Democrats Say It’s Safe to Spend Big Again. They’re Wrong.

(Bloomberg Opinion) -- Democrats are in a mood to spend again, as you can tell if you’ve been reading about their presidential candidates. From the 1990s onward, Democrats were eager to persuade voters that they were fiscally conservative in contrast to tax-cutting Republicans. More recently, they seem to have concluded that voters don’t care about fiscal restraint.

Over the last two years, Republicans have cut taxes, and both parties have agreed to raise spending. Democrats are not responding, as they might have in the past, with promises to cut the deficit. Instead they are advertising their willingness to spend trillions of dollars on single-payer health plans and a Green New Deal.

Intellectuals aligned with the Democrats are caught up in the new mood. A previous column tackled one of the justifications liberal intellectuals have been making for worrying less about deficits: that low interest rates make this a good time for the federal government to borrow money and invest it. Among the defects of this argument: It overlooks the possibility that interest rates are low because expected productivity growth is also low, and that the returns on federal investment may therefore have declined to match the decline in interest rates.

Now Jared Bernstein -- who, speaking of the presidential race, was chief economist for then Vice President Joe Biden – is advancing another argument for spending big. In the Washington Post, he writes that we should raise spending on infrastructure, job creation, health care, expanded Social Security benefits “and more.” 

It’s not just that we can tolerate all this spending thanks to low interest rates; we positively need it. “Economic conditions right now make this an excellent time for a bolder-the-better agenda.”

Supporting this case, he makes two main points. The first is that the economy appears to be slowing and so needs either fiscal or monetary stimulus. The second is that we appear to be facing “structurally weak underlying demand.”

Bernstein’s point about the near-term trajectory of the economy is a weak justification for the program he wants. Look back at his list of spending priorities. He’s not talking about one-off spending: He’s talking about a (gigantic) permanent increase in federal spending. If the economy is about to slip into recession, that could be a reason to embark on a counter-cyclical burst of spending. It’s not a reason to ensure higher outlays forever.

His second point, about chronically weak demand, better matches prescription to diagnosis. But both are open to challenge. Bernstein’s evidence for his diagnosis is that the economy seems to require interest rates that are low by historical standards. The Fed is holding off on raising the federal-funds rate above 2.5 percent in order to keep the economy growing. 

If the “neutral” or “natural” interest rate has fallen, though, low demand may not be the culprit. It’s what one would expect in a mature economy with fewer opportunities for productivity growth.

In that case, what would be needed are reforms to improve productivity. Additional spending by the federal government, if targeted well, could be among those reforms. But spending more, or redistributing more, in order to boost demand would not be called for.

If the diagnosis of persistently weak demand is correct, on the other hand, then it is worth giving more consideration to an alternative prescription that Bernstein mentions only in passing. He notes that a more expansive monetary policy could address the problem.

Monetary expansion seems preferable to fiscal expansion for several reasons. When the Federal Reserve expands the money supply (or takes other expansionary action), it does not require that more taxpayer dollars go to interest payments on the federal debt, or that future taxes be raised. Its policies can also be reversed more easily if it goes too far or conditions make it unnecessary: However difficult it has been for the Federal Reserve to raise interest rates over the last decade, Congress has found tax increases or spending cuts even harder. 

Another draw, at least for conservatives like me, is that monetary expansion doesn’t raise the government’s share of the economy whereas additional federal spending does.

Bernstein has presented a sophisticated case for much higher federal spending. But voters should remain wary of all that new spending, and unconvinced that the economy needs it.

To contact the editor responsible for this story: Katy Roberts at kroberts29@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ramesh Ponnuru is a Bloomberg Opinion columnist. He is a senior editor at National Review, visiting fellow at the American Enterprise Institute and contributor to CBS News.

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