Tuesday, September 14, 2021

Understanding Government Spending and All That

by Neil H. Buchanan

Last week, I wrote what one might charitably describe as an unrestrained response to Senator Joe Manchin's continued attempts to use cliches and (at best) half-truths to defeat his Democratic colleagues' current spending proposal.  They plan to supplement the physical infrastructure bill that Manchin supports with a "human infrastructure" bill, which is merely a way of saying that the government would invest in improving human beings' ability to function in the economy.  Manchin only wants the bricks-and-mortar bill.

The gist of my argument was that Manchin is engaged in shameless pandering and intellectual dishonesty, an argument that was easy to support by looking at Manchin's own words.  After writing that column, however, I had an "academic moment," in which I returned to a scholars' best instinct: Take a person's words as if they were offered in good faith and ask whether his arguments leave room for reasoned debate that could ultimately converge toward a meeting of the minds.
Again, my honest reading of the available evidence is that Manchin is engaged in excuse-making and misdirection, with no evidence that he is interested in being moved to a new position by facts or logic.  But if I am wrong about that, what would I say to try to get him to budge from his current stance?

My first attempt to answer that question is currently under consideration as an op-ed at a major newspaper.  If it is published, I will surely write a followup column here on Dorf on Law.  If, however, the piece is rejected (as almost all such submissions are), I will post it in its entirety here, most likely this Thursday.

In the meantime, I want to expand my frame of reference beyond Manchin, using his recent antics as an opportunity to think about the general run of public myths and right-wing lies about government spending and deficits.  Manchin might be the person whose drinking of the anti-government Kool-Aid has put him in the current spotlight, but he is not saying anything at all new or evenly mildly innovative.

Manchin is, in fact, peddling what Paul Krugman calls zombie ideas -- assertions that have been disproved over and over again, only to rise up again and eat Republicans' (and Joe Manchin's) brains.  There is, unfortunately, an almost endless army of such zombies, from lies about the 2020 election to claims that tax cuts pay for themselves.  But government spending and budget deficits are my bread and vegan butter, so I am especially familiar with the zombies in this area of policy analysis.

Some of the necessary responses to claims like Manchin's have to do with simple matters like timing.  Manchin is running around saying things like: "Do we have the urgency to spend another $3.5 trillion right now?"  But that is a classic straw man, because no one is talking about spending anything like that amount right now.  The Democrats' plan spreads it out over ten years, and even the first year's approximately $300 billion would be spread out over a twelve-month period, not dropped into the economy in full on Day One.

That matters not only for intellectual honesty but because it radically changes how we think about whether the bill is excessively stimulative.  This bill is not, especially in light of the growing evidence that the economy is weaker than we thought and that the sector-specific price spikes that we saw this summer are already fading.

But let me go back to Econ 102 and try to summarize the two fundamental issues as expeditiously (I dare not say "efficiently") as possible:

1. Is the spending (too) stimulative?

The debate about whether the Democrats' plan would stoke inflation is a subset of the more basic issue of whether any government spending would have an immediate stimulative impact.  The simple fact is that every bill that creates new spending is stimulative to some extent, even if that is not why the bill was enacted.  So, for example, even though Krugman was right in one sense to repeatedly correct people who called the first spending bill under Joe Biden a "stimulus bill" (where Krugman's objection was that we were simply trying to keep the economy afloat, not goose it to greater heights), it is true that failing to adopt that bill would have disastrously contracted the economy.

But admitting that a bill is in some basic sense stimulative (or anti-contractionary) is hardly the end of the story.  Some types of spending are more stimulative than other types, and even a fully "paid for" bill -- where every dollar of new spending is offset by one dollar of additional revenue -- can be stimulative in the aggregate, through what is called the balanced-budget multiplier.
In my column last week, I began by referring to the Democrats' current proposal as a bill that "is now widely known as the Democrats' $3.5 trillion infrastructure budget bill."  I used that somewhat indirect phrasing to emphasize that calling it a $3.5 trillion bill allows the Manchin types to confuse us into believing that it will all hit at once, as I noted above, but also because that $3.5 trillion label ignores the tax side.  Even though there is no good reason to increase taxes to pay for the kind of spending that is in this bill, Democrats are trying to offset about half of the total spending with progressive taxes.

I continue to believe that the Democrats' tax proposals are fine ideas on their own, and if they have to be married to the human investment bill, that is okay with me.  But it is worth pointing out that, as good as these tax proposals are, they will not be anti-stimulative, precisely because they are progressive.  That is, people who would pay the bill's new taxes are so wealthy that they would not need to cut back on their spending.  So the spending side's stimulative effects will barely be offset by those taxes, if at all.

Which means that we do need to understand the context in which this bill is being proposed.  With a still-weak economy, and an annual impulse of barely more than one percent of GDP from the spending, this is not going to do much to boost output within the business cycle, and it will have virtually no inflationary effect.  Any bill could be too big, too fast, and introduced in an already overheated economy.  This bill is none of that.

2. Is the spending (sufficiently) focused on investment?

A little more than ten years ago, I had the sudden realization that much of my professional time was spent making various forms of an argument that amounted to something like this: "Conservatives say that their anti-government policies must be adopted in order to help future generations, but in fact it is liberals whose policies will help future generations the most."

Mostly, that argument takes shape around conservatives' claims that deficits "crowd out" private investment, meaning that the economy will shrink (at least relative to a meaningful baseline, which itself if probably growing) over time, making future generations poorer than they otherwise would be.  Liberals, for reasons that I will go back over in a moment, say that spending can make future generations richer.
Once I saw that both sides in fact agreed on a fundamental decision rule -- we should only adopt policies that help future generations, and we should reject all policies that harm future generations -- things became much clearer.  I have written in other places that it is worth asking why everyone across the political spectrum agrees so readily on what is in fact a very contestable rule.  Why do we unquestioningly assume that current generations need to do more for future generations than we already do?  When would we know that we have done enough?  Why does everyone agree with this rule only when it comes to GDP growth, but not for minor sideshows like, I don't know, global climate collapse?

But the debate over the Democrats' current bill contains no nuance and merely relies on the old framework.  Manchin and other economic conservatives say that we will harm future generations by spending too much.  Liberals say that we can invest in the future by spending money on high-economic-payoff programs, such as family leave policies, green energy growth, child-friendly health and education spending, and so on.

Conservatives fervently believe that every dollar of government spending is and inevitably always will be wasted, but that is a matter of religious-like faith, not evidence or logic.  And although Manchin says that we need to slow down to study the situation more carefully and make sure that we only spend money on productive investments, he is acting as if we are writing on a blank slate and know nothing about how public investment works.  Although there is a lot of snark from the conservative side thrown at empirical studies showing that government investments can increase future economic growth -- sometimes with spectacular returns on the dollar -- the evidence is overwhelming that both physical and human investments can be great for future growth.

And to be clear, this is for the benefit of future generations, not us.  Although some people today will be hired to work on those investment projects, they could have instead been hired to do something that directly benefited people today.  I admire K-12 teachers, and I would not want them to quit their jobs to do something else (like being party planners); but we need to remember that every resource that we put into making future generations richer is a resource that we are choosing not to enjoy using for ourselves today.

Asking whether the Democrats' spending bill is sufficiently growth-oriented in the long run -- not stimulative in the sense of bringing us out of a temporary slump, but raising future living standards overall -- is thus a somewhat subtle question.  If the spending in the bill is stimulative enough that it raises future living standards, Manchin should be satisfied (although I doubt that he would allow himself to believe the overwhelming weight of scholarly analysis).  But even if some of the spending does not translate into higher future incomes, is that necessarily bad -- especially if the people who take today's jobs to try to increase future growth would otherwise remain poor?

After all these years, it continues to amaze me how much political nonsense surrounds what is in fact an analytically simple set of issues.  Zombie anti-government ideas always have an audience, so they will continue to shamble along.  For those of us whose brains remain in our heads, however, the current situation is in fact not difficult to comprehend.  Under current circumstances, the types and amounts of spending that Democrats are proposing are not too stimulative, and they will be spent over time on things that help people both today and in the future.