Why Biden will need to spend big

WHAT should US presidential candidate Joe Biden's economic policy be if he wins (and Democrats take the Senate, so that he can actually pass legislation)? I am pretty sure I know what his economists think he should do, but I am not equally sure that everyone on his political team fully gets it; and I am worried that the news media will experience sticker shock - that is, they may not be ready for the price tag on what he should and probably will propose.

So here is what everyone should understand: Given the current and likely future state of the US economy, it is time to (a) spend a lot of money on the future and (b) not worry about where the money is coming from. For now, and for at least the next few years, large-scale deficit spending is not just OK - it is the only responsible thing to do.

Today's column will be about the economics; I will talk about the politics another day.

First things first: If Mr Biden is inaugurated in January, he will inherit a nation still devastated by the coronavirus. President Donald Trump keeps saying that we are "rounding the corner", but the reality is that cases and hospitalisations are surging (and anyone expecting a lame-duck Trump administration to take effective action against the surge is living in a dream world). And we will not be able to have a full economic recovery as long as the pandemic is still raging. What this means is that it will be crucial to provide another round of large-scale fiscal relief, especially aid to the unemployed and to cash-strapped state and local governments. The main purpose of this relief will be humanitarian - helping families pay the rent and keep food on the table, helping cities and towns avoid devastating cuts in essential services. But it will also help avoid a downward economic spiral, by heading off a potential collapse in consumer and local government spending.

The need for big spending will not, however, end with the pandemic. We also need to invest in our future. After years of public underspending, America desperately needs to upgrade its infrastructure. In particular, we should be investing heavily in the transition to an environmentally sustainable economy. And we should also do much more to help children grow up to be healthy, productive adults; America spends shamefully little on aid to families compared with other wealthy countries.

But how can we pay for all this investment? Bad question. You sometimes hear people saying that the government should be run like a business. That is a poor analogy in many ways. But for what it is worth, think of what smart businesses do when they face great investment opportunities and have access to cheap capital: they raise a lot of money.

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We have just seen that the US government needs to invest large sums in the future. What about access to capital? The answer is that there is a global savings glut - the sums individuals want to save persistently exceed the sums businesses are willing to invest. And this situation - private savings all dressed up with nowhere to go - translates into extremely low government borrowing costs. In February, before the coronavirus sent us into recession, the average interest rate on long-term inflation-protected US bonds was minus 0.12 per cent. Yes, it was less than zero.

NOT A MAJOR PROBLEM

Under these conditions it would actually be irresponsible for the federal government not to engage in large-scale borrowing to invest in the future.

But should we not be worrying about running up more government debt? No.

When a government can borrow at low interest rates, and in particular when the interest rate on debt is well below the economy's long-run growth rate, debt just is not a major problem. It does not pose any threat to the government's solvency; it does not in any meaningful way compete with private investment.

And just to be clear, I am not pushing a radical, heterodox view here. At this point, arguing for large-scale deficit spending and a relaxed attitude towards debt is entirely mainstream. You hear arguments along these lines from the former chief economist of the International Monetary Fund, centrist top economists from the Obama administration, and (discreetly) Jerome Powell, the chairman of the Federal Reserve.

Non-partisan private sector analysts are also remarkably high on the economics of Biden's spending proposals. Moody's Analytics predicts that real gross domestic product would be 4.5 per cent higher under Mr Biden's plan than under a continuation of Trump policies; Goldman Sachs says 3.7 per cent. Neither is worried about the effects on debt.

So there is an overwhelming economic case for Mr Biden - if he wins! - to go big on spending, first to get us through the pandemic he will inherit, then to build a better future. But will politics get in the way?

It is a given that Republicans, who turned silent on deficits under Mr Trump, will suddenly declare debt an existential threat with a Democrat in the White House. The real questions are whether centrists and the news media will buy into deficit hysteria, the way they did in the Obama years, and whether members of the Biden team will lose their nerve.

More on those risks in a future column. NYTIMES