without any catastrophic consequences.)
But there’s also any easy way for deficit-conscious lawmakers to choose a cautious middle ground that keeps the federal budget stable over the long-term while still using the government’s ability to borrow to its advantage. The trick is to pay for new infrastructure or climate spending with deficit spending up front, while raising taxes just enough to cover interest payments on the debt over time. It’d be a bit like if a car company decided to issue a bunch of bonds to fix up its production lines, and planned to just keep rolling them over while its profits grew.
To understand why that strategy makes sense, it helps to step back and think about what it means for the government to be “fiscally responsible.” Mainstream economists will tell you that it’s OK for the government to run a budget deficit, as long as the interest payments on its debt don’t start rising unsustainably high (you don’t want to end up in a situation where obligations to bond holders eat up a larger and larger share of the economy each year, until your only options are to pass draconian tax hikes, inflate away the debt, or default). As a result, it makes sense to pay for permanent programs that would otherwise add significantly to the deficit each year. But with big temporary expenses, like a war or historic decarbonization effort, it’s better to finance them with debt, then pay the cost down slowly over time. (This has been a mainstream idea in public finance since the late 1970s). One way to do that is to raise taxes slightly in order to cover the cost of interest, so that it doesn’t compound each year. As the years go on, the government’s revenues will grow with the economy, and both the principle and interest will become less of a burden, as they shrink compared to the country’s GDP.
I asked the Committee for a Responsible Federal Budget to calculate how much it would cost the government to just cover the annual interest payments on $1 trillion of new infrastructure or climate spending over the next two decades, assuming it didn’t compound. The grand total came out to $387 billion, over 20 years, or a modest $19 billion annually. (That’s about 2.6 percent of the current defense budget).
Another nice thing about this strategy is that Congress’s arcane rules also more or less encourage it. The budget reconciliation process, which Democrats will have to use to pass this bill if they don’t get bipartisan support, effectively requires that lawmakers cover the cost of permanent programs, but they don’t have to pay for temporary spending—that can add to the deficit. The only thing stopping Democrats from using debt smartly here is a misbegotten sense that the way to be responsible stewards of the budget is to avoid borrowing except in emergencies like COVID. In reality, you don’t have to be a deficit-phobe in order to be fiscally responsible. Democrats need to realize that before they shoot themselves in foot.
