President-elect Joe Biden will face serious fiscal policy challenges as soon as he takes office. A hoped-for V-shaped recovery from the
Covid-19 pandemic has turned into a something that looks more like a
long-tailed Nike swoosh. Business closings, mostly classed as temporary back in
March and April, are, increasingly, proving to be permanent. Short-term
unemployment is falling, but long-term unemployment and involuntary part-time
work are increasing. Evictions and foreclosures loom over cash-poor working-classfamilies, who are estimated to have accumulated as much as $70 billion in back
rent owed. Meanwhile, state and local governments, whose spending is
constrained by balanced-budget rules, are laying off teachers and fire
fighters. The trade deficit remains high and the Fed has no room left to cut
rates to stimulate investment.
In a normal world, such a situation would cry out for fiscal
stimulus. Ominously, however, the deficit hawks of the Republican party, who
slept through the badly timed and budget-busting Tax Cuts and Jobs Act of 2017,
are starting to stir. They said “No” to any last-minute stimulus before the
2020 election, and their appetite for austerity will be ravenous once they are
fully awake. If Republicans hold their majority in Congress, they will have a
major role in determining policy in 2021, so little is going to get done
without at least a scintilla of bipartisanship.
“But,” you say … “Aren’t the budget hawks right this time? Just
look at the numbers!”
Yes, they are right to point out that under current policies, as
measured by the Congressional Budget Office, the federal debt is rising fast.
It is about to exceed its previous record as a percentage of GDP and it is
projected to go on rising for the next 30 years. But those raw numbers tell us
little of use for fiscal policy. A rational set of budget rules neither
automatically precludes nor condones large budget deficits or a debt ratio that
rises over time. To understand what a rational set of budget rules would actually
look like, read on.