The Delicate Deficit Dance That Will Define Biden’s Presidency

It was fascinating to watch Treasury-secretary designate Janet Yellen and several Republican members of the Senate Finance Committee dance their delicate deficit dance at Yellen’s confirmation hearing yesterday.

For her part, Yellen had to pitch President Biden’s willingness to “act big” with substantial new spending programs that would add trillions of dollars to the $20 trillion national debt. But, at the same time, the former chair of the Federal Reserve Board acknowledged the importance of long-term fiscal sustainability. As she told one senator, she’d be a “voice of fiscal sanity” for the Biden presidency.

A two-step

GOP senators had to manage their own two-step. As Republicans often do when they are not in power, they warned about the effects of high deficits on future generations. With Biden about to become president, they were sending an unsubtle message about their reluctance to support his big dollar spending programs.

Yet, they supported the 2017 Tax Cuts and Jobs Act that added nearly $2 trillion to the deficit over 10 years, mostly by cutting taxes for high-income households and corporations at a time when the economy was relatively robust. And yesterday, even as they expressed grave concern for high deficits, they fiercely defended the TCJA, especially its corporate tax cuts.

Thus, they were left with two arguments:

The first was to renew their long-standing calls for scaling back Social Security and Medicare for a growing population of older adults. Yet, such cries sound hollow for a party that was unwilling to pursue that agenda even when it controlled Congress and the White House in 2017-2018.

The second was their call to better target the pandemic relief President-elect Biden proposed last week. They especially focused on his promise to add $1,400 to the $600 in relief payments Congress approved in December. Individuals making up to $75,000 and joint filers making $150,000 would be entitled to the full payments while individuals making as much as $115,000 and couples making as much as $230,000 would get partial payments.

Not giving an inch

Yellen, however, was not giving an inch—at least not yet. Yes, she said, some higher-income households who may not need the assistance would get payments. But, she added, plussed-up unemployment benefits (another Biden proposal) would not help people who have had to drop out of the labor force and thus are ineligible for jobless assistance. As a for-instance, she mentioned mothers who have quit their jobs to care for children who must attend school remotely due to the pandemic.  

On the narrow merits, Republicans have the better of this argument. Biden could save money, help those who need it most, and do a better job stimulating demand by targeting those relief payments more effectively. Capping them at, say $50,000 instead of $75,000, would still help those in need.

But on the broader question of whether now is the time to worry about long-term budget deficits, Yellen has the better case. As she and Biden have said repeatedly, the most important steps the government can take to get the economy back on track are in public health: Distributing vaccines and accelerating testing. Right behind is supporting state and local governments that are having to slash their own spending on public services. All that will cost more money than Congress has authorized.

Avoiding a trap

Yet, Yellen—and Biden—have to be careful not to fall into a GOP trap. They say there is no need to worry about short-term fiscal deficits. But Biden has almost $3 trillion in proposed tax increases on high-income individuals and corporations sitting in his back pocket—something many on the Democratic left are demanding for their own sake.

Biden has promised a second big spending bill, including for infrastructure and other programs. If he wants to use those tax increases as a way to pay for those new initiatives, a what-me-worry message on the national debt won’t do.

Yellen told the Finance Committee that the incoming Administration is not yet sure how it would pay for a second round of spending—new taxes or borrowing. But if the decision is higher taxes, the Biden team will have to pivot away from its current lack of concern about fiscal red ink.

The deficit dance always is a delicate one, and you can expect both parties to continue to disco for some time to come.

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