Why the Case for Democrats’ Spending Binge Doesn’t Hold Up

 

There’s a natural impulse among both proponents and detractors to compare the Democrats’ $3.5 trillion reconciliation bill to massive spending efforts in the past, such as World War II or the New Deal.

Those comparisons aren’t really apt, however.

In the case of World War II, that spending was not entered into by choice. The country would have been better off if Pearl Harbor weren’t attacked and the war never happened. There’s no Pearl Harbor–like event demanding massive spending today.

In the case of the New Deal, that spending was spread out over many pieces of legislation over many years. And the spending, while significant, wasn’t really the thrust of the New Deal. The thrust was the redefinition of the role of the federal government in everyday life, for “the development of an economic declaration of rights, an economic constitutional order,” as Franklin Roosevelt said in his Commonwealth Club Address.The best comparison to the reconciliation bill is the American Recovery and Reinvestment Act, the stimulus bill then-President Obama signed in February 2009 to counter the Great Recession. Even this comparison isn’t perfect — the reconciliation bill is much bigger; more on that below — but it is illuminating as it demonstrates the sheer magnitude of spending being proposed today.

As Scott Lincicome wrote in his newsletter for the Dispatch, it’s really hard to think about large numbers like 3.5 trillion in the abstract. It helps to put them in context relative to something else:

1. Both the reconciliation bill and the 2009 stimulus were single pieces of legislation. There’s no evolution in purpose over many years spanning different congresses, like there is with wars or entitlement programs. Members of Congress will get one piece of legislation and give it a thumbs-up or thumbs-down.
2. The Democrats’ reconciliation bill would be the most expensive single piece of legislation in American history. The 2009 stimulus was, at that time, the most expensive single piece of legislation in American history.
3. The reconciliation bill and the 2009 stimulus involve many of the same people. Joe Biden was vice president in 2009. Ron Klain was his chief of staff. Jared Bernstein, now on the Council of Economic Advisers, was his top economic adviser. President Biden’s director of the National Economic Council, Brian Deese, worked for the National Economic Council in 2009. Gene Sperling, one of Biden’s closest economic advisers now, has been in Democratic economic circles since the Clinton administration. On the legislative side of things, Nancy Pelosi was speaker of the House. Chuck Schumer wasn’t the Democratic leader, but he was very influential.
4. The reconciliation bill and the 2009 stimulus promise to do similar things. Both are premised on the economy’s needing a boost of federal spending to recover from a previous downturn. Both are focused on job creation, with an emphasis on green energy. Both promise significant improvements in infrastructure having long-term benefits for the economy. Both required proponents to pooh-pooh inflation concerns.

Again, the comparison isn’t perfect. The White House sees the reconciliation bill as the second phase of a recovery effort (the first being Biden’s American Rescue Plan, passed in March), unlike the 2009 stimulus, which was the first and only phase (not counting the bailouts, which were more about salvaging than stimulating). The White House also argues that the reconciliation bill is primarily a supply-side measure, and the 2009 stimulus was demand-side.

The differences, then, in these otherwise similar efforts help illuminate the problems with the Biden administration’s sales job.The crisis the 2009 stimulus was addressing was far greater than anything we face today. According to the National Bureau for Economic Research (NBER) recession tracker, the Great Recession lasted from January 2008 to June 2009. Yet the stimulus still clocked in at under a trillion bucks. The COVID recession, using the same NBER standards, has been over since April 2020. It was the shortest recession in NBER records, and they track back to 1855. The immediate effects were severe, but they receded quickly.The unemployment rate spiked to 14.8 percent in April 2020 but was back in single digits by August and currently sits at a respectable 5.4 percent. Contrast that with the Great Recession, when the unemployment rate increased or stayed the same every month from April 2008 through October 2009. It took all the way until March of 2015 for the unemployment rate to be at 5.4 percent.

We’ve seen a V-shaped recovery in consumer spending from the COVID recession, and it’s already back on its pre-pandemic trend. Consumer spending sagged throughout the Great Recession and was actually lower in June 2009 than it was in January 2008. The COVID recession has also seen speedy recoveries in manufacturing production, construction spending, housing starts, and hires — all before the American Rescue Plan was passed in March of this year.

There’s a case to be made that the American Rescue Plan was already superfluous to the economic recovery. The Trump administration had already poured trillions into the economy, and the recession had already been over for almost a year when Biden “rescued” the economy. But it was passed, and it cost $1.9 trillion.

There’s a case some economists, notably Joseph Stiglitz, made that the reason the $800 billion 2009 stimulus wasn’t more successful is that it was too small. Let’s say it was off by 100 percent. That would make the ideal $1.6 trillion. That’s still less than the American Rescue Plan, which was passed during an expansion in the aftermath of a much shorter recession.

Let’s say the 2009 stimulus was off by 200 percent. That would make it $2.4 trillion. That’s a little bit larger than the CARES Act, which President Trump signed in March 2020 during the brief COVID recession.

Let’s say the 2009 stimulus was off by 300 percent. That would make it $3.2 trillion. That’s still less than the Democrats’ proposed reconciliation bill, which would come almost a year and half after the recession is over and in economic conditions that, while not perfect, aren’t in dire need of intervention.

Between the $1.9 trillion American Rescue Plan, the $550 billion in new spending from the bipartisan infrastructure package, and the $3.5 trillion reconciliation bill, the Biden administration wants you to believe the economy needs seven-and-a-half times more juice to turn the corner from the two-month COVID recession than the 2009 stimulus provided for the 18-month Great Recession. Even if you believe fiscal policy is highly effective at aiding economic recovery and think the 2009 stimulus was too small, it’s preposterous that this much milder recession requires a response seven-and-a-half times as great.

The Biden administration is trying to pull a fast one on the American people by framing all this new spending as an economic recovery effort to “build back better.” A comparison to the last economic recovery, more than a comparison to the New Deal or World War II, demonstrates just how absurd that framing is.