Is Biden Tripling the Debt?
After my last newsletter about Biden’s big speech, I had an fun social media discussion about spending and national debt. Someone made the claim that Biden’s spending wish list was going to triple the national debt. It’s a claim I have seen floating around several times since the details of Biden’s $1.8 trillion American Families Plan began to leak.
It is not true.
But, I thought it would be a useful topic for a newsletter, because this is so often misunderstood.
The trouble with the claim is that it confused debt and deficit, and doesn’t take into account time horizons for spending, economic growth, or inflation. Understanding these factors helps to show that Biden’s plans don’t have all that much impact on the structural deficits that existed before COVID.
To get started we have to establish a couple definitions and distinctions.
Debt and Deficit:
This is a concept that gets confused quite often. Deficit is the amount of money that is spent above the amount of money taken in in one given year. Debt is the accumulated total of money owed to creditors from all years. If the U.S. taxes $2 trillion in one year, but spends $3 trillion, they have a deficit of $1 trillion. If this happens for 20 years the deficit continues to be $1 trillion, but the debt will be $20 trillion, assuming only interest is paid.
Structural Deficit and Cyclical Deficit:
A structural deficit is the built in deficit designed by Congressional policy. Using the above example, if Congress chooses to tax $2t and spend $3t, they designed a $1t structural deficit.
A cyclical deficit occurs because of economic downturns. Less economic activity means less revenue, and oftentimes Congress also chooses to spend more in stimulus to end the recession faster. This is a cyclical deficit because it only occurs due to economic cycles. Once the economy starts growing again, this deficit goes away, and we return to any pre-existing structural deficit.
The United States currently has about a $1t structural deficit, and (prior to COVID) about $22t in debt. These have both grown with COVID, but I’ll get to that. the TL:DR here is that Biden’s plans don’t have a huge effect on the level of structural deficit. There is an argument to be made that $1t structural deficits are far too large, but this is what we have collectively chosen as a nation, so I’ll leave that discussion for another time.
Here is what the spending and deficit picture looks like.
Biden has, so far, proposed about $6t in additional spending, which includes the already passed $1.9t COVID relief package. Prior to COVID debt was already about $21 trillion, so even if all his plans get passed, and all the money got spent in one day (this isn't the case, which I'll explain below) it would only increase the debt by about 25%, not 300%.
The structural deficit was about $1 trillion for a normal Trump year, but jumped up to about $3.2 trillion last year because of the $2.2t CARES act.
Biden has already passed a $1.9t covid package. In Fiscal Year 2021 Trump also passed the Consolidated Appropriations Act (the $600 stimulus checks) which cost $.92t. This will add to the deficit for this year, but it wasn't Biden's spending.
Biden wants to add $4.1t more in spending for his infrastructure plan and his family assistance plan. The key for deficit here is that not all of this is spent at once; the infrastructure plan is spent over 8 years, and the family assistance plan is spent over 10 years. Together, these two plans would add about $477 billion to the deficit over the next 8 years. This $477 billion is also partially offset by higher taxes.
Hopefully you see it isn't as simple as someone on Fox News adding up numbers. The $920 billion spent by Trump will actually count toward Biden's deficit, though I will count it toward Trump’s here to be more accurate about who spent how much. The U.S. started out with a $1 trillion structural deficit under Trump. The deficit was actually down below half a trillion under Obama, so Trump more than doubled it. Trump's Covid Deficit was $3.2 trillion, and if we give him credit for the $920 billion he spent, it goes up to over $4 trillion (see first chart).
Again, starting with the $1t Trump deficits for Biden, we add in $1.9t for the third Covid relief, and another $.477t for infrastructure and family. That is about $3.3 trillion. If we add in the $920b Trump spent, it goes up over $4t. Based on who spent what, Biden will likely have a smaller cyclical deficit than Trump.
What about after Covid, will Biden’s structural deficit be 3 times higher than Trump? No. Again, the spending on infrastructure and family investment will occur over 8 and 10 years. At current levels, Biden's expected structural deficit moving forward would be about $1.5t because of his family and infrastructure plans, plus the $1t structural deficits from Trump.
However, this number assumes no change in economic growth, and leaves out the fact that Biden's plan also raises taxes to cover part of the cost. As the economy grows, tax revenues grow with it—even without raising any taxes. Because of this the deficit will fall, and, even if the total debt does not fall, the debt as a percentage of economic output will fall.
Again, even though overall debt was climbing, debt as a percentage of GDP—which matters far more than the dollar value—was starting to decline under Obama, and then increased under Trump, even prior to Covid.
If we do economic projections to factor in economic growth and higher revenue, a good estimate for the structural Biden deficit after the 2021 cyclical Covid deficit is in the $1.1t - $1.3t range. This is not actually all that different from the $1t structural Trump deficit. Again, there is a decent argument that this is too high, but that’s a different issue. The debt will keep growing, but if economic growth is above the 20 year average, debt as a percent of GDP will probably fall—slightly.
This is why there really isn’t any way to conclude that Biden is tripling the deficit unless you just simplify it and say "Trump COVID deficit was $2t and Biden wants to spend $6t." But, hopefully it's clear that simplifying it this way makes people sound really uninformed.
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