Joe Biden’s climate bill deserves bold fiscal support

The writer, chief executive of Lazard’s financial advisory business, formerly served in the Obama administration

The US is about to witness a dramatic climate versus deficit debate. With a new climate-aware president, and the UN’s COP26 conference in November, now is the moment for America to take decisive action on carbon emissions.

Yet after the $1.9tn coronavirus relief package, deficit angst is back in some circles, and the upcoming infrastructure and climate bill could cost another $2tn. President Joe Biden proposed a raft of new tax increases during his campaign that will be fiercely opposed by Republicans and business groups. In this showdown, climate investments should be prioritised — even if they are deficit financed.

The debate echoes what happened in 2009 when Barack Obama was president; revisiting that history is instructive. Back then, a new administration signed a stimulus bill before focusing on a pervasive, structural issue — healthcare. The Obama administration decided to offset new healthcare spending with tax increases and lower insurance and hospital payments. So why is the situation different today for the infrastructure and climate bill?

First, there are different degrees of concern over the deficit. An increasingly prevalent narrative is that the Obama administration moved too quickly to reduce the deficit in 2009, impeding the recovery. But that conveniently overlooks what was necessary to reform healthcare. At the time, a bill that expanded the deficit almost certainly wouldn’t have passed, due to opposition from moderate Democrats in Congress. Instead, we did as little immediate fiscal retrenchment as possible. Offsetting health spending was the only choice.

Today, deficit critics are more muted — even if it is likely to exceed $2tn this year, with debt coming close to 110 per cent of gross domestic product. This is partly because since 2009 we have learnt just how much uncertainty surrounds the fiscal outlook. Previous attempts to define top-down fiscal anchors — such as the Maastricht target of debt at no more than 60 per cent of GDP — are inherently flawed. We just don’t know how much fiscal room is available. Since a broad array of policymakers now recognise this, an infrastructure bill could be enacted despite adding to the deficit.

Even legislators who want to offset the new infrastructure bill admit that some fiscal space still exists, because they argue for offsetting only part of the new spending. The problem with a partial offset approach, though, is it confuses everyone. If the deficit is a problem, why only offset a quarter of the new spending? If the deficit isn’t a problem, why offset even a quarter of it?

The second difference between 2009 and today is that the spending offsets in the healthcare bill were aligned with the underlying policy goals of the legislation — to expand healthcare coverage while also making the system more efficient. This helped cohere the legislative debate. It was all about healthcare, instead of tangential issues such as capital gains or corporation taxes. 

This meeting of offsets and objectives is lacking for the infrastructure bill. Pricing carbon, either through a tax or a system of auctioned permits, is definitively off the table, as is increasing the cost of infrastructure use through tolls. Mostly this is because of politics. But there is also an emerging debate about the emphasis that should be placed on carbon pricing versus investments in research and development and regulatory interventions to address climate change. Carbon pricing may not be the panacea many believe it to be.

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Finally, and perhaps most crucially, the nature of the underlying risks is fundamentally different. Failing to reform healthcare in 2009 would have caused unnecessary human pain and loss. But failing to make significant climate investments today could cause irreversible and permanent damage to the planet, harming not only current but future generations too. 

Government policy alone is clearly insufficient to bend down the carbon emissions curve. Innovation and changes in business and private activity must do a lot of the work. Yet if we are to have any chance of meeting the 2050 goal of net zero emissions, we can’t afford to miss this moment on the policy front.

Climate change is irreversible; the world will never be the same. But fiscal risk is not and, if a fiscal crisis were to arise, we would still have options available. Over the next few months, the US is going to choose between these two. In this unusual moment, the priority should be protecting the globe rather than the budget.