Biden proposes 16% increase in federal spending

Austan Goolsbee, University of Chicago Booth School of Business economics professor and Fmr. Chair of the Council of Economic Advisers, joins Yahoo Finance’s Kristin Myers and Alexis Christoforous to discuss Biden’s $1.5 trillion budget outline and the infrastructure plan.

Video Transcript

KRISTIN MYERS: Let's talk now about the budget. We have those first details of that budget proposal already being released. So we're getting a nice look today on the Biden administration's priorities. We have Austan Goolsbee here with us now. He's an economics professor at the University of Chicago Booth School of Business and former chair of the Council of Economic Advisors.

Austan, welcome. So as I mentioned at the top of the show, it's a pretty big package, $1.52 trillion. This is on top of the $2 trillion infrastructure bill that had been proposed. That's a lot of money that we're expecting to spend here over the next year or so. How prudent is it? Should we be spending that much on these legislations?

AUSTAN GOOLSBEE: Well, you know, I've said publicly that I think this has been such an awful moment in the economy and that if you look at the, say, bottom third of the income distribution of workers, they're still in a horrible situation and that we really ought to be spending more on relief at a moment like that. So on content grounds, I think it's a good idea. On political grounds, I think that if you look at this budget, it's basically the Biden administration officially proposing pretty close to exactly what they said they were going to propose when they were running in the campaign.

By far the best guideline that would have predicted both the infrastructure package and this budget are just the fact sheets from the campaign. So I think you'll probably see language coming out of the White House, if I had to bet, that is of the form Joe Biden said he wanted to do this. Now he won. He got seven million more votes. And so he wants to do what he promised that he was going to do. So I think it'll probably be in the context of that.

ALEXIS CHRISTOFOROUS: Austan, at the end of the day, does this really amount to a wishlist from the Biden administration? I mean, spending at this level at this magnitude at the federal level is going to be really difficult to pass both the House and Senate. I know that the Democrats have narrow congressional majorities in both of those chambers. But you still have Republicans having filibuster power. So how much of this is really going to see the light of day?

AUSTAN GOOLSBEE: Yes, hard to say. You know, I come at it as the policy guy. So I don't 100% know what votes. I think for sure, your emphasis on anything that's not doable through reconciliation-- that is to say, requires 60 votes instead of 50 votes-- is going to be very hard to get anything like that through. Because you need 10 Republicans. You don't just need Susan Collins. You don't just need Mitt Romney. You need to get the 10th least conservative Republican, which is somebody like John Cornyn from Texas. And it's not obvious that he would support anything.

But as regards the budget, where you have the possibility of doing a 50-vote kind of bill, there, I think a lot of those are more realistic. And it is one of those where, once again, maybe we should go ask Joe Manchin what does he think, because he's going to be pretty important.

KRISTIN MYERS: All right, so you say you're the policy guy, so let's talk about that a little bit. What should the priorities be, especially as we are coming out of the pandemic? And as you mentioned, there are still folks that are very much struggling right now. Obviously, we've heard talks about further stimulus might even being needed. If you were a part of the team crafting this legislation, crafting this proposal, where would you put your emphasis?

AUSTAN GOOLSBEE: Well, Kristin, I think I would put emphasis on the part that is, who is suffering? Where might there be permanent damage in the short run, as we're still trying to get out of the grips of this pandemic? And I do think that's going to be steered toward lower income Americans and lower income workers and the earned income tax credit and a series of things, some of which they touched on in the rescue program. I think that's going to be an important side.

And I think that anything you can do on the supply side of the economy, you're seeing in a lot of these earnings announcements that manufacturing firms are discovering there are supply chain problems. You've got the automakers shutting down and idling plants because they can't get the right parts. This thing of millions of people got to come back into the labor force and millions of suppliers got to get restarted, I hope that through the budget, they're emphasizing those things that can accentuate the supply side.

ALEXIS CHRISTOFOROUS: Austan, I'd love to get your take on plans for spending on the military, which, according to this budget, is pretty flat. I think he's requesting $715 billion, which would be a decrease from Trump era spending trends. Do you think that Democrats are going to go for this? Are they going to see sort of, you know, this as a way of a compromise on the part of President Biden? Because I know that some of that money is slated for the Pentagon's environmental initiatives as well.

AUSTAN GOOLSBEE: Yeah, you know, when the president releases the budget, it's a guideline. And Congress has got to really go through the details of what-- hammer out a compromise and what's acceptable. I think you saw in the Trump era, massive tax cutting coupled with big increases in the defense budget. I think there's pretty-- it's not universal, but there's some widespread view that toning back the aggressiveness of the increases in the defense budget is probably warranted in a moment like this, where we got so many concerns outside of the defense budget. Maybe they could center that as some compromise legislation. I'm not sure.

I would imagine that on that side, the discretionary versus defense and the negotiating a spot on that continuum, the president's budget is probably just the first step. That one's going to be more Nancy Pelosi and Chuck Schumer talking to their colleagues.

KRISTIN MYERS: Austan, the IMF has already raised kind of some alarm bells, some warnings, about threats to the future economic recovery. Deficit overhang, financial spending, or federal spending, I should say, is part of that. Are there concerns that the way that we right now or at least are proposing federal spending, that it is, at some point further on down the line, going to threaten the economic recovery that we have going on right now?

AUSTAN GOOLSBEE: Well, I don't-- I think that the premise of that is a little off the mark. And I don't think that's the message that the IMF has been putting out. The IMF overall is thrilled that they're upping their growth rate forecasts for the United States and for the world. And a large measure of that is because of the direct policy interventions that we're seeing.

Now, the question of, in the longer run, is that going to generate inflation? Is that going to force the Fed to raise rates rapidly and endanger the comeback, it's fair to ask that question. I think that has been a little overblown. If you sit down and look at the numbers and ask, well, how much would output be above potential, it's not that much.

ALEXIS CHRISTOFOROUS: Our country's budget deficit has already eclipsed the entire size of the American economy, Austan. When should the government start paying that some mind? Because at some point, we're going to have to deal with it. And it seems as though President Biden's answer is going to be raise taxes. But what would your advice to him be?

AUSTAN GOOLSBEE: Well, it's the debt that's rising. The deficit reached these record levels in the pandemic. I think the thing that is historically unprecedented is that revenues as a share of GDP have plunged well below historic norms. It's not spending that's the problem on the deficit. It is precisely the $2 trillion of tax cuts plus that did not pay for themselves. So I think more revenue from high income people is definitely going to be a component of that.