The Scale We Need: How Deficit Spending Can Boost Biden’s Infrastructure Investments

May 12, 2021

In scale, the recently announced American Families Plan (AFP) joins the American Jobs Plan (AJP) as an ambitious break from decades of failed neoliberal economic ideas. But while their combined $4 trillion in public investment exceeds previous US policy responses to economic crises—for instance, the American Recovery and Reinvestment Act of 2009 provided a woefully inadequate $840 billion—they are not enough.

To ensure that recovery translates into lasting and equitable prosperity, we need much more government investment. But instead of matching additional spending to restrictive revenue-raising offsets—“pay-fors”—the federal government can take on necessary additional spending through the deficit. 

There is little risk of inflation or “overheating,” since after a year of historic job loss and depressed demand, the US economy is well below full potential (and was even before the pandemic). And with today’s low interest rates, there is no risk of a debt spiral. In fact, additional spending through the deficit to fund new public initiatives is a huge benefit to the economy.

As the pandemic continues, the US faces both health and economic crises. Simultaneously, the climate emergency persists, and could cost the US economy $1.9 trillion annually in direct damages by 2100 if we don’t invest at scale now. Together, all of these crises will have especially tragic consequences for Black, brown, and Indigenous communities that have long suffered from systemic racism and underinvestment.

A full and equitable recovery and long-term prosperity are not inevitable, but will be the culmination of ambitious and sustained government investment in critical areas: infrastructure, childcare and caregiving, higher education, and clean energy. The AFP offers a good down payment on these mounting problems, but falls short of sufficiently tackling them. 

The US federal government has the means and the ability to manage these crises and make bigger investments with deficit spending, circumventing the need for pay-fors to raise revenue or reduce spending elsewhere. The case is clear in both the long and short term: More public investment—like what the AJP and AFP begin to do in clean energy, childcare, higher education, and physical infrastructure—would provide needed relief to struggling workers and families and boost demand in hard-hit industries.

Crucially, further spending will help us recover equitably. Marginalized and low-income workers—especially women and BIPOC, who have been hardest hit by the economic fallout of the pandemic—are the very workers who benefit most from the tighter labor markets that additional spending will bring. When jobs are scarce and workers are abundant, workers have little bargaining power, and wages stagnate. Only with significant additional spending that prompts strong demand and tightens labor markets will it be possible for these workers to achieve higher wages and enhanced benefits.

Additionally, more investment now—especially that which isn’t attached to other spending reductions—will put us on a higher growth path well into the future. Infrastructure investment pays for itself in future increased economic capacity and productivity, and the same people who acquire new jobs and skills through the AFP will continue to benefit from those jobs and skills for the rest of their lives. Similarly, further spending to combat climate change will spur clean technological innovation that will stimulate yet more growth long-term. 

Deficit spending is also fiscally responsible, given current economic conditions. When interest rates are lower than growth rates—as is true today—a permanent increase in public spending (no matter how large) will always result in the debt ratio stabilizing. In other words, today’s low interest rates—likely to continue for the foreseeable future—mean there is extremely little economic risk with more large-scale deficit spending. 

Thus, we need not attach spending offsets—like tax increases—to government spending except for those that are important reforms in their own right. Progressive tax reform is good: Taxing the rich to provide for a better economy and society makes both moral and economic sense. But we can’t allow pay-fors to constrain the scale and timing of government investment—determinations that must be based on economic need.

The AFP and AJP both call for several long-overdue tax reforms that will help rectify the tax code’s bias for corporations and the uber-wealthy: an increase in the corporate tax rate to 28 percent, an increase in the ordinary income tax rate for the highest-earners to 39.6 percent, and the elimination of incentives and loopholes for corporations to offshore jobs and shield profits. (Note: Even with these reforms, the US tax regime will still privilege the wealthy and well-connected, and rates for the highest earners will still be much lower than they were for most of the 20th century.)

During his campaign, President Biden endorsed several other progressive tax reforms, including an increase to the estate tax, a higher income cap on the payroll tax that funds Social Security, and the elimination of various deductions that business owners use to hide profits. Policymakers should promptly pursue all of these reforms—not to pay for spending, but for their inherent fairness.

The pandemic and economic downturn have devastated millions of lives and livelihoods. The combined $4 trillion in public spending outlined in the AFP and the AJP is much-needed, but still not nearly enough to overcome the underinvestment of the last 50 years and the existential crises underway. 

The US can—and must—invest more now to ensure lasting and equitable prosperity. For the scale we need, more deficit spending is a must.

For more Roosevelt analysis of the American Jobs Plan and American Families Plan, click here.