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Biden’s big financial bet on America’s future

Last time, the US budget deficit as a percentage of GDP was double digits. over 1 year It was during World War II. Joe Biden was just a toddler. Few people heard of Harry Truman. As Biden approaches his first 100 days as president, the size of the dice throws is beginning to shrink. In terms of US economic share, Biden’s fiscal expansion is many times higher than Lyndon Johnson’s “gun and butter” spending. This heralded the arrival of the recent era of high inflation in the United States.

No one knows if Biden’s new spending of about $ 5 trillion will lead to runaway inflation. Former US Treasury Secretary Lawrence Summers, Take the risk Inflation is about one-third. He gives the same odds to the prospect that the United States will continue to enjoy non-inflationary growth. In terms of its value, inflation expectations in the US bond market have jumped in the last few weeks.But neither the bond market nor most economists foresaw. Inflation era It was a “great stability” that began in the late 1960s or replaced it in the 1980s.

There is no doubt that Biden is taking risks. What is questionable is the composition of his gambling.Biden put most of his financial chips at $ 1.9 trillion American rescue plan It passed last month. This was an exciting bill for an economy that didn’t need much aggregate demand. Last year it added more than $ 3 trillion in stimulus.

By comparison, his suggested $ 2.3tn American Employment PlanWell-known as the infrastructure bill he proposed last week, is small. At least half of the spending has little to do with infrastructure, but is distributed over eight years. This means less than $ 300 billion is added to federal investment annually. Given that Biden’s “better buildback” plan was the centerpiece of his campaign, the end result is surprisingly modest.

This leads to a strange situation where both centrist Summers and socialist Bernie Sanders are saying about the same thing. Sanders believes Biden’s infrastructure charges are too low. Summers believes the stimulus was too great. Both may be correct at the same time. As a rule, it is worth emphasizing that investment spending is less inflationary than stimulus, as it boosts long-term productivity growth.

What are the political risks? Biden’s logic was that it would be better to make the first invoice as large as possible, as he may not get a second chance. That may be true.The prices of moderate Democrats such as: West Virginia Senator Joe ManchinDemands support for his infrastructure bill. This transaction may reveal a partially funded proposed corporate tax hike. It could also get stuck in demanding wealthy Democratic taxpayers, such as New York, to get their state income tax refunds back (Donald Trump removed most of them in the 2017 tax bill).

Even without the tax increase, Republicans will probably unanimously oppose it. The plan includes $ 80 billion in additional funding for Amtrak, the US rail system that conservatives will resurrect as a form of socialist transport. To understand its size, the total is about one-third. UK annual defense budget..

Nevertheless, the bill will be of great help to the amendment Decades of underinvestment On US roads, bridges, broadband and public housing. Biden’s upcoming $ 1 to $ 2 trillion “caring economy” bill makes education and worker training more affordable and gives U.S. parental leave rights to other wealthy nations Will match. All of these are terribly needed. Neither always occurs.

The risk is that Biden over-interprets the times. The pandemic has undoubtedly changed the political situation in the United States. It helped to defeat Trump. But did the coronavirus say that many observers claim the end of neoliberalism? I don’t know yet.

If Biden overshoots US Federal Reserve Republicans will reap the downside if they are forced to brake to control inflation or if new spending leads to a series of white elephant projects that reduce confidence in the government. In that case, Biden’s new era could turn into a one-time blip. His gambling is noble and can be rewarding. But it’s still gambling.

edward.luce@ft.com

Biden’s big financial bet on America’s future

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