What the Biden presidency means for US economic policy

STANFORD — US President-elect Joe Biden’s economic-policy agenda differs markedly from that of President Donald Trump. But Biden’s ability to enact his proposals will depend on three factors: The final composition of the Senate; his ability to learn from past successes and failures, not least the historically anemic Obama-era recovery; and whether the US economy can avoid a growth-sapping shock.

Biden easily won the popular vote in this year’s election, and, as with Trump in 2016, small pluralities in several swing states delivered him a comfortable Electoral College victory. But, despite being heavily outspent, Republicans made surprising gains in the House of Representatives and state legislatures. Exit polls show that voters’ top concerns were the economy, jobs, and the COVID-19 pandemic. With even California voters refusing to reinstate affirmative action or raise property taxes on businesses, the election turned out to be more of a Republican “red ripple” than a Democratic “blue wave”.

To win control of the Senate, with Vice President-elect Kamala Harris casting the tie-breaking vote, Democrats will have to win both of the Georgia run-off elections on January 5. Failing that, Biden’s agenda will be constrained substantially, forcing him either to compromise with Senate Republicans or resort to executive orders and regulatory diktats, as did Obama and Trump.

If the Democrats do prevail in both Georgia races, Senator Chuck Schumer of New York will become Majority Leader. Schumer has indicated that in such a scenario, he would abolish the filibuster, a procedural rule that effectively requires a 60-vote supermajority for most legislation. In that case, the Democrats would be able to enact any policy that they could unite their own ranks behind.

For his part, Biden wants to increase the corporate-tax rate and raise the income, capital gains, dividend, estate and payroll taxes on higher-income individuals, earning more than $400,000 per year, and small businesses. After accounting for state income taxes, his program would set a top marginal tax rate of about 65 per cent for higher-income taxpayers in California and New York City. The United States has had such high tax rates in the distant past, with controversial effects on economic growth and government revenue, but they applied to a much smaller share of the population.

Beyond massive pandemic-related stimulus spending, Biden also wants to spend trillions of dollars more over the next decade to fight climate change, provide government health insurance, invest in infrastructure, and much else. These proposals will add trillions of dollars to the national debt over ten years, on top of the $13 trillion dollars already projected. And that is after massive deficits from the two previous administrations. Though the US Federal Reserve appears willing to accommodate the debt surge for now, its attitude could eventually change.

With the economy still below full employment, some targeted deficit-financed spending makes sense on humanitarian grounds. The problem is that any new legislative package is likely to include costly, extraneous, and harmful spending provisions. A prime example is the proposal not only to extend unemployment insurance, which I support, but to add $600 per week on top of normal benefits, resulting in two-thirds of beneficiaries receiving more than they would earn working.

Biden is also proposing a slew of new regulations for many parts of the economy, from energy to healthcare, the economic costs of which could well swamp the benefits. His approach to dealing with China’s unfair trade practices is likely to be more multilateral, as he will consider joining the successor to the Trans-Pacific Partnership and will lighten the Trump administration’s tariffs, signalling a more supportive view of the benefits of trade. If and how China responds remains to be seen.

In America’s polarised political environment, it is common to think reflexively that all of the Obama administration’s policies worked, or failed, whereas all of Trump’s policies have failed, or succeeded. But such thinking does not make for wise decisions. Not all of the anemic growth after 2008 can be attributed to Obama’s policies, considering that his administration inherited the worst financial crisis since the Great Depression. Nonetheless, the lack of robust growth is prima facie evidence that there was room for improvement, as I had predicted there would be in 2008.

Likewise, Trump cannot claim credit for all of the strong growth, historically low unemployment among minorities, rising wages at the bottom, and record-low poverty rates before the COVID-19 disaster. Nonetheless, he obviously did some things right, such as passing corporate-tax reform and cutting regulations.

Biden’s priorities will be fleshed out and promoted by his economic team, led by former Federal Reserve chair Janet Yellen as secretary of the treasury, and with former Obama policy advisers filling other key positions. Most of these figures’ views are liberal, but not radical, on regulatory, fiscal and macroeconomic-policy matters. While all express an admirable concern for the disadvantaged and the environment, they will have to resist their more ideological colleagues’ zeal for proposals that would flunk any serious cost-benefit test. Of particular concern is the nomination of Neera Tanden, the president of the left-leaning Centre for American Progress, as director of the Office of Management and Budget, a position that is usually occupied by someone with a skeptical eye toward spending, deficits and regulation.

In any case, the current recovery is likely to slow in the coming weeks, owing to a fresh round of business lockdowns. But Biden will probably enjoy a strong tailwind by spring and summer from the arrival of COVID-19 vaccines and any additional “stimulus” spending. Americans have traditionally looked to divided government to swing the policy pendulum toward the centre. If Republicans hold on to the Senate, Biden may find himself better positioned to withstand pressure from the surging left, as will Democratic Speaker of the House Nancy Pelosi.

After his politically disastrous first two years, President Bill Clinton worked with a Republican Congress to balance the budget and reform welfare. That is a model Biden should consider emulating, for the good of the country and his own legacy.

Michael J. Boskin, professor of Economics at Stanford University and senior fellow at the Hoover Institution, was chairman of George H.W. Bush’s Council of Economic Advisers from 1989 to 1993. Copyright: Project Syndicate, 2020. 

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