Former US President Donald Trump.
Credit: Reuters Photo
By Matthew Yglesias
This week’s presidential debate is a golden opportunity for Joe Biden to draw a contrast with his opponent on one of the most consequential yet neglected issues of the 2024 campaign: the federal budget deficit and its influence on middle-class living standards.
Many provisions of the Tax Cuts and Jobs Act, signed into law by then-President Donald Trump in 2017, are scheduled to expire in 2025. But Republicans are pushing for the whole law to be made permanent, despite a $4 trillion price tag (and that’s before interest costs). Biden, if he wins, will oppose the extension of the law and push for higher taxes on wealthy households and corporations.
That stand hasn’t won the president friends in the business community, but it is absolutely the right call for middle- and working-class families struggling not so much with the cost of goods as with high cost of money. The Federal Reserve’s interest-rate hikes have contained and reversed inflation, but they have also made it much harder to buy a new home, renovate an old one or finance a new car. These higher costs have meant less activity in the homebuilding sector and less investment in new domestic energy of all kinds.
Progressives tend to construe this problem rather narrowly as a question of Fed policy, and are hoping for rate cuts before Election Day. The Fed does matter, and that’s a reasonable hope. But in the long term, the policy that matters is fiscal, not monetary.
The latest forecast from the Congressional Budget Office estimates a budget deficit amounting to 7 per cent of GDP this year, a wildly unreasonable figure for a country enjoying a low unemployment rate. Fortunately, if the TCJA is allowed to expire, that percentage is expected to decline over the next few years. Those falling deficits should make it cheaper for both US households and US businesses to borrow money.
Credit: Bloomberg
None of this will happen, however, if Trump wins the election and blows trillions on tax cuts for the rich.
That’s particularly true because Trump is pairing his tax commitments with promises to increase defense spending, while also ruling out cuts to Social Security and Medicare, while also shrinking the labor force with steep cuts to immigration. Covering all those commitments with a smaller population and tax base is going to mean much more federal borrowing.
This kind of fiscal irresponsibility characterized Trump’s presidency — deficits steadily rose during his administration even before Covid, even though the economy was growing the whole time. But at least Trump had the good luck to take office during a time of ultra-low interest rates, so nobody really noticed or minded that his policies were pushing up the cost of money. Today’s economy is much more robust, but it is groaning under the legacy of debts incurred — mostly during Trump’s term, by the way, not Biden’s — during the pandemic.
Biden’s deficit argument is strong on both the merits and the politics. Taxing the rich is by far the most popular approach to addressing America’s fiscal issues. Yet it’s often challenging to get voters to focus on budget math and other tedious matters. That’s what makes this week’s debate so important.
To the extent that people tune into anything political these days, it will be the debate. Yes, a lot of them will be watching simply to see whether the president can string together a few coherent sentences (spoiler alert, for those who’ve already forgotten the State of the Union: He can). But Biden can use it as an opportunity to draw a contrast between him and the spendthrift he’s running against.
To take advantage of this opportunity, Biden needs to be smart about which points he emphasises. In one sense, the president remains committed to the progressive agenda items that were cut as his expensive Build Back Better agenda was transformed into the more modest Inflation Reduction Act. Realistically, though, the odds of a bold new era of progressive policymaking happening in 2025 — regardless of who wins in November — are minimal. Democrats are unlikely to control Congress, and even if they do, it will be almost impossible for them to pass huge new spending programs.
The expiration of the Tax Cut and Jobs Act, by contrast, will occur automatically. That means a big debate about taxes next year is inevitable — and the outcome of that debate will be profoundly shaped by the outcome of the election. If Democrats do well, taxes on the rich will rise and the deficit will shrink, at least temporarily. If Republicans do well, the deficit will explode and the bankruptcy of Social Security will accelerate.
The consequences will be profound for any middle-class voter who cares about mortgages, auto loans or small businesses in need of financing — but thus far few of these voters seem to realize it. This week’s presidential debate is Biden’s best chance yet to lay out the stakes.