Chronic. By approving the $ 1 trillion (€ 890 billion) infrastructure bill, the US Congress has taken a significant step forward in implementing President Biden’s fiscal agenda. But what will happen to his second project, the $ 1.7 trillion program for social spending and the fight against global warming? In its non-partisan wisdom, will the Congressional Budget Office (CBO) accept that it be funded entirely by additional taxes and other levies, as moderate Democrats obviously want?
In a way, this is the debate the United States needs. So-called moderate Republicans and Democrats insist that physical infrastructure and social infrastructure should not be deficit-financed. After spending trillions of dollars to help the victims of the pandemic, the United States already has gaping deficits. Opponents of the new spending say they cannot afford to do more.
Profitable public investments
This argument ignores the fact that the debate is about public investment, and not just about helping households and consumer spending. Productive public investments are profitable if they increase gross domestic product (GDP). This is the case with the physical infrastructure that facilitates the unloading of containers, their transport by truck to warehouses and the distribution of their contents allowing producers to increase the efficiency of global supply chains. Better infrastructure increases GDP, which translates into more tax revenue for debt service and debt repayment.
This is true for investments in social infrastructure: preschool education and the right to lifelong learning improve workers’ productivity. It also applies to investments devoted to the fight against global warming, insofar as this expenditure makes it possible to avoid destructive weather events that lead to a decrease in GDP.
The challenge is to proceed in stages, so that the consolidation of public finances does not aggravate the existing fiscal drift.
The debate on these programs tends to revolve around values. But it should be about the rate of return and the investments that are self-financing. Would an increase in deficit financed spending not create excessive demand, thus worsening inflation which is becoming worrisome? Many programs that fuel the deficit will end by the end of 2021. According to the CBO, the deficit / GDP ratio will decrease by 13.4% this year to 4.7% in 2022.
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