The US Capitol building in Washington on August 1 Samuel Corum / Getty Images
America desperately needs to start investing in itself.
And you can easily afford it.
But the path to a better future has been blocked by partisanship and misguided concepts of fiscal rectitude.
That is why I am pleased to see members of Congress adopt budget gimmicks.
The background: The Senate appears to be on the verge of passing a bipartisan infrastructure law, that is, one that will receive the support of a large enough minority of Republican senators to overcome parliamentary obstructionism.
The law falls short of what the country really needs;
It will be up to the Democrats to fill in the gaps with additional legislation that they must pass through the reconciliation procedure.
Still, it's a great political achievement, especially after "infrastructure week" became a running joke in Trump's time.
More information
Democrats and Republicans unblock the debate on Biden's infrastructure plan in the Senate
But how has the Senate gotten to this point?
The politics were pretty obvious: infrastructure spending is hugely popular, and a significant number of Republicans didn't want to be seen as complete obstructionists.
What was not clear, however, was how the expense would be financed.
On the surface, Republican demands should have made it impossible to reach an agreement.
Republican senators were opposed to raising taxes.
They also blocked proposals that gave the Internal Revenue Service (IRS) resources to pursue widespread tax evasion, a stance that even cynics like this server have found somewhat scandalous.
What kind of party is more or less openly on the side of wealthy tax crooks?
Yet Republicans were insisting at the same time that the new spending be paid, as opposed to, say, the tax cut they passed in 2017, which, as they cheerfully (and falsely) asserted, would pay for itself. So how have they solved it? Basically, based on concealment; much of the alleged financing would come from accounting tricks. Specifically, much of it would derive from “reallocating” money from aid programs for covid-19 that ended up costing less than expected, ignoring others that had cost more than expected. In other words, it could be said that investment in infrastructure would be paid for in smoke and mirrors. (The Congressional Budget Office agrees.) And that's okay. In fact, it's probably a good thing.
To understand why, we must analyze the arithmetic of debt in a time of low interest rates. Suppose the federal government was asking for a trillion dollars right now, to use a round number, and that it did so without establishing any provision to pay off the additional debt. That is, it would not collect taxes or cut expenses to pay the principal; he would not even do anything to cover the interest on the debt, and would simply ask for more money as the interest matured.
In these circumstances, the debt would increase over time. But it wouldn't increase very quickly. The current interest rate on long-term US debt is less than 1.2%, so that, in a decade, the debt would only increase by around 13%. And the growth of the economy would far exceed the increase in debt: the Congressional Budget Office predicts a 50% increase in nominal GDP over the next 10 years. Debt would not accumulate excessively, but rather, relative to the economy, it would be diluted.
So the fact that the infrastructure law actually paid for public investment with borrowed money is nothing to worry about. If the investment is worth it - and it is worth it - we should make it. And what about concerns that increased spending would be inflationary? This is where we need to have a sense of relative magnitudes. We are talking about expenses that would be spread over a decade, a decade during which the budget office estimates that the total GDP of the United States will be 287 trillion dollars. Thus, even a public investment of several trillion dollars would amount to only a moderate fiscal stimulus as a percentage of GDP, and any inflationary impact could easily be controlled by a slightly tighter monetary policy.
Now, the exclusively Democratic part of the public investment program will include some real sources of new revenue, if only to satisfy the moderates who are still overly concerned about debt. But when it comes to finding these "means of payment," the Republican Party's refusal to raise taxes or even attempt to collect those owed under current law may have done Democrats a favor. Why? Because they can now afford much of what they want with extremely popular policies.
Polls consistently show strong support for higher taxes on multinationals and the wealthy. I have not seen polls related to forcing wealthy fraudsters to pay what they owe, but I think I can assume that this measure would be even more popular. So Republicans have offered Democrats a golden opportunity to show that they are fiscally responsible and that they are on the side of hard-working American workers, not defrauding elites. Essentially, of course, we shouldn't be having this debate. In a better world, politicians would point out that governments, like businesses, sometimes have to go into debt in order to make productive investments.
But if politicians feel the need to hide what they're doing with a few tax tricks, that's better than not investing.
Creative accounting in search of a better future is not a vice.
Paul Krugman
is a Nobel Laureate in Economics © The New York Times, 2021. News Clips translation.
