May 13 2021

Chairman Beyer on FY2022 Budget: Empirics Should Outweigh Hypotheticals

“The physical and human infrastructure investments that the Biden Administration wants to make are the right investments at the right time, and we have the spending capacity to make them.”

On Friday, May 7, in a letter to House Budget Committee Chairman John Yarmuth, Congressman Don Beyer (D-VA), Chairman of the U.S. Congress Joint Economic Committee (JEC), made the case for why the FY2022 budget should make investments in physical and human infrastructure despite warnings from deficit hawks that the United States doesn’t have the spending capacity to do so.

The letter, released publicly by the JEC for the first time today, is an annual requirement of section 301(d) of the Congressional Budget Act of 1974, which tasks the JEC with making recommendations to the House Budget Committee on the most appropriate fiscal policy approach to take with the budget.

Specifically, the JEC’s recommendations are required to further the goals of the Employment Act of 1946, which tasks the federal government with using all its means to maximize employment, production and purchasing power. The law also created the JEC and its sister organization, the Council of Economic Advisers.

Chairman Beyer said:

“The physical and human infrastructure investments that the Biden Administration wants to make are the right investments at the right time, and we have the spending capacity to make them.

“By increasing the two primary inputs of economic growth—capital and labor—while also addressing long-standing racial and gender inequalities, these investments will ensure that our nation becomes even more prosperous in the years to come and that more Americans can share in that prosperity.

“Concerns have been raised that the federal government does not have the spending capacity to make these investments, especially on top of the previously passed stimulus funds. As we weigh the passage of the American Jobs Plan and the American Families Plan, or other legislative proposals, it is important to remember there are revenue-raising options to ensure they are not entirely deficit-financed.”

Chairman Beyer also addressed concerns about inflation, following Wednesday’s Bureau of Labor Statistics report showing increases in the rate of headline and core inflation in April.

Chairman Beyer said:

"After more than a year of depressed demand because of a deadly pandemic, short-term inflation is not unexpected as Americans get vaccinated and feel more comfortable returning to their normal lives. But that does not mean we should panic, as these trends are likely to be short-term.

“As Federal Reserve Chair Jerome Powell and others have pointed out, we are experiencing ‘pent up demand,’ which, along with supply chain problems, is causing short-term inflation. As the economy continues to re-open and normalize, supply and demand should level out, causing prices to go back to rising at a normal rate.”

In the first part of the letter, titled “Analysis of remaining fiscal space,” Chairman Beyer addresses spending concerns—specifically the output gap, inflation and raising revenue. In the second part of the letter, titled “Ways to increase future potential output,” Chairman Beyer makes recommendations for investments that would help increase economic growth.

Excerpts from the letter are below and should be attributed to Chairman Beyer. Full text of the letter is attached and online. The House Budget Committee’s request for the letter is attached and online as well.

Part 1

Analysis of remaining fiscal space

  • Output gap

“The economic policy research group Employ America points out that models for calculating potential output use outdated assumptions and methodologies that bake racial inequality into estimates for the future.”

“Instead of getting wrapped up in estimates of the output gap, we should pursue policies that will increase the potential output of the economy in the long-run, which will be the focus of the second half of this letter.”

  • Inflation

“Given that the reality for the past decade has been weak demand and low inflation, short-term increases in demand and inflation after an extraordinary year are unlikely to change these longer-term trends.”

  • Raising revenue

“To the extent that concerns about fiscal capacity remain, there are also opportunities to increase total spending capacity by raising additional revenues. The easiest way to do this is by simply enforcing the tax codes already on the books. In recent testimony before the Senate Finance Committee, IRS Commissioner Chuck Rettig estimated that the U.S. government is failing to collect as much as $1 trillion annually that it is owed under current law. That is a significant amount of money that would go a long way to addressing concerns about deficits.”

Part 2

Ways to increase future potential output

  • Increasing and improving U.S. capital stock

“As we make these investments in our physical infrastructure, we must center racial equity in our approach.”

“For example, as NYU School of Law professor Deborah N. Archer writes, when the Federal interstate system was built, ‘In states around the country, highway construction displaced Black households and cut the heart and soul out of thriving Black communities as homes, churches, schools, and businesses were destroyed.’”

  • Increasing U.S. labor force participation and labor productivity

“But in addition to our physical infrastructure, we also need to invest in our human infrastructure in order to increase our labor force participation and its productivity. Specifically, investing in child care will facilitate greater labor force participation, particularly among women, as well as improve children’s human capital development in ways that will drive future economic growth for decades to come.

“Women’s labor force participation had already stalled out by 2000 because of our failure to invest in paid leave and child care infrastructure. The stalled labor force participation of women hurts economic growth—one Brookings analysis found that if American prime-age women’s labor force participation rate had kept pace with that of Japanese women’s from 2000 to 2016, for example, U.S. GDP would have been nearly four percent higher, or $800 billion greater, than it actually was.”

“Finally, another factor to consider as we explore ways to improve the productivity of our workforce is the role of racist norms and stereotypes in influencing the career pathways that people pursue. Research by Chang-Tai Hsieh and co-authors found that as norms and biases shifted over the last 50 years, better allowing White women and Black people to pursue the careers best suited to their interests and talents, this more equitable distribution of talent across occupations accounted for between 20 and 40 percent of growth in U.S. GDP.”

  • Improving total factor productivity

“There is another way to increase the United States’ future potential output, and that is to improve our total factor productivity. Total factor productivity refers to the part of output that cannot be explained by the inputs of labor and capital alone, but by the way in which they are combined. Growth in total factor productivity is commonly thought of as innovation.”

“Research by economist Lisa Cook into innovation offers insight into policies that we should consider if we want to improve rates of innovation and therefore future potential output in the United States. Specifically, her research, along with Yanyan Yang, has found that if more women and Black Americans were engaged in the technical innovation that leads to patents, U.S. GDP per capita could be 0.6 to 4.4 percent higher.”