A Biden-led plan that is overly protectionist is a much greater inflation threat than a plan that isn’t paid for in the traditional deficit-neutral budgetary sense. This framework — based on the principles of Modern Monetary Theory — redefines fiscal responsibility by flipping the age-old question “How will you pay for it?” The real challenge is “How will you resource it?”
Senator Bernie Sanders of Vermont recently hinted at this approach when he told Politico: “You don’t start off by coming up with a sum and working down. You start out by looking at the needs that need to be addressed and adding them up.” The next step is to figure out how to budget your available real resources to deliver on those priorities.
Modern Monetary Theory is not alone here. For a historical outlook, we can revisit what John Maynard Keynes proposed in “How to Pay for the War: A Radical Plan for the Chancellor of the Exchequer,” a lesser-known work of his. To the contemporary ear, the title suggests that Keynes was trying to figure out how to come up with the money to finance World War II spending. He wasn’t.
Keynes understood that the British government, which controlled its national currency, could create all the money needed. The purpose of the book was to show the government how to scale up and sustain higher levels of spending while containing inflationary pressures along the way. It noted the soldiers, bombers, tanks, combat gear and more that would be needed to prosecute the war and how the entire economy would need to be reoriented, quickly, to supply those things.
Biden’s 2022 Budget
- A new year, a new budget: The 2022 fiscal year for the federal government begins on October 1, and President Biden has revealed what he’d like to spend, starting then. But any spending requires approval from both chambers of Congress.
- Ambitious total spending: President Biden would like the federal government to spend $6 trillion in the 2022 fiscal year, and for total spending to rise to $8.2 trillion by 2031. That would take the United States to its highest sustained levels of federal spending since World War II, while running deficits above $1.3 trillion through the next decade.
- Infrastructure plan: The budget outlines the president’s desired first year of investment in his American Jobs Plan, which seeks to fund improvements to roads, bridges, public transit and more with a total of $2.3 billion over eight years.
- Families plan: The budget also addresses the other major spending proposal Biden has already rolled out, his American Families Plan, aimed at bolstering the United States’ social safety net by expanding access to education, reducing the cost of child care and supporting women in the work force.
- Mandatory programs: As usual, mandatory spending on programs like Social Security, Medicaid and Medicare make up a significant portion of the proposed budget. They are growing as America’s population ages.
- Discretionary spending: Funding for the individual budgets of the agencies and programs under the executive branch would reach around $1.5 trillion in 2022, a 16 percent increase from the previous budget.
- How Biden would pay for it: The president would largely fund his agenda by raising taxes on corporations and high earners, which would begin to shrink budget deficits in the 2030s. Administration officials have said tax increases would fully offset the jobs and families plans over the course of 15 years, which the budget request backs up. In the meantime, the budget deficit would remain above $1.3 trillion each year.
We’ve all grown accustomed to thinking about taxes as an important source of revenue for the federal government. That’s in part because it’s easy to think of the federal government as being like state and local governments, which without sufficient revenue — from income taxes, property taxes, sales taxes and more — could not finance their operations. Yet these entities don’t have the federal government’s currency-issuing powers, which greatly changes the spending capacity of government.
In 1945, a man named Beardsley Ruml delivered a fiery speech before the American Bar Association titled “Taxes for Revenue Are Obsolete.” He wasn’t a crank. He was the chairman of the New York Federal Reserve Bank. As Mr. Ruml explained in that speech, taxes first and foremost help to avoid a situation where too much money chases after too few goods: “The dollars the government spends become purchasing power in the hands of the people who have received them,” he said, while “the dollars the government takes by taxes cannot be spent by the people.”
More recently, economists like L. Randall Wray and Yeva Nersisyan have begun to think about how to pay for a Green New Deal using Keynes’s earlier “radical” framework. And even if one were to accept the terms of the old deficit-oriented budgeting currently favored in Washington, going even bigger on infrastructure, if executed carefully, is still doable: Larry Summers, the former Obama White House senior economist, admitted in 2014 that “public infrastructure investments can pay for themselves” and that “by increasing the economy’s capacity, infrastructure investment increases the ability to handle any given level of debt.”
We face enormous intersecting crises: a climate crisis, jobs crisis, health crisis and housing crisis, among others. It is going to require a lot of money to do what is necessary. As Kate Aronoff recently wrote in The New Republic, “To meet the emissions targets outlined in the Paris Agreement, experts estimate the United States government will need to spend at least $1 trillion annually.” And the White House’s infrastructure proposal, while historically ambitious, still falls far short of the scale of the problem.
Ms. Ocasio-Cortez pointed out, for instance, that Mr. Biden’s plan has a $40 billion investment in public housing for the entire nation but New York alone may have that level of need.
By focusing on how much revenue they think they can raise from a broad array of tax increases on the well-off, Democrats risk allowing the scope of their ambitions to be governed by the dated framework of fiscal responsibility in Washington and the political appetite for tax increases, rather than what is truly possible based on logistics in the real economy.
The Bureau of Labor Statistics, the Federal Reserve, the Treasury Department and other agencies that track labor force participation, price increases and supply shortages can be tasked with developing a specific dashboard of blinkers and warnings to alert to problems.
If Congress and the White House want to be responsible stewards of both society and the U.S. dollar’s value, then rather than focusing on taxation of the rich, they should prioritize and supply exactly what it would take, in terms of real resources, to electrify the nation’s power grid, repair every deficient bridge, give caretakers a living wage, upgrade our railways, and deliver clean drinking water and high-speed broadband to every home. How many people will it take to do all of that work? How much steel, concrete and fiber optic cable? How many tower cranes and other kinds of building equipment will be needed? The list goes on.
These are the questions we should ask our leaders, and the ones they should be asking themselves — not “How will we pay for it?”
Stephanie Kelton, a professor of economics and public policy at Stony Brook University, is the author of “The Deficit Myth” and a senior fellow at the New School’s Schwartz Center for Economic Policy Analysis.
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