By Michael Fahn
It has been four-and-a-half months since President Joe Biden took hold of the reins of economic policy from President Donald Trump, and many who voted for him in the heat of the COVID-19 pandemic’s disastrous toll on the American economy, hoping for a swift recovery and a better economic future are now rightfully wondering if they bubbled in the right name last November. While the economy is making a steady recovery, it has surely fallen short of many’s expectations, and large swaths of his spending, infrastructure and tax plans have caused even lifetime liberals to raise an eyebrow.
Consumers are ready, willing and able to start spending again, but businesses cannot seem to re-employ enough workers to meet this surge in demand. The Commissioner’s Statement on the Employment Situation from the Bureau of Labor Statistics tells us that 559,000 new net jobs were added in May, but simultaneously that the number of people that reported that they had been unable to work because their employer closed or lost businesses due to the pandemic dropped by 1.5 million, indicating that hundreds of thousands should have found new job openings, yet at most, only 559,000 did. With job openings reaching the highest level in 50 years, businesses are forced to raise benefits and wages to incentivize workers to take businesses up on job offers, and as they rise prices on goods and services to compensate, economists warn that the outpacing of the labor market recovery by economic activity will only worsen economy-wide supply-chain bottlenecks to the point where demand can no longer be sustained, and the recovery becomes stifled.
This all begs the question of “where is this worker reluctance coming from?” The answer lies in concerns about COVID-related health risks and a lack of child care necessary for parents to be able to comfortably take on work duties again, but more importantly, many economists are pointing to the excessive and arguably unjustifiable enhanced unemployment benefits of the past months. Originally proposed as emergency relief for workers, they have now become a liability and a deterrent for the considerable portion of the labor force that gains more from not working and collecting the benefits than returning to work. $300 a week of unemployment benefits, $1400 checks to all qualifying individuals, a $3000 per child tax credit, ObamaCare subsidies, up to $25 an hour to qualified households in 21 states, and up to the equivalent of a $100,000 annual salary for families of four with two unemployed parents as estimated by economists Steve Moore, Casey Mulligan and E.J. Antoni have in conjunction with each other, thoroughly disincentivized significant proportions of the labor force from abandoning unemployment.
The recovery is steady and would be lauded in virtually any other circumstance but still disappointingly falls short of the “million-plus type prints” that “we were anticipating...over these coming months” as Matthew Luzzetti, chief U.S. economist at Deutsche Bank, puts it. Biden would do well to correct what he can while he still can and turn his attention away from retroactively stimulating demand for political optics and towards addressing the supply-side of the economy, which is soon to be in crisis should we continue down this path.
So, what about the rest of Biden’s economic policy? With regards to his budget, the data are concerning. According to the Office of Management and Budget, World War II was the only time in modern history in which spending and debt were at the level that Biden is proposing relative to GDP. The ballooning from a pre-COVID average of 19.4% of GDP to 25% under Biden still fails to take into account community college tuition subsidies, paid family leave and lifetime entitlement program expansions that are sure to skyrocket in coming decades as entitlements and transfer payments historically always do at the dire expense of the defense budget. Meanwhile, the president wants to downsize Defense and Homeland Security funds even with the immigration crisis at the southern border and as China and Iran remain credible and relevant threats to our national security.
Most worrisome is his desire to levy a $3 trillion tax hike, the largest since 1968, and repeal the Trump-era tax cuts, threatening business investment, wage growth and supplier survival right when they need the most help and outpaces any measly increase in overall tax revenue the unprecedented hike could generate. A vicious cycle of Fed debt monetization coupled with a doubling of debt interest payments is sure to come.
As it relates to infrastructure, we see what we would expect after months of trillions in wasteful, non-germane spending masquerading on the Senate as nothing more than COVID relief. While legislation addressing bridges, roads, public works and highways are core bipartisan initiatives of any administration, only $115 billion of the proposal is dedicated to these. The rest is a plethora of union bailouts and green energy subsidies, which seem like predictable policy propoundments seeing as Biden has expressed that unions would take care of the employment problem brought on by his climate regulation. A review of the legislation reveals that to that end, a mammoth $620 billion is allocated for transportation, $85 billion for mass transit and $80 billion for Amtrak on top of $70 billion already allocated for that same purpose from the COVID-19 “relief bills.”
His green energy subsidies include $174 billion for electric vehicles and charging stations on top of the existing $7500 tax credit (while EVs are still too expensive for most Americans and too impractical for rural Americans) and $100 billion to eliminate coal and natural gas despite the latter’s empirically and massively positive effect on lowering emissions. This is all on top of a $23 billion Green Bank with Treasury and tax money access that makes political rather than economic lending decisions led by executives and advisers with no required banking or investment experience to manage a trillion-dollar balance sheet over the next decade which is quasi-guaranteed by the federal government. Does bad lending and federal guaranteeing remind anyone of any recent financial crisis?
Finally, we have the $100 billion for public schools, $213 billion for affordable housing, $400 billion for home health care and $25 billion for child-care facilities (some of which is on top of existing funding). It’s important that we note that welfare spending is what crowded out public work from the budget in the first place, and this re-labeling of the latter as the former makes for a regressive approach to infrastructure legislation that should be the most forward-looking of the century.
Last but not least, on the subject of taxes, there are three main areas of concern: corporate taxes, capital gains taxes, and personal income taxes.
The rationale behind the president’s plan to raise $2 trillion through raising corporate taxes on the highest bracket is that it will target the highest earners in the richest companies as well as foreigners and normally tax-exempt entities. He wants to reduce stock buybacks and shareholder payouts, and in the short term, he’s largely correct and the GOP’s response to his policy proposal, saying that it will decrease investment, productivity, and wages plays out mostly in the long term according to most economists, and even the conservative think tank, American Enterprise Institute, concurs with this dichotomy. Sources differ in their delineation of the burden that capital and labor take on when corporate taxes are increased (e.g., 75/25 respectively by the Joint Committee on Taxation versus 50/50 respectively by the Tax Foundation), but most concur that the effect on stocks will translate to the 401(k)s of middle-class Americans taking a hit, even in the short term.
Regarding Biden’s proposal to raise the top capital gains tax rate to a virtually unprecedented 43.4% from the current 23.8%, the supposed purpose is aimed at countering the so-called loophole of preferential long-term capital gains tax rates, which as it turns out, is in no need of correction as businesses are already being double-taxed (first under the corporate income tax, then under capital gains), no loss (which are often substantial in the short term) is fully deductible despite all gains being fully taxable and no asset is taxed on an inflation-indexed basis, despite many owners opting to hold them for decades to offset their non-deductible losses. As Biden drives the rate way up and away from 28%, which the Congressional Budget Office has deemed “ideal,” tax revenue will actually counterproductively decrease as asset realization decreases by 1.2% for every 1% increase in the capital gains tax rate.
Lastly, while for the purposes of this op-ed, we will refrain from going into the specific data of how the top official marginal income tax rate has never been collected at its intended rate from any considerable number of people relative to the total number of taxpayers at any given time, it is still worthy to note several important facts. With respect to Biden’s mantra of getting the “rich to pay their fair share,” everywhere else in the developed world, lower-income earners pay far more than their American counterparts as a share of GDP in taxes while higher-earners pay comparable amounts if not significantly less in some countries as revealed by the Organization for Economic Cooperation and Development. In Germany, France and Sweden for example, the top 10% pay, respectively, 21%, 19% and 26% less of their income than their counterparts in the U.S. pay of theirs, and the bottom 90% in those countries pay, respectively, 17%, 34% and 21% more of their incomes than their American counterparts do.
However, the evidence is mixed when it comes to the effect of the president’s tax plan on the middle class, which he purports to exclude, at least explicitly/directly, from his tax hikes. While the Penn Wharton Budget Model suggests that 82.6% of all Americans have a 93% chance of seeing an increase in their taxes and the Heritage Foundation indicates that Americans would be $26,900 poorer over the next decade should the Trump tax cuts be repealed, the Tax Policy Center actually presents contradictory evidence, saying that the middle quintile of households will actually experience a 1% cut. Whichever way it is, Biden should take care not to propose tax plans that disincentivize investment, better productivity, new market growth, wage growth and long-term economic expansion.