It’s Fiscally Irresponsible Not to Spend More Money

Two people are standing in the way of trillions of dollars of investment in the U.S. economy. U.S. Sens. Kyrsten Sinema and Joe Manchin have repeatedly expressed opposition to U.S. President Joe Biden’s social infrastructure bill, ostensibly out of a commitment to fiscal responsibility. The price tag, they argued, is just too high. This might seem intuitively to be a reasonable concern about is now a $1.75 trillion bill. But when considered in detail, it’s just not.

Let’s talk about fiscal responsibility. Manchin and Sinema have argued the U.S. government is spending too much. Specifically, the social infrastructure bill might be fiscally irresponsible because it is likely to lead to inflation or excessive debt. The problem with this argument is inflation and debt are not, in fact, reasons to avoid spending.

Manchin, Sinema, and their ilk (i.e. all Republican Congress members) seem to believe there is a straightforward, causal relationship between government spending and higher inflation. But if we take a minute to think about this, it quickly becomes evident it is obviously untrue. Just consider all the times when the government spent significant sums and inflation didn’t occur. (Remember 2008, anyone?)

But we don’t even need to think that hard. After all, we have experts for this. Congress has established a very powerful and well-resourced set of experts dedicated entirely to preventing runaway inflation and maintaining price stability: the U.S. Federal Reserve. Those experts have clearly said inflation is not a concern right now. Some have even argued in favor of increased infrastructure spending. Unsurprisingly, the data supports this. Prices are rising in relation to last year’s pandemic prices, and prices are high for things effected by supply chain shortages. This is economics 101: Prices are high because supply and demand in the economy are adjusting to each other after a shock. This isn’t inflation; it’s the economy seeking equilibrium, and when it does, prices will stabilize. Moreover, a rise in prices is nothing to be afraid of. In fact, central banks all over the world have been trying to spark reflation of this sort for years. From their perspective, this is something to celebrate.

Furthermore, even if there was a real danger of inflation here, it is not clear that lower spending would be the solution. Inflation is the result of money sloshing around in the economy without a real, productive purpose. That is not the case when it comes to infrastructure spending. We know exactly where this money would go and what it would do. To put the same point differently, how much spending is too much from an inflationary perspective depends on what it is spent on. (As I’ve argued before in more detail, the economy is more like a garden than a bathtub.) A dollar might be too much if it is going directly into billionaires Jeff Bezos or Elon Musk’s pockets, but $1.75 trillion might not even be enough when it comes to investments in infrastructure, especially when we consider items like green energy, education, and parental leave—investments likely to produce stronger economic growth in the future.

In short, the experts commissioned by the government to worry about inflation are not currently worried, yet Sinema and Manchin seem determined to claim the proposed bill will spend too much. If inflation doesn’t give us reasonable grounds for this concern, perhaps something else will, such as excessive debt? That doesn’t work either. Since the mid-20th century, U.S. government borrowing has been disconnected from U.S. spending, and consequently, there is no guarantee that limiting spending will limit borrowing.

Prior to World War I, Congress authorized every specific instance of the U.S. government spending and borrowing money. Each spending bill came with a specific plan for funding, and each debt issuance came with a specific spending plan. It was project-based finance.

In the early 20th century, that all changed. Things got more complicated with the implementation of a national income tax and the complexity of wartime spending. In reaction, Congress delegated its powers to both borrow and spend. The legislature attempted to maintain control over both by implementing levers of aggregate oversight.

The 1921 Budget and Accounting Act created the federal executive budget. In doing so, Congress empowered executive agencies to make specific spending decisions while attempting to maintain control over aggregate spending by putting the budget process in place. The president and all the executive agencies under them were thereby responsible for assembling a budget to be presented to Congress.

In 1917, Congress delegated the power to make specific borrowing decisions to the U.S. Treasury, attempting to maintain control over aggregate borrowing by establishing the debt ceiling. The Treasury, which by 1939 was in complete control of designing and managing the country’s debt, decided to employ its newfound powers to establish a deep, liquid market in U.S. government debt. (It was successful—perhaps too successful.) As then-U.S. Treasury Secretary Henry Morgenthau Jr. described, the Treasury would market securities that were “best suited to the needs of the investors” to whom U.S. debt was sold. In other words, since Congress delegated this power to the Treasury, U.S. debt has been issued with an eye to supporting investing, not spending.

If borrowing isn’t determined by spending, then limiting spending won’t necessarily limit borrowing. If what Manchin and Sinema care about is preventing excessive borrowing, then limiting the nation’s spending is not the way to do it. The United States issues debt for many reasons as limiting national spending will not necessarily limit the debt. If they were serious about this debt worry—which is not to say they should be, and there is evidence that they aren’t—then the answer is to reinstitute direct congressional control over the debt and limit the integration of U.S. government debt with international financial markets. Manchin and Sinema have expressed no such interest.

In sum, neither stymying inflation nor limiting the nation’s debt offer a reasonable justification for opposing spending. Fiscal responsibility is not just about deciding not to spend; it’s about deciding when to spend and what to spend on. As any family who has spent money on education or any small business that has taken out a loan to expand can tell you, sometimes you have to spend to earn. That’s what infrastructure spending is all about. Whether it’s physical or social, it’s all infrastructure: the structures beneath us are the foundations of society. As such, it’s the basis for future economic growth and prosperity. If Manchin and Sinema truly believe parental leave and green infrastructure are not good investments, then let them make that argument. But the idea the U.S. government is “spending too much” in the abstract just doesn’t make sense.