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 says will spur growth, create a more equitable 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 big tax and spending proposals would impact the economic recovery for years to come is much debated.
The latest proposal 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 $2.3 trillion in proposed infrastructure investment and the $1.9 trillion that Congress passed in March as an emergency 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 those from Sen. Joe Manchin, D-W.Va.
“The is not a stimulus package,” said Heather Boushey, a top Biden economic adviser. “These are long-term investments spread out over the next couple of years, depending on the program. I think that tempers the inflation risk.”
Boushey also stressed that expanding child care, paid leave and pre-K schooling should lead to more parents working, which also reduces the inflation risk.
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 liberal yet in many ways. It dramatically expands education in the United States, offering two years of free community college and preschool for all three and four-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.
“These investments are the kinds of investments that will boost labor supply, particularly for women and caregivers,” said Boushey, the White House economist.
Over the past decade, there has been a major push, especially on the left, to address the untapped potential of getting more women into the workforce and raising incomes for those 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 have public support. Some economists worry they will not be fully paid for. New spending programs would balloon the yearly deficit further, causing more government borrowing and potentially less private sector investment.
According to White House estimates, the latest plan would raise $1.5 trillion over the next 10 years from tax increases and tighter tax enforcement, which does not quite cover the $1.8 trillion cost. The White House says the plan would be fully paid over 15 years.
“This is very strange budgeting from my perspective. It is fuzzy. It is definitely fuzzy,” said William Hoagland, senior vice president at the Bipartisan Policy Center and a former Senate Budget Committee staff member. “They’re going to spend $1.8 trillion in this package over 10 years but pay for it over 15 years.”
The White House argues a 10-year budget “window” is arbitrary and the changes the president is proposing will likely bring in enough revenue over time to more than pay for the new programs.
“The way we budget for these plans is responsible,” said David Kamin, deputy director of the National Economic Council. “These are investments with long-term benefits for the economy. Using conservative assumptions, the plans are fully paid for over a 15-year period and would, in fact, produce deficit reduction over the long term.”
The White House is also hoping to raise $700 billion in new revenue over the next decade from the Internal Revenue Service scrutinizing big companies and rich households. While there is a lot of support for doing this, some say it’s highly unlikely to raise that much revenue.
“I’m sure they’ll raise a great deal of money, but $700 billion is a tall order,” said Mark Everson, the former IRS Commissioner from 2003 to 2007 who is now vice chairman at alliantgroup, a tax consulting firm.
Another budget oddity is the American Families Plan only extends a key payment for families with children for a few years. Biden’s signature plan to reduce child poverty is a $3,000 per child payment (it would be $3,600 per child under age 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.
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,” said economist Sohn.
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,” wrote the White House in its announcement of the American Families Plan.
Economists, even on the Democratic side, say 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.”
A more nuanced debate is taking shape over whether Biden’s policies might dissuade some lower-income Americans from returning to work, especially parents who are slated to begin receiving monthly child payments in July on top of stimulus payments and, for some, an extra $300 a week in unemployment. Fast food companies and other restaurants are complaining that they cannot find enough workers. Many liberal economists argue that if low-wage jobs paid more and did not have such harsh conditions, people would be more eager to return to work.
For many in Congress, the tax debate is likely to be the most fraught. The higher income tax on the wealthy would impact individuals and families earning over $400,000. And tax changes on corporations, while popular, often end up getting passed on to consumers in the form of higher prices or lower wages. And it can hurt long-run growth if businesses scale back on investments in new products and technologies.
But the Biden team is betting that Americans are ready to embrace bigger government that delivers more services and benefits to them, especially after two deep recessions and years of lackluster middle-class income growth.
Polling indicates that support for smaller government is at the lowest level since 1984. A recent Washington Post-ABC news poll found high support for larger government among people under 40 and minorities, suggesting a generational shift in what people want from government economic policy.
“Everybody was running around in 2008 trying to save the banking system. Now there’s a very different effort this time to save the day-care centers,” said Betsey Stevenson, a University of Michigan economist who served in the Obama administration. “We shouldn’t just be asking what policies will do for long-run growth. We should also be asking what they will do for our well-being.”