WASHINGTON – President Joe Biden, fresh off a victory on a large stimulus package, is pitching another $4 trillion in spending to make bold investments in the nation’s physical infrastructure and human capital in what he said will spur growth, create a more equal economy and make the United States more competitive with China – without any negative side effects.
It’s a bold experiment that hasn’t been tested in the modern U.S. economy. This year and next, forecasters are predicting a burst in hiring and growth that will rapidly heal most financial wounds from the pandemic. But how Biden’s tax and spending proposals would impact the economic recovery for years to come is much debated.
The latest plan in Biden’s economic agenda would spend another $1.8 trillion, mostly on education, child care and family and medical leave programs, but that would be on top of more than $2 trillion in proposed infrastructure investment and the $1.9 trillion that Congress passed in March as a response to the pandemic.
The biggest concern is that the economy will overheat from so much stimulus, triggering rapidly rising prices that would make it difficult for middle-class families to afford goods and force policymakers to slow growth to contain inflation. Already there are pockets of concern with used car prices up nearly 10% and meat, including beef and pork chops, up almost 6% over the past year.
To pay for this new spending, Biden wants significant tax increases on the wealthy and corporations, but some economists and business leaders warn this has the potential to backfire. Higher taxes can stymie new investment in the private sector, curb enthusiasm for starting new businesses and even push existing U.S. companies to move overseas.
Separately, some economists worry that spending so much to strengthen the government safety net has the potential to dissuade some lower-income workers from working, especially in lower-paying jobs that continue to dominate much of the service sector.
“The philosophy behind the Biden administration is everyone can have more. We can have the cake and eat it, too. There is no price to pay in terms of inflation, higher interest rates or slower growth,” said Sung Won Sohn, a professor of finance and economics at Loyola Marymount University and a former bank executive. “If they are wrong, the price tag will be pretty high.”
The White House argues there’s minimal risk of these negative consequences coming to pass and that the benefits for the economy – and people’s well-being – far outweigh any costs. Biden’s team also wants to see tangible improvements in reducing inequality and climate change, not just faster growth. But this debate about how big to go and what the trade-offs are will play out in the coming months, and the arguments will shape the thinking of key senate votes like Sen. Joe Manchin, D-W.Va.
So far, the tab to repair damage from the pandemic is nearly $6 trillion, making Republicans and some Democrats queasy about spending another $4 trillion so soon. While the White House proposes raising some taxes to pay for the latest initiatives, there is nothing in the package to address the existing debt, which is already at the highest level since World War II, and widened by the recovery efforts.
“The big sea-change is the Democrats have very much let go of the worries about the size of the federal deficit or inflation that’s associated with it,” said Tim Duy, a professor at the University of Oregon and chief U.S. economist at SGH Macro Advisors. “There’s room for Biden to turn this into a 21st century New Deal. Whether he can follow through on that remains to be seen.”
The American Families Plan that Biden unveiled Wednesday is Biden’s most progressive yet in many ways. It would dramatically expand education in the United States, offering two years of free community college and preschool for all 3- and 4-year-olds. It would eventually make 12 weeks of paid family leave available to all, along with reducing child care costs for most and increasing government payments to low and middle-income families with kids.
At heart, the Biden economic team’s rationale is that more Americans are likely to work if affordable child care is more widely available, and it’s easier to obtain education beyond high school. Men without college degrees have been dropping out of the labor force for three decades as muscle jobs in factories declined in the increasingly digital economy. More recently, the pandemic wiped out a generation of women’s gains in the working world as many mothers had to scale back their jobs to care for children during the pandemic. The White House believes it can reverse these trends, which should boost growth in addition to making people’s lives easier.
Economists acknowledge these benefits are difficult to model. Over the past decade, there’s been a major push, especially on the left, to address the untapped potential of getting more women into the workforce and seeing more income growth at the bottom through a higher minimum wage and direct government payments to workers.
“We have ignored the whole human capital side of the economy too long,” said Diane Lim, an economist who writes the Economist Mom blog. “Republicans say these programs are just social welfare spending and that’s wasteful. The way to push back on that is to explain that there’s a lot of supply side human capital that will be freed up if caregiving is subsidized.”
Many of the policies in this latest Biden plan enjoy popular support. Where some economists worry is that the American Families Plan creates a lot of new safety net programs without a clear way to pay for them in perpetuity. For example, Biden’s signature plan to reduce child poverty is a $3,000 per child payment (it would be $3,600 per child under 6) to low- and moderate-income parents. Biden wants to make this a permanent new program, but his plan only calls for funding it through 2025.
Those concerned about the U.S. debt are urging Congress and the White House to find a clear revenue source – either by raising taxes or reducing spending elsewhere – for programs that are meant to continue year after year. If that doesn’t occur, these programs would balloon the yearly deficit further, causing more government borrowing and potentially less private sector investment.
Other economists are skeptical that anything outside of perhaps large-scale immigration can increase U.S. labor force participation, especially with so many baby boomers retiring from work. The latest U.S. census from 2020 also shows the slowest population growth in 90 years as the nation’s birthrate continues to decline.
“I am not convinced any policies will change the long-term trend of declining labor force participation,” Sohn said.
Taken together, Biden’s three major economic policies – the emergency spending bill, the infrastructure plan and this latest family plan – represent a massive boost in government investment in the economy and a significant increase in the incomes of lower-income Americans who stand to gain the most from the various programs and tax changes.
“It is not enough to restore where we were before the pandemic. We need to build a stronger economy that does not leave anyone behind – we need to build back better,” the White House wrote in its announcement of the American Families Plan.
Economists, even on the Democratic side, said Biden is taking a gamble. If his team’s assumptions are correct that inflation can be kept under control while job options expand for many lower- and middle-class Americans, it will be a significant policy win. But there’s also a chance his strategy leads to unwanted side effects like higher inflation that former Clinton and Obama adviser Larry Summers and others have warned about.
Inflation is the economic equivalent of a termite problem. It can often go under the radar for years and by the time it surfaces as a major red flag, it takes dramatic action to reverse its effects, such as having to send the U.S. economy into a recession to end the 1970s inflation problem.
For now, Federal Reserve Chair Jerome H. Powell pledges he can keep inflation under control and that the economy can afford to have inflation a little high for a while since it has been so low for so long. But any sign that is changing will cause a quick reaction in markets, dinging confidence in the recovery.
“If there’s a unifying theme from both (Powell and Biden), it’s a desire to move quickly and impose massive medicine in a bold experiment to drive the economy – and employment – much higher despite the obvious inflation risks,” wrote Greg Valliere of AGF asset management in a note to clients. “At what point could the Biden and Powell medicine become an overdose? We may find out this summer.”