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The huge Democratic bet on 'bricks and butter'

The huge Democratic bet on 'bricks and butter'

Posted: Jul 20, 2021 1:11 AM
Updated: Jul 20, 2021 1:11 AM

The spending proposals that Senate Democrats plan to begin advancing this week amount to a massive gamble that the party can simultaneously advance two of its longest-standing economic goals without generating a political backlash or overheating the economy.

The packages that Democrats are now formulating in a pair of bills -- one they hope to pass with bipartisan support and another they anticipate approving with only Democratic votes -- are so sweeping that passage would mark a historic expansion of government's role on two distinct fronts.

As currently written, the bills would generate the largest increase in federal public investment since the interstate highway system and post-Sputnik subsidies for science and education under President Dwight Eisenhower in the 1950s, and the greatest expansion of the social safety net since President Lyndon Johnson's Great Society in the 1960s.

In some ways, the Democrats' bet that they can simultaneously turbocharge public investment and strengthen the safety net amounts to a modern equivalent of Johnson's famous gamble during the 1960s that he could afford both "guns and butter," funding the Vietnam War even as he substantially increased domestic spending through his "Great Society" agenda. The new Democratic agenda, with its dual focus on infrastructure and aid to working families, might be called "bricks and butter."

The new public investments -- the bricks -- reflect the widespread Democratic belief that over time the economy will grow more quickly and more equitably with a strategy of greater spending in areas such as infrastructure, education and scientific research than behind the competing Republican approach centered on reducing taxes.

"The investments that we are making ... are ones that the private sector has not done or cannot do," says Heather Boushey, a member of the White House Council of Economic Advisers. "We have not seen a nationwide investment in affordable, accessible universal pre-K. It is the public sector that has traditionally made it possible for kids to afford community college. We have not seen the private sector solve the climate crisis. It is really important to recognize that growth hinges on ... much-needed public investments that provide the basis for an economy that is inclusive."

In turn, the new safety net proposals -- the butter -- which include an expanded child tax credit, increased health care subsidies and expanded Medicare benefits -- reflect not only a Democratic desire to respond to persistent income inequality but also a political conviction that the party can win back some of the working-class voters drawn to conservative Republican cultural messages by delivering more direct benefits from government.

Democrats think the timing is right

Johnson's bet that he could balance guns and butter failed both politically and economically: Backlash from the left (over the war) and the right (over his domestic programs) helped elect Republican Richard Nixon in 1968, and the cost of LBJ's agenda contributed to the inflationary pressures of the late 1960s and early 1970s.

But Democrats believe years of widening economic inequality and slowly growing incomes for average families have created an environment more conducive than at any point in decades for a bricks and butter agenda. The cumulative price tag for the new proposal means Democrats are wagering that the promise of faster growth and more financial security can sell Americans on a federal government that both spends and taxes more as a share of the overall economy than it has at almost any point in its peacetime history, according to federal figures. And they are calculating that they can swell spending in both areas without prolonging the spike in inflation that has accompanied the economy's recovery from the severe Covid-19 downturn.

Many Democrats also believe that the party suffered its huge losses in 2010 partly because then-President Barack Obama did not propose enough spending in response to the 2008 financial crash. Though much difficult negotiating remains, the party from left to right appears committed, on both economic and political grounds, to passing something approaching the huge program sketched out in the bipartisan and reconciliation proposals.

"If we go into this election cycle and our agenda is delivering tax cuts for middle-class parents, delivering jobs through investment in infrastructure and delivering lower health care costs," says David Bergstein, communications director for the Democratic Senatorial Campaign Committee, "we have a package that appeals both to those swing voters, some voters who have more of a conservative bent and to our base as well."

Republican pollster Gene Ulm argues instead that Democrats are trying to flood the economy with federal spending to improve their prospects in the 2022 election -- but could face a backlash against the taxes included in the plan and inflation that it might fuel. "Structurally they are betting the farm and everything possible to get through these midterms," he says. "And they are just opening up the checkbook to do it.'

Public investment shrinks as safety net balloons

Whatever the immediate political impact, if President Joe Biden ultimately signs anything like the proposed program, it would mark a new era in Washington's role in the economy.

Over the past 50 years, federal spending, as a share of the nation's economic output, has averaged about 20.6%, according to calculations by the Committee for a Responsible Federal Budget, a centrist group that argues for budgetary restraint. Washington has significantly exceeded that level only in times of crisis: Spending reached 24% of the nation's gross domestic product during Obama's first term immediately after the 2008 financial crisis and roughly 32% during the Covid pandemic, federal figures show. (Federal spending as a share of the economy reached its modern high of more than 40% at the height of World War II.)

Though federal spending over the past half century has remained relatively constant at about one-fifth of the economy, the composition of that spending has shifted dramatically. Over that period, public investment -- defined primarily as federal spending on infrastructure, education and training, and support for research and development -- has declined, while the safety net -- including such payments to individuals as Social Security, Medicare, Medicaid, food assistance and various tax credits for families -- has soared.

In 1969, federal figures show, public investment and payments to individuals each consumed nearly one-third of total federal spending, an amount equal to about 6% of the economy. By 2019, the last year before Washington poured huge sums into the Covid crisis, public investment had fallen to just 12.5% of the budget while payments to individuals had grown past 70%. Public investment now equals only about 2.5% of the economy, while payments to individuals consume more than five times as much.

The exact distribution between public investment and safety net spending in the Democratic plans isn't known, because the party hasn't released details on the funding levels in the $3.5 trillion budget blueprint that Senate Budget Committee Democrats recently agreed on. But it's clear that the proposal -- coupled with the bipartisan infrastructure agreement advancing on a separate track -- would represent a huge expansion on both fronts.

The infusion of new money for public investment might be most striking, given how steadily it has lost ground in federal priorities. Public investment fell from about 30% of federal spending in the late 1960s to about 20% by the late 1970s and 15% by the mid-1990s, a plateau from which it's since drifted further down except for a brief recovery under Obama's first-term stimulus plan.

The budget plans Democrats are advancing would provide a more lasting turnaround.

The bipartisan plan would spend almost $600 billion on "hard" infrastructure, including repairing roads and bridges, upgrading water systems, modernizing the electrical grid, expanding access to broadband and funding thousands of charging stations for electric vehicles. The Democratic plan would couple that with substantial new investments in education, including universal prekindergarten, greater access to community college and larger Pell Grants for college; an array of direct expenditures and tax incentives to quicken the development of clean energy; and funding for worker training, scientific research and bolstering America's manufacturing supply chain.

Josh Bivens, research director of the Economic Policy Institute, a liberal group that has long advocated for larger public investments, says a reasonable estimate might be that such investment programs will constitute about half of the $3.5 trillion Democratic package. At roughly that level, with the added spending on hard infrastructure from the bipartisan plan added in, he projects the Biden proposal would fund a durable increase in public investment equal to about 1 percentage point of the economy, far more than either Bill Clinton or Obama, the last two Democratic presidents, achieved.

In fact, Bivens says, the Democratic proposals would represent a net increase in new public investment probably unmatched since the late 1950s, when the nation built the interstate highway system that facilitated a massive move to the suburbs and also poured billions into education and scientific research after Russia took the lead in the space race by launching its Sputnik satellite.

"It's totally different from anything put forward by Obama or Clinton," Bivens says. "In terms of any kind of coherent strategic focus there's been nothing like this since the build-out of the suburbs, and the buildup of the educational system" during the late 1950s and early 1960s.

Government spending would skyrocket

The safety net has grown more steadily since then, with the creation of Medicare, Medicaid and food stamps (now known as the Supplemental Nutrition Assistance Program) in the 1960s, the broadening of Social Security benefits, the establishment of other help for families such as tax credits for children and child care, and the passage of the Affordable Care Act in 2010. Such expenditures on individuals, according to federal figures, crossed 40% of total federal spending in 1972, 50% in 1992, 60% in 1997 and 70% in 2014.

The Democratic plan would channel significant new sums into these programs as well. The blueprint released by Senate Budget Committee Democrats would create new hearing, dental and vision benefits under Medicare (which the Congressional Budget Office has previously estimated could cost around $35 billion annually); extend the expanded child tax credit included in Biden's Covid rescue plan (at a cost that's been projected to reach at least $100 billion annually); create a new paid family leave program, significantly expand financial help for child care and broaden the Earned Income Tax Credit (programs that have been projected to cost about $65 billion annually as Biden proposed them); increase care options for seniors and children; and pour billions more into health care through increased subsidies for those purchasing insurance through the ACA and a plan to extend coverage to eligible adults in the handful of remaining states that have refused to expand Medicaid under the law.

With the Democratic plans proposing such panoramic increases in both public investment and the safety net, the inevitable result is to substantially increase government spending as a share of the economy. The Committee for a Responsible Federal Budget analysis concludes that under the plan federal spending over the next decade would average 24.5% of the economy, far above the average for the past 50 years, and even higher than the previous peak single year between World War II and Covid -- the 24.4% in 2009.

Former Congressional Budget Office director Douglas Holtz-Eakin, now president of the center-right think tank the American Action Forum, says flatly that the plan would raise government spending to "the highest fraction of GDP for a 10-year period in our history," including the decade that included World War II.

Moreover, Holtz-Eakin argues that the new spending constitutes a more lasting shift in government's role than then. The huge public expenditure in World War II, he notes, "was a discretionary program ... and was ramped down really quickly." (Federal spending plummeted from almost 43% of the economy in 1944 to just 14% by 1947.) By contrast, apart from one-time infrastructure expenditures, he argues, the current Democratic proposals "are all mandatory spending programs. So they represent permanent commitments."

Economists argue over impact

Holtz-Eakin generally supports the "hard" infrastructure investments in the bipartisan plan, which he says will potentially improve "the productive capacity of the economy." But he sees both short- and long-term problems from the twinned proposals in the Democratic-only budget plan. He argues that over the long term, the public investment plans, on balance, will slow the economy's expansion because the taxes required to pay for them will hurt growth more than the new investments will help it. And in the near term, he maintains, the plan's expansion of the social safety net through the child tax credit and other payments to individuals risks swelling inflation.

"The economy is already massively overstimulated," he argues. "The more this is front-loaded the more it exacerbates that problem."

But more liberal economists and policy analysts argue that the ongoing inflation spike is a temporary problem rooted in the economy's recovery from the pandemic disruption and will soon recede. And they maintain that public investment not only in infrastructure but also in education, training and green energy will produce a recovery that is more stable and more equitably shared than one centered on tax cuts.

"We have clearly reached the outer bound of how much money you can give back to the those at the top of the income distribution and have it be economically useful," says Boushey. Even the safety net spending on expanding care options for seniors and children will encourage economic growth by allowing more adults (especially women) who now must provide that care to enter the workforce, Democratic economists maintain.

Bivens argues that the investments included in the plan "will provide a real boost to economywide productivity growth" while expanding opportunities and providing better public services to economically struggling families. From universal pre-K to improved public transit, he argues, under the plan "life gets better along a bunch of dimensions for a lot of low- and median-income families." So long as Democrats offset most of the new spending with tax revenue, as they've proposed, "from an economic point of view, I'm very unworried about the guns/butter/overheating-type problem" of fueling inflation, he says.

Robert Reich, the former labor secretary for Clinton and now a professor of public policy at the University of California at Berkeley, similarly argues that the envisioned expansion of public investment and the safety net offer reinforcing benefits.

"The two initiatives complement each other nicely," Reich, a leading liberal analyst, told me in an email. "Public investments are for the future. We make them now in order to become more productive later on. Safety nets are for us now. We spend on them to give us security against suddenly losing our footing. Logically, the two fit together and a smart and caring society would do both."

But Maya MacGuineas, president of the Committee for a Responsible Federal Budget, argues that failing to choose more between the two priorities could ultimately backfire by increasing the federal debt too much.

"While such a historic expansion in investment in infrastructure and the safety net will appeal to those who share those goals, a simultaneous expansion in borrowing and debt should not appeal to anyone who cares about our economic health, national security, or the legacy we leave to the next generation," she wrote me in an email.

These arguments will ring through the upcoming legislative debate, but history suggests they are unlikely to end even when that debate concludes. The last big permanent expansion of government's role that Democrats passed into law was the ACA in 2010. In the years since, Republicans have unstintingly sought to repeal the law through both legislative and legal challenges. Those efforts have all failed, a dynamic that underscores how difficult it is to withdraw government benefits after the public grows accustomed to them.

If Democrats later this year can pass even a fraction of the new investment and safety net programs they are proposing -- from universal preschool and tuition-free community college to the huge expansion in tax credits for raising children and paid family leave -- they are certain to provoke years of similar resistance from Republicans. But once benefits start flowing, the GOP may find these programs are as difficult to dislodge as the health care plan that has frustrated them for more than a decade.

The-CNN-Wire
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