We all understand the concept of trade-offs. If we spend more of our paycheck on restaurants, then we will have less money for rent. If we spend more time watching television we will have less time to read or do sports. There will often be similar sorts of trade-offs in public policy decisions. If we spend more money on health care then we will have less money for education or child care.
But trade-offs in public policy decisions don’t always work that way. At a time when the economy has large amounts of unemployed workers and idle productive capacity, spending more in one area doesn’t have to mean spending less in another. In other words, we can spend more on both health care and education.
This is an issue that many, including those sitting in Congress, often find very confusing. After all, it is standard practice in politics to talk about the government’s budget like the family’s budget. We all know that we can’t spend more than we earn month after month.
Unfortunately most of the people in policy positions either don’t know or don’t care that the government’s budget is not like their family’s budget. The government can spend more than it taxes, and it can do this by large amounts for an indefinite period of time. The limit on the government’s spending is not its tax revenue, but the economy’s ability to produce goods and services.
The budget balancers might be able to see this simple fact if they just carried through their logic to the next step. Suppose the government did run out and spend another $200 billion this year on modernizing the infrastructure, pre-school education and energy conservation/conversion.
The standard story is that the additional borrowing would drive up interest rates. Currently the interest rate on long-term government bonds is less than 2 percent. This is incredibly low. When we had large budget surpluses in the late 1990s the interest rate was generally more than 5 percent and sometimes more than 6 percent.
Furthermore, suppose interest rates started to rise. The Federal Reserve Board could buy up government bonds in order to keep interest rates down. It essentially has unlimited capacity to intervene to keep interest rates down.
At this point, the budget balancers would all be screaming about inflation. But for the last six years the problem has been that the inflation rate has been too low, well below the 2 percent average rate of inflation that the Fed has chosen to target.
This doesn’t mean that at some point inflation could not become a problem, but we are far from that being the case today. Furthermore, all the models show that inflation is a very gradual progress. We don’t go to sleep one night with 1.5 percent annual inflation and wake up the next morning to find inflation in the double-digits.
The models show that inflation creeps up gradually. If it turns out to be the case that we have pushed the economy too far so that inflation is on an upward track, then we should have plenty of time to tighten up, with spending cuts and/or tax increases, to keep the inflation rate from getting too high.
In short, since the government is not constrained by any real need to balance the budget, nor do we face any plausible interest rate or inflation constraints in the near future, there would be no cost to our decision to spend another $200 billion a year on infrastructure and other forms of public investment.
The immediate impact of higher spending would be to employ more workers. This tightening of the labor market would also improve the bargaining power of the workers who are already employed, allowing them to see real wage growth.
This means the decision to not spend more money on infrastructure did not involve any sort of normal trade off. We did not get ourselves more health-care or education spending because we didn’t spend more money on infrastructure. We just kept millions of workers from being employed.
So when we ask why the federal government could not ensure that the people of Flint, Michigan had safe drinking water, or address the enormous infrastructure needs around the country, the answer is that our politicians didn’t want more people to have jobs. That’s a great reason for poisoning kids.