The $3.5 trillion (or more) federal spending proposal now under consideration has some worthy components, but on the whole is concerning. It’s too large and expensive, and funding it would cause negative dynamic responses through the economy. Here’s a brief overview.
The U.S. already has a very large debt burden due to decades of enormous deficits due to poorly conceived fiscal policy, unfunded and inefficient spending programs, and tax cuts based on faulty projections. Both major parties are culpable. This situation was made worse by extensive deficit spending over the past 18 months associated with COVID-19. Most of these outlays were appropriate and needed to keep families, small businesses and key sectors viable during a genuine emergency situation, but they nonetheless limit flexibility going forward. Interest expense is becoming an increasing percentage of the federal budget, and higher rates are likely down the road. Any conversation about new programs must be viewed within this framework.
To put it simply, the proposed new programs are much too large to undertake at this time. There are parts of these initiatives that represent genuine governmental objectives and pressing priorities that have been neglected for too long; they should be discussed, enacted and prudently funded. The basic infrastructure bill falls into this category, as do some pieces of the larger package. Others are either well-intentioned but misguided efforts to address global climate concerns (more on that later), or represent a level of social engineering that is inconsistent with the way market-based economies are designed to function. Decades of experience teach us that simply throwing federal dollars at something doesn’t often lead to optimal outcomes and that better results may be (and have been) achieved through properly structured incentives and private initiatives.
While some politicians have been saying that this massive program won’t cost anything, that’s simply not correct. Such statements assume that policy actions to increase revenues (namely increasing taxes, another topic that I will address soon) will be enough to pay for the new spending. Any scoring that shows these large, all-encompassing packages as self-funding are based on accounting tricks and a limited time horizon that does not fully capture all of the dynamic effects which play out over a longer period.
The large social spending packages of the past were debated and implemented over periods of years if not decades. Sweeping change was only enacted after thoughtful consideration of overall priorities and development of a meaningful, if not unanimous, consensus, which is not the case at present. While there is clearly room for and need for improvement in some areas, we are simply not in a fiscal position to implement trillions in new programs in one fell swoop.
Economist Ray Perryman is president and CEO of the Perryman Group, an economic research group and analysis firm based in Waco.