Introducing the People’s Budget

The American economy faces two major and interrelated problems, and contrary to what one would expect given the newly resurgent cries of deficit hawks, more spending is essential to solving both.

First and foremost, the economy has still not fully recovered from the Great Recession. Since the enactment of the Budget Control Act of 2011, ongoing austerity measures have meant that now, six and a half years after the Great Recession officially ended, the economy still has some slack and demand for workers is still too low. Indeed, if public spending growth over the current recovery had simply matched that of the early 1980s recovery, the economic recovery would already be complete. Instead, pulling away fiscal support too soon led to unnecessarily depressed output and high unemployment that has persisted throughout the recovery.

But austerity hasn’t just blocked a recovery to pre-recession trends, as bad as that would be. A growing body of research strongly suggests that the decelerating productivity growth that’s shown up in economic data recently is driven in large part by the weak aggregate demand implied by austerity.

Our analysis of the Congressional Progressive Caucus’ budget alternative, ”The People’s Budget—Prosperity Not Austerity,” shows how fiscal policy can push back on both of these issues. In the short run, The People’s Budget provides a fiscal stimulus large enough to not only close the CBO’s measure of the output gap, but also push unemployment to 4 percent provided accommodation by the Federal Reserve. And as my colleague Josh Bivens points out in a paper that accompanies our analysis, this fiscal stimulus would not only fully complete the economic recovery—thereby raising growth in the short run and finally halting the deterioration of productivity caused by unnecessary economic slack—but has the potential to actually reverse some of the weakened productivity growth and potential output loss seen in recent years.

In the longer run, The People’s Budget would further stimulate productivity growth through an emphasis on public investment. The People’s Budget invests heavily in infrastructure and returns non-defense discretionary spending to its historical levels by 2021. Sustaining these investments will build the country’s stock of public and human capital, a key driver of long-run productivity growth.

In order to fund these productivity enhancing investments, while still putting the debt-to-GDP ratio on a declining path, The People’s Budget raises revenue progressively. But for those worried about the associated long-term growth aspects of these higher tax rates, it is worth noting that the highest marginal income tax rate under The People’s Budget would still be significantly lower than the revenue maximizing top marginal income rate estimated by Peter Diamond and Emmanuel Saez. Including state and local tax rates (estimated by Diamond and Saez) the top marginal rate implied by the People’s Budget is 61 percent, as opposed to today’s top marginal rate of 51.6 percent. To the tax-averse, this will sound high, but a couple of notes are in order. First, this top rate in The People’s Budget only applies to incomes over $1 billion (with a ‘b’). For a married tax unit, The People’s Budget would begin marginal rate increases by raising rates modestly on those making between $231,450 and $413,350 from 45 percent to 48 percent. And for those making between $413,350 and $1 million the marginal rate would be 51.6 percent. The People’s Budget wouldn’t raise marginal rates for any married tax unit making under $231,450, and top rates for tax between $231,450 and $1 million are essentially just Clinton-era rates plus the surtax imposed by the Affordable Care Act. We think this is a reasonable ask of families firmly in the top 2 percent of the income distribution. But we also don’t think these tax units should be paying the same rates as the Warren Buffets of the world, and The People’s Budget starts to phase in rate increases at $1 million and continues phasing in higher rates until incomes of $1 billion are reached.

Further, this 61 percent top rate is well below the historic highs in US economy history. The top rate was higher than this during long periods in the 50s and 60s when economic growth was substantially higher than in recent decades. Finally, the 61 percent is comfortably below what Diamond and Saez rigorously estimate is the revenue-maximizing top rate of 73 percent, meaning that The People’s Budget would still not be close to the wrong side of the Laffer curve.

Of course, The People’s Budget is highly unlikely to be passed by this Congress, which is too bad. The large up-front stimulus and sustained public investment it calls for are exactly the type of evidence-based fiscal policy necessary to boost both short and long run economic growth. Noting that it won’t be passed by today’s Congress doesn’t signify political sophistication—it just highlights the enormous and damaging gap between what is politically feasible and what is economically necessary.