Andrew Harnik/AP Photo
President Biden, with Treasury Secretary Janet Yellen, at his weekly economic briefing in the Oval Office of the White House, April 9, 2021
Last summer, remnants of Joe Biden and Bernie Sanders’s presidential campaigns launched a “unity task force,” to identify common ground for the 2020 platform and governing agenda. At these meetings, top Biden officials on the economic team, most of whom now serve in the administration, outlined a two-step legislative framework, according to people with knowledge of the proceedings.
There would be a big COVID relief package, primarily designed to alleviate economic suffering caused by the pandemic and assist with the mass vaccination program. That emergency outlay would not include any offsets on the revenue side. Then Biden would pivot to his Build Back Better agenda, with lasting public investments on climate, infrastructure, industrial policy, health care, education, and more. That package, it was decreed, would be “paid for.”
The first hundred days of the Biden administration played out in exactly this fashion: a deficit-financed emergency $1.9 trillion American Rescue Plan, followed by a proposed $4 trillion in public investment, with matching revenues. The president foregrounded this in his joint address to Congress, calling the American Jobs and Families Plans “fiscally responsible” and emphasizing that they would be accomplished “without increasing the deficits.”
Appearing on Meet the Press on Sunday, Treasury Secretary Janet Yellen gave a full-throated endorsement of Biden’s deficit rhetoric, which progressives hoped he’d abandoned after passage of the American Rescue Plan. “[President Biden] has made clear that permanent increases in spending should be paid for, and I agree,” Yellen said, busting into public a debate that has carried on inside the White House for weeks. “We don’t want to use up all of that fiscal space. And over the long run, deficits need to be contained to keep our federal finances on a sustainable basis.”
Other senior administration officials, like Council of Economic Advisers member Jared Bernstein, have made similar statements in recent weeks. But Yellen has a long history as a deficit hawk, and according to sources with direct knowledge, she has been the key official driving the idea that the infrastructure investments must be paid for. This could prove hazardous as negotiations on the package continue in Congress.
Democrats in the Senate, all of whom need to agree on the legislation in order to pass it through the majority-vote budget reconciliation process (unless you think ten Republicans will vote to raise taxes), have developed nothing close to a consensus on the tax measures proposed. Various members have expressed opposition to setting the nominal corporate tax rate at 28 percent, and to equalizing capital gains and income tax rates for high earners.
Increased tax enforcement without code changes would seem to be the easiest lift; Yellen was quick to highlight that Sunday. “This is a matter of fairness to increase and collect the tax revenue that’s due under our tax code,” she said, citing a $7 trillion underpayment over the past decade.
But budget scorekeepers vary wildly on what tax enforcement would actually yield. The Congressional Budget Office estimated last year that $40 billion of investment in the IRS would bring back only $100 billion in revenue, about one-third as much as the Biden team’s proposal. Even Biden’s estimate from investing $80 billion in tax enforcement only yields $700 billion over ten years, not even one-fifth of the total Jobs and Families Plan spending.
Some Democrats want to find a way out of this box by rejecting the premise that the entire bill needs to be offset. One-time investments like infrastructure, which return several dollars back for every dollar put in, are ideal for deficit financing. Even Yellen on Sunday said that the investments would lead to rising productivity and higher tax revenues.
But she quickly added that “the safest thing” would be to raise taxes to pay for the investments. And inside the White House, Yellen has signaled she would be an obstacle to deficit spending. So if the package must come in deficit-neutral, then any reductions on the tax side would have to be complemented by reductions in spending. That would whittle down both necessary public investments that have been deferred for decades and the inequality-reducing power of taxing capital income and corporate profits. Given that some experts already see the spending package as too small, such an outcome would be catastrophic.
The individual in the government most historically aligned with deficit hawkery, of course, is Joe Biden. Going back to the late 1970s, he made multiple efforts to freeze government spending, including Social Security. He was aligned with deficit hawks for the bulk of his Senate career. The Rescue Plan offered hope that Biden is willing to shift away from deficit priorities, but continued public pleas for “fiscal responsibility” threaten to extinguish that hope.
One-time investments like infrastructure, which return several dollars back for every dollar put in, are ideal for deficit financing.
The White House has never said explicitly that the tax piece is inextricably tied to the spending piece. Many believe that, if tax increases meet resistance in Congress, the spending still must be done.
But looming over this is Yellen, a prominent voice in the administration’s economic debates who also has a long history of deficit obsession. She grew up in the same DLC, Clinton-era Democratic Party as Biden, which was consumed with fiscal discipline as a way to portray seriousness in Washington. Throughout the past decade, she has repeatedly suggested that the nation’s finances have headed down an “unsustainable path,” even in 2010, when the country was gripped in the aftermath of the Great Recession and was experiencing a significant shortfall in fiscal spending.
“A failure to address these fiscal challenges would expose the United States to serious economic costs and risks,” Yellen said in a speech while Federal Reserve vice chair, using very common tropes of fiscal hawks. She warned of “upward pressure on interest rates … restraining capital formation, productivity, and economic growth,” claiming that deficits would “crowd out private spending” and force “an increasing share of our future income [into] interest payments on federal debt held abroad, thereby reducing the amount of income available for domestic spending and investment.”
None of this proved true in the post-recession period. Inflation did not rise, private spending was not crowded out, and interest payments on the debt actually precipitously fell as a percentage of GDP. Yet even last year, Yellen was still pushing this line about “completely unsustainable” debt, despite a decade of sustainability. Yellen also served on the board of the Committee for a Responsible Federal Budget, the premier deficit hawk organization in Washington, right up until her nomination as Treasury secretary.
And we know how she would handle this preoccupation. In 2018, Yellen told CNBC, “If I had a magic wand, I would raise taxes and cut retirement spending.”
As the American Rescue Plan was being debated, Yellen did reject calls for a smaller relief package and warnings that it would raise the debt burden too much. She correctly stated that the economy would be in worse shape without fiscal support, making the additional spending necessary. And indeed, estimates for economic growth are years ahead of where they would have been without the $1.9 trillion boost, and without near-term inflationary pressure.
But too many commentators were seduced into thinking that Democrats had finally sidestepped the deficit trap that had tangled them for decades. Deficit hawkery in the Democratic Party, at least with respect to Janet Yellen, may not be dead, but just deferred.
The Treasury Department did not return answers to queries about Secretary Yellen’s views on the budget deficit.
There is economic value in both the spending and tax packages. Both of them are very popular, and they serve different goals. The spending package protects the public from contamination and protects the planet from overheating; closes the digital divide; ensures dignity in care work and affordability for families needing care; revitalizes manufacturing; and a host of other priorities. The tax measures target capital income, the only way to truly bring about an equitable society; the capital gains hikes could even slow down the merger frenzy by adding to private equity costs in all-cash deals. And there’s no public pressure to rein in spending or trim sails on taxes; nobody is really concerned about deficits, because this isn’t the 1990s.
The fear is that, to Yellen and a handful of centrist Democrats, it’s always the 1990s.
