While government policies rarely have major effects on the overall growth rate of the economy, they can have dramatic effects on people’s quality of life.
Numerous reports on the Biden administration’s budget proposal, released on Friday, make it appear huge. Headline-grabbing President Joe Biden wants to spend SIX TRILLION DOLLARS next year. (Sorry, I can’t help but do my best to emulate Dr. Evil.) You have to dig to learn that the baseline – the amount the administration estimates we would spend next fiscal year without news. policies – is $ 5.7 trillion.
In fact, one of the most striking aspects of Biden’s budget initiative – arguably about his entire administration – is its relative modesty in terms of both money spent and statements about what. these expenses would accomplish. He does not propose or promise a revolution, just policies that would dramatically improve the lives of Americans.
And I, for one, find it extremely refreshing after the old guy’s unsuccessful bombast.
Now, the Biden plan is by no means trivial. The budget proposes to spend 24.5% of GDP over the next decade, up from the benchmark 22.7%. This increase, mainly due to increased spending on infrastructure and families, is larger than it appears, as a large part of the baseline is devoted to the military, medicare and social security. But it is not socialism either. It would still leave the United States with a smaller government than most other rich countries.
Still, the extra spending would make a huge difference in some economic sectors, including renewables, and significantly improve the lives of some Americans, especially those of low-income families with children.
Notably, however, the administration is do not claiming that these policies would dramatically accelerate economic growth. Guy’s former economists predicted that their policies would produce sustained GDP growth of 3% per year, which would have been extraordinary in an economy with barely growing working-age populations. Biden economists are forecasting growth of less than 2% after the economy rebounds from the pandemic.
Why this modesty? In part, this may be a political strategy: Biden likes to under-promise and over-deliver, as he did with vaccinations. Administration economists are actually quite optimistic, for example, that childcare and other family policies would expand labor force participation and that investing in children would produce benefits. big long-term economic returns.
But they also know the story. Governments can do a lot to fight short-term recessions (or make them worse), but the point is that it is very difficult for policies to make a big difference to the long-term growth rate of the economy.
This is something the right has never understood. (It’s hard to get people to understand something when their salary depends on not understanding it.)
The Conservatives constantly claim that tax cuts, in particular, will stimulate growth; they like to quote Ronald Reagan’s alleged economic triumph. But Reagan only presided over a few years of very rapid growth as the economy recovered from a severe recession. During the 1980s the economy grew only 0.015 percentage point faster – essentially a rounding error – than it did in the struggling 1970s.
And a broader analysis of history, both at the national and state levels, shows that predictions that tax cuts will produce economic miracles have never happened – not once. By the way, there are also no predictions that tax hikes, like the higher levies on corporations and the wealthy that Biden is proposing, will spell disaster.
So it makes sense that the Biden administration is avoiding making big claims about economic growth. But does that mean his plans aren’t important? Not at all.
You see, while government policies rarely have major effects on the overall growth rate of the economy, they can have huge effects on the quality of people’s lives. Governments can, for example, ensure that their citizens have access to affordable health care; they can dramatically reduce the number of children whose lives are marked by poverty. The Biden Plan would take great strides on these and other fronts.
And it is in this sense that the Biden plan, despite its relatively moderate price, represents a radical break with past economic policy.
For the past four decades, the American economic debate has been dominated by an ideology fundamentally opposed to spending money to help ordinary citizens: we cannot borrow more for fear of causing a debt crisis. We cannot raise taxes on those who can afford to pay for fear of destroying their incentive to create wealth.
The Biden budget, however, reveals an administration liberated from these fears. The budget does not propose huge deficit spending, but it does point out that the federal debt burden, properly measured, is minimal. And administration officials have made it clear that they do not buy into low-tax propaganda.
You could say that what matters most in this budget is not so much the money it brings in as the dogma it rejects. And if Biden’s presidency is seen to be successful, this ideological liberation will have enormous consequences.
Paul krugman, Nobel Laureate in Economics, is a columnist for the New York Times.