Congress’s Infrastructure Plan Must Put Climate First
(Bloomberg Opinion) -- As the $1.9 trillion Covid-19 relief legislation moves to the Senate, it temporarily distracts attention from even more ambitious legislation that’s set to follow — President Joe Biden’s Build Back Better recovery plan — and the battle it’s sure to provoke. At the heart of this brewing fight is the question of which does more to protect the future: addressing climate change or containing fiscal risks. Because it probably won’t be possible to accomplish both, climate mitigation must come first.
The recovery plan will include trillions of dollars of investment in infrastructure, clean energy and other things. And the coming debate will consider whether that new spending should be offset by revenue increases or spending cuts elsewhere in the budget.
The Biden administration has signaled that the permanent parts of the infrastructure and clean-energy package will indeed be paid for, rather than adding to the deficit, and this is what many moderate Democratic senators also favor. Thus, any long-term spending on electric-car charging stations, carbon capture, aviation, water infrastructure, broadband and other priorities in the bill will be tied to tax increases or reductions in other spending.
The idea here is to avoid worsening the country’s long-term deficit. However, as Robert Rubin, Joseph Stiglitz and I noted in a recent Peterson Institute for International Economics paper on fiscal policy, budget projections are subject to substantial uncertainty, and that complicates the question of when and where offsets should be imposed. Indeed, this issue — whether new programs that entail long-term changes need to be linked to deficit-reducing measures — was the most prominent area on which the three of us could not reach agreement. As we wrote:
Although we agree on much about how fiscal policy should be conducted, we disagree along several dimensions. As one illustration of the ambiguities inherent in an uncertain world, for example, the three of us have different perspectives on whether any spending increases or tax reductions enacted today but that extend past the end of 2022 should be offset by other changes in the budget. One view is that because it is politically easier to cut taxes and increase spending than to do the opposite — and because of the uncertainty about future fiscal constraints — new spending increases or tax cuts that extend beyond the end of 2022 should be offset with deficit reduction measures. Policymakers could then undo those offsets in the future if the economy remains weak. A second perspective is that any such offsets should be automatically triggered off if an economic indicator, like the unemployment rate, signals continued weakness in the future (so with similar effects but less discretion than the first perspective). A final perspective suggests that because a robust economy benefits lower-income groups the most, particularly those previously marginalized, one should wait for more compelling evidence that further fiscal stimulus is not needed before enacting the offsets.
The core problem is that while deficit offsets are theoretically a good idea, they are very hard to legislate in practice. I vividly recall many times, when I was director of the Congressional Budget Office, being summoned to a senator’s office to discuss options to lower the deficit. I would bring my massive binder full of possibilities, and walk through them one by one — and would inevitably be told that each one was just not possible. Gradually, billions in savings would shrink to millions, and then perhaps hundreds of thousands.
The difficulties in raising revenue or cutting spending are well illustrated by the absence of a carbon tax (or a revenue-raising tradeable permit system) in the climate and infrastructure package. Pricing carbon may not be the panacea that some economists present it as, but it would make a certain amount of sense to finance new climate investments with carbon-linked revenue.
Yet sacrificing climate investments at the altar of budget neutrality would be a grave mistake. We have reached a crucial moment in the climate debate. Lazard’s studies of the levelized cost of energy and storage have documented stunning declines in the expense of generating and storing renewable energy. What’s more, a generation of electricity-producing capacity needs to be replaced, and hydrogen technology may be on the verge of a revolution. The window for making bold investments to cut the risk of catastrophic climate change remains open, but it won’t stay open forever. There’s a reason Bill Gates took this moment to write a book about the clean-energy transition: He knows it’s essential to act now to “avoid a climate disaster.”
So there are two fundamental risks in requiring deficit neutrality for new climate investments: It would shift the debate to offsets, rather than the need for ambitious new investment. And the investments would be scaled back to match the available offsets, making the legislation insufficiently ambitious.
Forced to choose between going big on climate mitigation or limiting deficit expansion, I would take the first option without hesitation. Fiscal problems can be fixed in the future if need be, but the opportunity to fix climate change won’t last. If our main concern is our legacy for future generations, climate must be the priority.
The legislation may be enacted under budget reconciliation, which imposes specific rules on measures that expand deficits over the long term. Failing to offset the spending would then require ensuring that no such spending extends beyond the relevant budget window under reconciliation, if necessary by sunsetting the spending before the window closes.
In addition, many Democrats have committed to removing the current $10,000 limit on deductible state and local taxes. Doing so would cost more than $600 billion over the next decade, and if that cost must be offset, it is likely to consume a substantial share of the viable options.
Imposing deficit neutrality on some of the new investments but not others is possible, but it is also likely to be confusing and seem arbitrary.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Peter R. Orszag is a Bloomberg Opinion columnist. He is the chief executive officer of financial advisory at Lazard. He was director of the Office of Management and Budget from 2009 to 2010, and director of the Congressional Budget Office from 2007 to 2008.
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