President Joe Biden today unveiled a budget proposal that would increase U.S. federal spending to levels not seen since World War II. As usual, the new president’s proposed budget has already triggered a fierce debate. But while we can expect the usual scrum over spending details, the Biden budget is an attempt to push forward and leverage a much broader ideological shift. The coronavirus pandemic has made government spending and programs significantly more appealing to Americans.
It’s something of a perfect storm. The budget arrives after coronavirus pandemic relief proved hugely popular and seemingly effective. Longer-term rising inequality and other serious social problems have created more space for pro-government voices like U.S. Sen. Bernie Sanders. Meanwhile, conservative deficit hawks have been marginalized by the rise of Donald Trump. That creates a scenario friendly to the return of big government.
David Z. Morris is CoinDesk's chief insights columnist.
But, of course, all that comes with a cost. An increasing embrace of government spending could not only lead to a long-term debt hangover, but could also fuel rising inflation. That could further increase interest in one of the major arguments for bitcoin: that it can act as an inflation hedge against currencies like the dollar. Rising inflation was a key factor in investor Ray Dalio’s recent endorsement of bitcoin at CoinDesk’s Consensus 2021 event this week. The idea is still relatively untested, especially in the U.S., but Americans’ shifting attitudes and Biden’s legislative agenda could create a real-world showcase of how bitcoin responds to rising government spending, debt and inflation.
The Biden budget would increase discretionary spending for 2022 by 8.4%, according to The Wall Street Journal, and overall nondefense spending would rise 16%. The proposed budget for 2022 would total $6 trillion. Biden also lays out proposed spending for the next decade, which according to the Congressional Budget Office would push U.S. federal debt to 117% of GDP by 2031, a level widely considered risky to an economy. Notably, the Trump administration’s pre-pandemic tax cuts and spending had already had a similar effect, setting a course for the same level of debt by 2035.
Instead of tanks and bombers for fighting Nazis, Biden’s big spending push would be focused on improving Americans’ lives (the military budget would barely grow). Proposals include subsidized child care, tuition-free community college, paid leave for workers and big spending on transportation and utility system upgrades. The budget would also increase government revenue by increasing the capital gains tax, and restoring corporate tax rates and some personal income tax rates to pre-Trump levels.
None of this is law yet and, realistically, much of it never will be. The White House budget proposal is largely a symbolic document, a way for an administration to signal what it wants – whether or not it can actually get it. Though Democrats technically have control of Congress, their ability to get legislation through depends on the support of centrist Democrat senators Kristin Sinema of Arizona and Joe Manchin of West Virginia. That’s just one reason there will likely be a lot of compromises as proposals become reality.
What’s really significant about the Biden proposal may be less its individual provisions than how it reflects major shifts in thinking about government spending. The Biden administration is framing its proposal as a strategic investment in the future of America, arguing that high spending now on things like infrastructure and education will create growth down the line. That’s been a tough argument to make in America during the past half-century of ideological dominance by the conservative stance that lower taxes and less spending are the best way to grow the economy.
But Biden’s case for public investment comes at a moment when Americans suddenly appear much more receptive to it. Most obviously, the coronavirus pandemic shrank the U.S. economy by 3.5% last year, creating an opportunity for accelerated government spending to pick up economic slack. This “Keynesian” approach to recessions was already put into action under President Trump, whose Treasury Secretary Stephen Mnuchin championed a nearly $1 trillion emergency relief program.
American support for that and subsequent relief programs has been high, even among Republicans who have long opposed such spending. That reflects another shift that seems likely to make deficit-fueled spending more popular: The rise of Donald Trump as the effective leader of the Republican Party has reduced the traction of traditional conservative ideas, including balanced budgets.
That big-spending approach to economic relief has already shown success: Despite shrinking dramatically for the year, the U.S. economy actually grew at a more than 4% annualized rate in the last quarter of 2020, and 6.4% in the first quarter of 2021. U.S. GDP is now expected to exceed pre-pandemic levels by the end of June. The usual point of comparison here is with the 2008 financial crisis, when some argue a more limited federal relief effort led to sluggish growth that dragged on for nearly half a decade. It’s not an entirely apples-to-apples comparison because of the deep structural roots of the financial crisis, but many Americans appear to have taken the contrast as a vindication of Keynesian deficit spending.
The success of relief programs so far, of course, is also the argument against continued high government spending: Maybe we’ve already done enough, and the economy is well on its way to being fine. In addition to recovering GDP, for instance, the standard measure of unemployment now stands at just 6.5%, down from a terrifying 17% in April of 2020. Continued high government deficit spending into a relatively healthy economy, critics say, risks causing higher inflation. Inflation has already risen to a 13-year high, though there’s some reason to believe that’s a temporary effect of pandemic-driven shortages and reopening demand.
But the Biden budget is ultimately looking well beyond COVID-19 to try to address deeper economic problems that the administration argues are holding the U.S. back.
Here again circumstances give Biden a major advantage when it comes to selling his proposal to the public. Though the U.S. response to the pandemic got off to a rocky start, the ultimate success of relief and vaccination programs seems to have actually increased Americans’ faith in government and their belief that government can play a positive role in their lives. According to a Johns Hopkins survey from October of last year, the share of U.S. adults who support an “active government role in society” rose from 24% to 34%.
The Biden proposal is an attempt to leverage that higher faith in government towards longer-term goals than pandemic relief. In many cases, the measures are responses to problems that have been allowed to fester for decades under the tax cuts and austerity that Ronald Reagan made the lodestar of U.S. policy. Disinvestment in public utilities, roads, bridges and dams has left them increasingly at risk of catastrophic failure, with massive economic costs. The failure of the Texas power grid in February, for example, could incur costs as high as $195 billion, as well as causing a number of deaths. That’s far more than it would have cost to prevent the failure, which was caused by inadequate winterizing of power plants before a major, predicted, drop in temperature in the region.
The best example may be education, where declining funding for public universities has played a major role in increasing student debt loads. Biden’s proposal to spend more to support community colleges would help address that in the long term, and his budget may include more direct student debt relief. But what might be most significant is that 90% of Democrats and 68% of Republicans support government action to ease student debt burdens.
Student debt relief is popular because it would make life easier for many individuals right now. But the deeper argument for spending more on education is, again, that it would increase long-term growth. The focus on community colleges is a great illustration of how this might work, since those schools often teach trades like welding and machining that have seen major worker shortages.
Those shortages not only increase expenses for businesses by driving wages up, but also hamper innovation and have other broad harmful effects. Lack of skilled machinists in the U.S., for instance, was a major hurdle to scaling up domestic PPE manufacturing in response to the pandemic. Longer term, America’s “skills gap” is also making it more difficult to bring manufacturing operations back to American shores, another major Biden policy priority.
So that’s the theory, spending more now to improve the economy down the road. Even something like Biden’s child-care subsidy, which might be tempting to view as a mere handout, could be supported on economic grounds. The pandemic pushed millions of women, including many high earners and innovators crucial to the success of the broader economy, to stay home. Child care could help them get back to work.
But what about that huge bill? The least outlandish defense is simply that with wise investment now, real economic growth will make it easier to pay off debts down the road. But the Biden proposal’s enshrinement of permanent deficits as a normal and uncontroversial part of the U.S. budget is much harder to rationalize, even from the most progressive perspective. The pandemic has convinced many Americans for the first time that the government has a legitimate and positive role to play in their lives, but the bill for all that help does eventually come due.