Politics needs fiscal constraints

With Joe Biden days away from signing a $1.9 trillion COVID-relief package, most Democrats are ecstatic. To paraphrase one liberal pundit, it feels like nothing less than the definitive end of the Reagan era and the start of a new one in which progressives act more boldly than they have since the 1960s.

For starters, the bill is enormous. Whereas the 2009 stimulus was 5.5 percent of 2008 GDP, the relief package that passed the Senate this past weekend is 9.1 percent of 2020 GDP — and it comes on the heels of the $900 billion relief bill that went into effect less than three months ago, which itself came just nine months after the massive $2.2 trillion CARES Act.

Then there's the fact that the bill was passed without much if any hand-wringing on the part of Democrats. Biden proposed $1.9 trillion, and that's what he got. It wasn't an opening bid that was whittled down in interminable negotiations with Republicans. Democrats just passed it on a party-line vote after a minimum of trivial adjustments to placate a handful of moderates in their own party. More than ObamaCare, and certainly more than anything Bill Clinton attempted, this represents a sea-change in Democratic thinking. It's the kind of self-confident policymaking, undertaken without constant self-doubt, that we haven't seen from the left side of the aisle in over half a century.

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It was made possible by the worst pandemic in a century shutting down large swaths of the economy for a year. But there's also something else, and far more sweeping, going on behind the scenes, and that is a change in perceptions about fiscal constraints. Many Democrats have come to believe that the longstanding conventional wisdom about the limits of responsible deficit spending was wrong. That is having enormous — and unnerving — effects on how they think about policy.

Until recently, policymaking took place in a bounded world, with fiscal limits set by the assumption that the federal debt shouldn't be permitted to get too large as a percentage of the economy. Yes, the government can and should play a vital role in building and financing the nation's productive capacity through borrowing — and it should use deficits to tame the business cycle. But this spending needs to be strictly restrained.

Today, mainstream Democrats don't so much believe that there are no limits at all — though some popularizers of Modern Monetary Theory might come close to such a fanciful view — as they think the limits need to be radically rethought. Exactly how high can our deficits and debt rise before we see a surge in inflation and interest rates? If we reached full employment and continued deficit spending, we'd get a spike in inflation — and possibly far more than a spike. On the other hand, if the Fed started selling bonds instead of buying them, we'd see a dramatic surge in interest rates. But other than in those situations, there's no reason not to continue spending vastly more than we take in from tax revenue. That's the thought that has Democrats feeling so giddy.

It's not a feeling I share or believe we should be encouraging — for three distinct if interrelated reasons.

For one thing, we're blowing through limits based on current economic conditions, but those conditions could change rapidly at any time. In an illuminating and troubling tweet thread and Substack post, Bloomberg economic columnist Noah Smith admitted that the U.S. is running a risk of inflation — and potentially even ruinous hyperinflation — from its spending habits. But he also noted that economists can't say how great the risk of the worst-case scenario really is, because they don't yet understand what triggers it. What economic research does appear to show is that a transition from the very low inflation of the past several decades to a hyperinflationary reality would likely be preceded by sharp but not (yet) calamitous rise in the inflation rate. Averting disaster in such a situation would require a drastic and painful change of course.

Is this something we could accomplish in time to prevent disaster? I have my doubts. As Smith's analysis makes clear, an economic doomsday scenario is clearly out there somewhere down the road we're currently walking. We just don't know if the bottomless pit is 10 feet or 10 miles away — and the road is dark, potentially leaving us very little time to avert a fatal fall. Under such circumstances, is it really wise for us to keep on our current path just because we haven't yet reached the abyss?

But I'm also concerned with scenarios in which circumstances change somewhat less suddenly, necessitating longer-term belt tightening. That's because spending creates constituencies that come to depend on it. What at first seems like a bonus — thousands of dollars arriving from Washington to supplement incomes, child-care expenses, and other costs of daily life during a once-in-a-century pandemic — quite quickly becomes a new baseline and set of expectations. Once that happens, reverting to the status quo ante can become extremely difficult in political terms, rendering crucial spending cuts nearly impossible.

My final concern is broader, having to do with what could happen in a society that grows accustomed, even briefly, to a politics without fiscal limits. After all, if we can spend $1.9 trillion on COVID relief without even entertaining tax hikes to pay for it, why not $4 trillion? Or $10 trillion? Or the estimated $60 trillion or $97 trillion in spending that Sen. Bernie Sanders' 2020 presidential campaign proposed?

If we don't have to worry about constraints, shouldn't we immediately implement single-payer universal health care regardless of the cost, while also transforming the economy from top to bottom to combat climate change, and forgiving everyone's student-loan debt? And why not continue to spend $700 billion a year, or more, on the military while doing it? And combine all those spending plans with tax cuts, too, because who wouldn't be better off with lower taxes?

Politics is about making choices, prioritizing among competing goods, weighing costs against benefits, making tradeoffs — all of it under conditions of constraint that provide elected officials with a multitude of fully justified, reasonable excuses for failing to eliminate every kind of hardship. But what if there are no constraints forcing us to choose, prioritize, think about costs and benefits, and make tradeoffs? Under those circumstances, politics could turn ugly fast, as expectations rocket into the stratosphere and every failure to alleviate suffering or rectify injustice begins to look like an act of malice or outright indifference.

In a world where everything is possible, every failure, shortcoming, or delay becomes an occasion for indignation — which means that politics in such a world would be cutthroat and volatile, quite likely even more so than the significant turbulence we've endured over past several years.

So by all means be pleased that the Biden administration is doing so much to provide relief during a still-ongoing national crisis. But also be worried about what it could portend for our economic and political future.