ECONOMICS Bloomberg Businessweek August 10, 2020
DATA:U.S.DEPARTMENT*MEDIANFORECASTSOFTHETREASURY,BASEDONCOMPILEDA BLOOMBERGBYBLOOMBERG;SURVEYOFPEWECONOMISTSRESEARCH25Joe Biden, who’s warned about the dangers of
budget deficits for decades, will inherit one of the
biggest in U.S. history if he becomes president—and
he’ll be in no rush to pare it back.
That’s the signal the Democratic candidate is
sending after his campaign rolled out a $3.5tril-
lion economic program over the past month that
promises to invest in clean energy and caregiving,
buy more made-in-America goods, and start nar-
rowing the country’s racial wealth gaps.
The bill for this agenda is modest compared
to the universal health-care and student loan
forgiveness plans backed by some of Biden’s pri-
mary season rivals. Still, it would come right
after the U.S.’s multitrillion- dollar effort to pull
its economy out of a pandemic slump. This year’s
budget shortfall is forecast to exceed 17% of gross
domestic product, the most since the country
mobilized to fight World War II.
All that red ink might have been a problem for
past incarnations of Biden. First elected to the
U.S. Senate in the 1970s, he has a history of urg-
ing fiscal restraint. In the 1990s he twice voted
for unsuccessful Republican efforts to make bal-
anced budgets compulsory by amending the
Constitution. And as a presidential candidate in
2007 he signaled that he would consider trimming
spending on Social Security and Medicare in the
interest of sound public finances.
Since then there’s been a sea change in
American politics and economics. It began
while Biden was vice president in the Obama
administration. Concerns that too much stimulus
was being pumped into the economy and might
trigger higher inflation proved unfounded. Instead,
the drawn-out recovery highlighted the opposite
risk: premature belt-tightening after a recession. “It
took us 11 years to get back to full employment. One
key reason was that lawmakers went from fiscal
support to fiscal austerity much too quickly,” says
Mark Zandi, chief economist at Moody’s Analytics.
“It’s pretty clear that was a mistake, and hopefully
we don’t make that mistake again.”
“The attitudes around deficits and debt in all
circles—academic, political, economic—were very
different,” Zandi says. The shift was gathering
pace well before the pandemic as the U.S. ran big-
ger budget deficits under President Trump without
any sign of inflation surging, the dollar weakening,
or the flight from U.S. bond markets that Wall Street
analysts used to warn about.
In recent years, several prominent economists—
including some who are now part of the Biden
brain trust, such as former U.S. Treasury Secretary
Lawrence Summers—have downplayed the risks of
deficits in an era of feeble economic growth and
rock-bottom borrowing costs. Modern Monetary
Theory has gained a following, especially in the left
wing of the Democratic Party. MMT argues that a
country with its own currency has room for more
government spending as long as inflation doesn’t
get out of hand. Stephanie Kelton, a leading MMT
economist, was a member of the task force jointly
convened by Biden and Senator Bernie Sanders of
Vermont to seek policies the party can unite around.
Fiscal hawks were driven further into retreat by
Covid-19, which brought more pressing problems
such as Depression-era levels of unemployment as
the economy shrank at a 33% annual pace in the
second quarter. Biden retains a “laser focus on○ Kelton○ Summers○ The Democratic nominee
is willing to spend big on issues
such as climate and inequality
0%-1 0-201975 2022
FORECAST*
Biden on Deficits
U.S. budget balance
as a share of GDP
orsheplans
axes.
“irresponsible
sugar-hightaxcutshad
alreadypushedusinto
a trillion-dollar deficit.”a balancedbudget
amendment tothe
Constitution.
“I amoneofthose
Democratswhovoted
fortheconstitutional
amendmenttobalance
the budget.”fora one-yearfreeze
onallfederalspending.
“Whilethisprogramis
severe,it is theonly
proposalthatwillhaltthe
upward spiral of deficits.”in a seriesofbills
tocurbgovernment
spending.
N
R
CApr
CoJanuary 2019
Ina survey,44%
ofDemocratssay
deficitreduction
is a highpriority,
vs. 65% in 2013.January 1985
BacksRepublican
legislationseeking
tointroduce
a line-item veto.