The Biden administration and Congress are feverishly working on another massive economic plan. It calls for nearly $600 billion in additional infrastructure spending and $3.5 trillion in investments in social programs over the next decade. What lawmakers have in mind isn’t what I would do if I were king, but it’s close.
The plan is big, but that is needed to meet the daunting economic challenges we have long struggled with. More investment in public infrastructure, education, child care, housing, and health care will get more people into the workforce and lift productivity. Long-term economic growth will get a boost. By directing the benefits of this stronger growth to lower- and middle-income Americans, the plan will help arrest the widening gap between the haves and have-nots. And the attention on climate change will work to forestall its increasingly corrosive economic effects.
Critics of the plan
Not surprising given its size and complexity, the plan has gotten a lot of push-back. Some worry that the proposed policy changes are too expansive, given the fiscal support already provided during the pandemic. The concern is that even more spending would exacerbate the uncomfortably high inflation already evident as the economy reopens. The economy could even overheat if the Federal Reserve is forced to tighten monetary policy quickly.
This concern cannot be dismissed, but it is overdone. With unemployment still high at nearly 6% and labor force participation well below where it was pre-pandemic, the economy has considerable slack. Even with all the fiscal support already in place, this plan would be just enough to provide the added boost needed to lift the economy all the way back to full employment.
Moreover, much of the additional fiscal support being considered is designed to raise the economy’s longer-term growth and ease inflationary pressures. For example, the plan calls for additional spending on new rental housing supply for lower-income households. This is critical to rein in rent growth and housing costs. And part of the plan reduces prescription drug costs.
Others are concerned that tax increases in the plan will have serious negative economic consequences. Higher taxes will weigh on economic growth, but the impact on the economy from the higher proposed taxes will be small. In part, the tax increases under consideration on high-income and wealthy households would be the first meaningful tax hike on individuals since the early 1990s. And from a historical perspective, the hikes are, on net, modest. Effective tax rates will remain close to historical norms.
The proposed tax increases for multinational corporations, similarly, only partially roll back the large tax cuts of the Tax Cut and Jobs Act in 2018. Moreover, there is little evidence to date that the TCJA led to a meaningful sustained increase in business investment, hiring or wages, or prompted businesses to shift production to the U.S. from overseas as intended. This suggests that partially undoing those tax cuts will not meaningfully hurt the economy.
Can the bill be well-organized?
The most serious concern is around execution. That is, the infrastructure deal and reconciliation package are complex with massive moving parts. Organizing them successfully would be difficult even among the best-managed private companies. Scaling up existing programs as envisaged in the legislation is one thing, but standing up new programs and tax policy is another.
On paper the plan is largely paid for and does not add meaningfully to the nation’s deficits and debt. But there is a risk that spending and tax credits in the plan that are slated to ultimately expire will not; ending any government program is politically vexing. Tougher tax enforcement also might not raise as much additional revenue as anticipated. The result would be larger federal budget deficits and debt.
Running large deficits makes a lot of sense during the pandemic, so those hit hard can manage through. It also makes sense, as the pandemic winds down, to get the economy back to full employment.
But, once the economy has returned to full employment, focusing on our long-term fiscal problems becomes critical.
The nation has long under-invested in both physical and human infrastructure and has been slow to respond to the threat posed by climate change, all with mounting economic consequences. The plan lawmakers are debating addresses this. Passage of legislation is far from certain, but failing to pass legislation would certainly diminish the economy’s prospects.