Next round of recovery spending is about meeting social needs, not filling macroeconomic gaps
Today, President Biden will give a speech laying the groundwork for a new legislative package his administration bills as “building back better.” Much of the debate around this new package has swirled around its headline cost, and we have frequently gotten questions about what is the “right” number for this upcoming proposal.
There is no one right answer to this question. The “right” number for this upcoming proposal depends on what particular set of social problems you think can and should be fixed through public investment and fiscal redistribution. For this reason, any headline cost number needs to be derived from a “bottom-up” assessment that figures out the “right” cost of a rescue package by deciding which specific proposals would be good things to do and scoring them based on that.
This focus on identifying some “right” number that is derived instead from some top-down macroeconomic analysis is understandable. Since the COVID-19 shock first hit the U.S. economy, there has been an obvious and measurable “output gap” that will eventually need to be filled in to restore the labor market to pre-COVID health (or even better). This output gap is the difference between what the economy could produce if most resources (most importantly, workers) were fully utilized and what is actually being produced. The gap between this potential and actual gross domestic product (GDP) is generally driven by a shortfall of demand (spending by households, businesses, and governments) relative to the economy’s productive capacity. This gap can be reasonably measured (not with real precision, but at least in rough magnitude). Once the gap is identified, policies that pump up spending—either by direct federal government expenditures or by transferring resources to households and state and local governments to spend—can quickly close the gap. It was this sort of rough gap analysis that informed debates about the proper size of the American Rescue Plan (ARP).
Happily, the ARP has closed any reasonable estimate of short-term output gaps for at least a couple of years. To be clear, it has not locked in a “go for growth” macroeconomic strategy forever (that’s essentially impossible to do, since it requires real-time monitoring of any output gap). The rescue plan’s spending will decelerate pretty significantly starting about a year from now, and there’s a chance that eventually more policy help will be needed to maintain growth at a pace fast enough to keep labor markets tight.
But these caveats aside, the economy does not “need” a big new package of investments in the next few years as a matter of macroeconomic stabilization. Instead, the case for undertaking another round of ambitious public investments rests simply on the fact that they will help provide a better and fairer society, and will address pressing social challenges and/or persistent market failures.
Think the nation’s physical infrastructure needs investment to provide acceptably safe drinking water and transportation options for all U.S. families? Then we need to determine a dollar figure that would bring water treatment and transit systems to an acceptable level of quality.
Think we need to make efficiency investments in the nation’s existing building stock and that this is best done through public financing? Then we need to figure out how much it would cost to hire people to do these retrofits.
Think we should invest more in making high-quality child and elder care available and affordable to U.S. families? Then we need to estimate how much it would take to train and employ a stable corps of professional staff to provide this care.
Think the unemployment insurance system needs to be modernized and made more generous? Then the specific modernization investments and parameters of generosity need to be figured out and costed.
Some might be on board with a couple of these agenda items but not others. Their “right” plan would hence cost less. Some might think that a number of valuable public investments and welfare state expansions are sadly not being discussed enough in the current debate. Their “right” plan would hence cost more. But centering any such argument around the headline number ($3 trillion versus $4 trillion or $5 trillion) is supremely uninformative. If somebody thinks the right plan should cost more, they should be clear about what social problem is not being addressed or why a specific policy might cost more to get the job done.
Below, we provide a very rough table of a number of policy proposals and their 10-year costs. If we were in charge, we’d happily do them all. But some of these are not even on the table right now. For example, we think a large investment in an economic and public health monitoring corps would be hugely useful. The nation’s real-time assessment of both the public health and the economic effects of the COVID-19 pandemic was helped enormously by ad-hoc additions to existing economic surveys and the on-the-fly creation of new ones. For this reason, and to build back up the statistical validity of many economic surveys that have eroded in recent years due to falling response rates, the nation should invest in a large corps of workers who are trained to do household surveys that monitor economic and health developments across U.S. communities. The scale should be roughly half of the effort used to conduct the decennial census, but should be made each year.
Thinking even bigger, a couple of large steps to boost public health insurance coverage could also be taken. One idea would be a Medicare “buy-in” for those 50 and above. Another would be providing full health insurance coverage for all kids.
Hopefully, this way of thinking and some of the very rough spending estimates could provide some decent grist for others to figure out how big their “right” plan should be.
Roughing out costs of needed public investments and social spending
|Proposals in current debate||Note||10-year cost||Cumulative tally (trillions)|
|“Core” infrastructure||1||$2 trillion||2.00|
|Green investments||2||$2.5 trillion||4.50|
|Care investments||3||$1 trillion||5.50|
|Child tax credit||4||$1 trillion||6.50|
|ACA subsidy expansions||5||$100 billion||6.60|
|Higher education (Biden)||6||$100 billion||6.70|
|Unemployment insurance reform||7||$500 billion||7.20|
|Paid family and medical leave||8||$550 billion||7.75|
|EPI stretch proposals|
|Higher education (debt-free college)||9||$500 billion||8.25|
|Economic and health monitoring corps||10||$70 billion||8.32|
|Medicare at 50 buy-in||11||$750 billion||9.07|
|Medicare for kids, fully paid for||12||$1.4 trillion||10.47|
|Total||$10.47 trillion||$10.47 trillion|