Why Joe Biden Can Stop Worrying and Start Spending Like Crazy

And that’s the magic of public money, the alchemy of public
finance. Because then even big, well-directed public investment is—by
definition!—not inflationary. The new money, simply spent into existence by our
money-issuing federal government, creates the very means of its own absorption.
This observation is the key to an economic recovery program that can be both ambitious
and noninflationary—a program that will truly see the United States build back
better.

These questions are hardly academic. While Biden has several
options for juicing the economy through executive action (which we outline
below), he will still have to deal with moderate Republicans and moderate
Democrats in Congress if he wants to enact even a fraction of his agenda. That
will mean that he can’t cave to deficit hawks on the crucial question of
whether a large deficit is bad for the economy. Republicans themselves have all
but admitted the specter of expansion-killing deficits is a fiction by passing
a raft of tax cuts that did little but line the pockets of the wealthy and
explode the very deficit they now seem so keen on bringing down. If Biden wants to enact a successful recovery
program, he will not just have to adopt the right policies but also change the
way Washington thinks and talks about spending once and for all. 


We all can agree that federal spending matters and that
inflation can, in some circumstances, be dangerous. This was the victory achieved
by what’s known as the Great Moderation: 30 years of low consumer price index inflation in the
aftermath of the stagflation of the 1970s. What the Great Moderationists
ignored, however, were the massive bouts of hyperinflation in the form of asset price bubbles outside of the index raging throughout the Clinton era and beyond:
first in the stock market, then in tech stock specifically, and finally in housing
and housing-associated markets. There could be no better example of capital
misallocation, involving trillions of dollars thrown into mere speculation. It
is why the economist Robert Shiller dubbed it an era of “irrational exuberance.” 

Like all hyperinflations, the Clinton- and Bush-era asset
price inflations were credit-fueled. What Greenspan, then the Fed chair, and
his friend Larry Summers, the Clinton Treasury secretary, should have done was
to crowd out that merely speculative expenditure with productive investment; or else rein it all in through taxation,
interest rate hikes, and Treasury sales; or pursue some combination of both. All
in the name of impounding that excess credit then flowing to speculative asset
markets and redirecting it to actual productive
investment: investment that fuels the production of real, not paper, wealth.

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