A Harbinger Of The Future

A Harbinger Of The Future

Incoming President Joe Biden has given the nation another glimpse of his economic policy plans. Not too long ago, he outlined his future tax proposals, and just a few days ago, he announced a $1.9 trillion spending plan, to relieve the pandemic’s economic stains his speech said. To be sure, parts of this plan might help ease some of the suffering caused by the anti-virus lockdowns and quarantines, but much has less to do with Covid than with the Democratic Party’s long-standing wish list. As far as the economic effects of the pandemic are concerned, much in this proposal is probably unnecessary.

Biden quite rightly excused all the proposed spending from the usual requirements on new budget outlays. To stem the tide of red ink, each new spending initiative typically must find compensating spending-cut offsets or tax increases to justify itself in the budget. Biden claims that the debt in this case should not be of concern. He made dubious claims that his proposed spending would pay for itself by stimulating economic activity, but he stood on firmer ground when he claimed that it is an obligation of the federal government to use debt to meet needs in an emergency. His is the same argument used to justify using debt to fight an existential war.  Future generations will bear the payment burden, but they will also benefit from the immediate effort to protect the nation. In other words, it is unreasonable to ask the generation that fights the war (copes with the pandemic) to pay for it as well. If his desire to use debt is reasonable, Biden’s plan still leaves two questions: Are these measures well targeted to people’s needs and are they necessary at all? On both counts, there is ample room for doubt.

Biden’s plan has two basic parts. One aims at direct relief for households. It offers eight measures: First it would give $1,400 direct payments to most households, topping up the monies offered last December to the $2,000 originally promoted by Donald Trump. Second, the plan would add $400 a week to unemployment insurance payouts through September 2021. Third, it would expand paid leave, and fourth, it would extend the 15 percent increase in food stamps presently in place but set to expire. Fifth, Biden would extend the moratorium on evictions and foreclosures. The sixth element was previously announced with Biden’s tax initiatives, increasing the child tax credit from $2,000 to $3,000 and adding $600 more for each child under six. Seventh, this plan would also offer $10,000 in student debt loan forgiveness, and finally, it would raise the national minimum wage to $15 an hour.

Other elements in the proposed action would aim more at assisting states and municipalities. It would dedicate $50 billion to increase virus testing and $160 billion to establish a national vaccination effort in addition to the state-managed plans already in place. Additional funds would go to help Medicaid administer vaccinations and would add to the $8.4 billion passed in December to help states with the vaccination rollout. The new plan would also establish a $30 billion general national disaster relief program and earmark considerable additional funds to help states and cities bear the more general financial burden of coping with the pandemic.   

Clearly, some of this spending would make it to people who need the help, but much is poorly targeted. A great deal of the $1.9 trillion aims more at the middle class rather than at the working families most affected by the anti-virus lockdowns. Student debt relief, for instance, hardly seems suited to the immediate needs of pandemic relief. A payment moratorium might have a place in such an effort, but outright forgiveness would use funds that could otherwise help those in greater need. After all, student debt implies that those involved have at least some college, which would further imply that they have advantages not shared by many others. Similarly, the plan to send $1,400 checks to households will by nature have only a one-time impact on economic activity. These funds also could be better targeted. Analysis by the Tax Policy Center has concluded that some 58% of these checks would go to families with over $50,000 a year in current income while some would go to families with annual incomes of over $200,000. The proposal to hike in the national minimum wage is not likely to put people back to work. It might enrich those who already are working, but it would discourage many already struggling small businesses from hiring and may even convince these already strapped business owners to close down altogether.

Nor is it apparent that these measures are well suited the economy’s immediate needs. These proposals generally come from the standard anti-recession playbook, aiming to stimulate economic activity by boosting consumer and business demands for goods and services. But a shortage of demand is not today’s problem. To be sure, those thrown out of work are spending less than they otherwise would, but at the same time, large portions of the population would happily spend if they could. So, too, would businesses spend to rebuild if they had reason to expect these consumers to come out. Instead of an insufficient willingness to spend, there is, in fact, a huge pent-up demand that would generate considerable economic activity were it not blocked by the strictures put in place by the various state authorities. The extent of that potential buying flow is clearly evident in the Commerce Department’s report that savings have increased cumulatively by almost $3.0 trillion since last March, almost $2.0 trillion more than would normally have been the case. Last spring and summer made clear how even a partial lifting of these anti-virus strictures allowed that pent-up demand to propel economic activity and hiring at an unprecedented pace. With vaccines promoting a greater economic reopening, there is good reason to expect a similar surge quite aside from any federal stimulus.  Indeed, federal stimulus on top of this surge could invite economic distortions.

Whatever the virtues and risks of this plan, it is a long way from law. Although the president’s party controls both houses of Congress, its majority in the House is slim, and it is even slimmer in the Senate. General procedures usually require 60 votes in the Senate to pass legislation. Reconciliation bills allow a simple majority, which Vice President Kamala Harris could give with a tie-breaking vote, but that can happen only a limited number of times, and the party might not want to use one for these measures. On these bases, the eventual legislation seems subject to the watering down that inevitably occurs in debate and compromise.

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