President Joe Biden has an ambitious spending agenda and a lot more fiscal room to maneuver than conservatives like to admit.

His $1.9 billion stimulus package is burdened by additional payments to households that have borne little loss of income. With the GOP worried about the size of the package and impact on the national debt, we are in for some lengthy bipartisan bridge-building that could delay a much needed extension of unemployment benefits and aid to state and local governments.

In 2020, the federal deficit jumped from $1 trillion in 2019 to $3.1 trillion in 2020—the CARES Act, other pandemic-related emergency spending and the hit on tax collections from layoffs and shutdowns were largely responsible. The Federal Reserve printed money to purchase about three quarters of the new bonds, and as EU governments boosted their debt, the European Central Bank did much the same.

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Debt service

The important thing to grasp though is that the debt servicing burden did not increase a lot. The Fed also added other securities to its balance sheet, and it remits the interest received on additional bonds to the Treasury.

The money supply did increase but caused little inflation—now that’s a conundrum for the limited wisdom of conservative orthodoxy.

Americans working from home drove less, couldn’t attend sporting events, consumed delivered meals that cost less than those at downtown restaurants, and generally saved the extra cash if they weren’t unemployed.

Corporate liquidity also swelled. With the future so uncertain, many cut dividends and held back hiring and spending on new projects.

Biden can’t count on consumers and businesses sitting on their hands. However, with the vaccinations proceeding, the FY 2021 federal deficit is on track to fall to about $2 trillion with the passage of the bipartisan 2020 supplemental stimulus package and to $1.1 trillion in FY 2022.

Three trends

Three great trends give American and European leaders more head space to borrow than their predecessors enjoyed. China may be creating an ever-larger share of global wealth, but its currency is highly regulated, and its weak legal protections combine to make long-term Chinese government bonds risky assets.

Nowadays, business assets are more highly concentrated in intellectual property than buildings and machinery. New projects require less capital to create value and is an important reason why corporate balance sheets were so flush and share buybacks so much in fashion before the pandemic. The latter will resume after COVID-19 is squelched.

Even as businesses require fewer investment funds from households, an aging population is saving a lot more and needs low-risk assets—dollar-, euro-, yen- and pound-denominated government bonds—to balance stock investments in retirement portfolios.

Biden won’t be able to run $3 trillion annual deficits, but he can likely get away with doubling Trump’s $1 trillion pre-pandemic shortfall long after stimulus spending is no longer needed.

Without new taxes, the cost of Biden’s campaign promises ranging from broad expansion of the Affordable Care Act to breakneck spending on green energy projects is about $10 trillion over 10 years.

With central banks likely to keep interest rates low, financing $1 trillion a year in additional debt won’t have quite the same negative consequences as during the second half of the 20^th Century. But the wrong kind of spending or unwise regulations can discourage work, skew capital to unproductive uses, and significantly drag on growth and wages. 

Cost-saving projects

It would be best if Biden focused on projects that save money as they spend. For example, benchmarking U.S. drug, hospital and physician services to prices in the efficient German system to provide universal health insurance would free up chronically wasted resources.

The same goes for tying higher education reform and lower tuition to student debt relief.

Overall, projects that improve infrastructure—charging stations for electric vehicles and better roads, rails and airports—would boost efficiency and growth. The same goes for reversing the decline in support for federal spending on R&D.

Thanks to government policies, the minimum required return on renewable energy projects is as low as 3%. Overall investment in solar and wind is outrunning the science of cost reductions and will leave the country with outdated equipment a decade from now.

Biden should be cautious of more projects like Solyndra. By constantly angling for higher taxes and woke regulations, Presidents Clinton and Obama suffered big midterm losses and ultimately surrendered control of Congress to the Republicans.