President-elect Joe Biden has announced the largest public spending program in US history to bring back the world’s No. 1 economy. What are these measures?
The ratification of the Electoral College vote by the United States Congress has officially confirmed that Joe Biden will succeed Donald Trump and become the country’s next president.
Taking into account the wide differences between these candidates, as well as the very opposite promises with which both have carried out their electoral campaigns, there is the possibility that this change of government will translate into a radical turn in many aspects, including economic policy.
In this article we will analyze the great reforms that Biden has promised for the first economy of the world, of which we already know some details.
A new New Deal?
On January 14, Joe Biden announced the main lines of his action plan to recover the United States economy, divided into two parts. The first, called the American Rescue Plan, includes increasing subsidies for low-income people by up to $ 2,000 a month, an extension of unemployment insurance; rental aid and moratoriums; a reinforcement of food aid programs and more guarantees for credits requested by small businesses; in addition to measures aimed at subsidizing the care of children and the elderly. Also, among other things, it is contemplated to raise the minimum wage to $ 15 an hour throughout the national territory, while increasing the education budget, with a total cost of about $ 1.9 trillion.
On the other hand, the second part of the plan, as announced by the president-elect, will be aimed at public investment in sectors such as infrastructure, industry, innovation and clean energy, while these investments will be implemented throughout the year. Far from surprising analysts, the two parts of the economic stimulus plan are quite aligned with what was promised in its electoral program.
Broadly speaking, these ideas can be said to be inspired by the New Deal, a set of reforms implemented by Franklin D. Roosevelt in response to the Great Depression. Applying the fashionable Keynesian policies in the interwar period, the New Deal sought to restore growth and employment through the construction of large public works and the creation of state-controlled enterprises. All this, accompanied by steep tax increases and greater regulation of economic activity.
Although the success of the New Deal is still under discussion today (GDP per capita took 11 years to recover and employment only did so under the distorting effect of World War II ), the truth is that for many people it is a paradigmatic case of the need for the State to stimulate the economy in times of crisis. Today the abrupt fall in economic activity as a result of the pandemic, with the consequent destruction of millions of jobs, seems to set up a similar scenario for them where they consider that political intervention in the economy is the only possible solution.
In this sense, the great axis of Joe Biden’s economic policy seems to be the Green New Deal, a package of measures inspired by those of Roosevelt, although adapted to the current context and directed, also, to another of the great concerns of our century: environment. In this way, during the electoral campaign, the president-elect of the United States has promised to spend 1.3 billion dollars from the public treasury in the next 10 years on transportation, education, communication and energy infrastructures, with a special emphasis on projects that reduce CO2 emissions. He has also pledged that his country will once again be part of the Paris Agreement, after having formalized its withdrawal in November 2020 under the mandate of Donald Trump.
With regard to the labor market, and as if it were a déjà vu of the 1930s, in addition to the increase in the minimum wage that we have discussed, Biden’s program includes various measures to strengthen the power of unions, especially favoring negotiation collective. The intention of these measures is to increase the purchasing power of the middle class, for which tax deductions have also been promised for medium and low income for medical expenses, purchase of a first home and care for children and the elderly.
On the other hand, the economic plan of the Democratic candidate includes important tax increases such as that of Societies up to 28% (from the current 21%) and with an effective minimum of 15% and a new maximum rate of the Income Tax of the 39.6%. To promote national production (another axis of the program), it has also been promised to penalize companies that relocate jobs and sell in the United States, as well as to double the tax on profits obtained abroad of North American companies that have moved their headquarters to other countries.
Enthusiasts vs. Skeptics
Although Biden’s economic plan has generated great optimism among those most enthusiastic about the role of the state in the economy, the electoral results also indicate that millions of people in the United States have a different view on it. In this regard, it is important to remember that although the grand objectives of Trump and Biden’s economic policy (stimulating growth, recovering lost jobs, and strengthening the middle class by boosting domestic production) may seem similar at first glance, the means to reaching them are completely opposite.
Under the Trump administration, the path chosen to stimulate growth has been to enhance the freedom of entrepreneurs and consumers by reducing taxes and regulations, increasing the disposable income of the private sector and thus allow an efficient allocation of resources based on the spontaneous order of the market. The exception to this policy has been the foreign market, where economic freedom has suffered a setback due to increased tariffs and restrictions on imports (especially from China). The model could therefore be summarized in promoting freedom in the domestic market and restricting it abroad, presenting some similarities with mercantilist ideas.
On the contrary, Biden proposes to strengthen low and middle incomes through a more redistributive tax system and better wages imposed by law or by collective bargaining. In this case, it is committed to an allocation of resources less linked to market preferences and more directed by the country’s political authorities, as demonstrated by its public works plan. Regarding the foreign market, it is still difficult to foresee concrete measures since, although the Democratic electoral program mentions rebuilding commercial ties that have been weakened in recent years, there is also talk of promoting national industry and there are not too many details about the commercial conflict with China. However, foreign relations are expected to be less aggressive than those Trump maintained during his term.
Thus, the election results seem to show a higher voter preference for Biden’s proposals, but that does not mean that his detractors are devoid of arguments. After all, according to the Bureau of Labor Statistics in September 2019, the unemployment rate had fallen to an all-time low of 3.5% (the best figure since 1969), with levels especially low in groups such as African Americans, Hispanics and workers without studies. Subsequently, in the first half of 2020, the economy was severely impacted by the pandemic that destroyed 22 million jobs, but only in the third quarter of the year 11.4 million were created (the fastest recovery rate quick of the historical series).
For this reason, opponents of Biden’s measures argue that market freedom is the best way for people who belong to groups considered to be “disadvantaged” to prosper, and that the restrictions that are intended to help them (such as the minimum wage or membership union) only contribute to perpetuating their difficulties. If Biden’s electoral program justifies the need for unions by pointing out that more than 60% of their members are women and / or members of minorities, their detractors criticize that the fact that these people belong to a union does not seem to have had a significant impact on reducing social inequalities that supposedly penalize these groups.
Finally, adherence to the Paris Agreement also raises the concern of thousands of workers linked to the coal, oil and natural gas industries, since the reduction of emissions threatens to restrict their activity. In this sense, the Biden stimulus plan promises to create new jobs linked to clean energy, but as we have explained in previous publications, when an energy transition does not take place naturally (due to the greater competitiveness of the new source of energy) but by legal imperative, inefficiencies may arise and, therefore, also imbalances in the labor market.
Hopes and concerns on the horizon
The Keynesian turn in US economic policy has sparked optimism in many, but also reservations on the part of others. As we have commented, for many the results obtained up to 2019 and the rapid recovery in the third quarter of 2020 show that a good way to boost job creation is with a framework of low taxes and economic freedom. From this point of view, making hiring more expensive by raising the minimum wage in a context of massive unemployment will only delay the recovery of the labor market, as happened in the 1930s.
Furthermore, any increase in public spending that is not accompanied by an equivalent increase in the tax burden usually results in an acceleration in the growth of public debt. In the United States, where this variable exceeds 120% of GDP and expansionary monetary policies are also expected to continue, stimulus measures could affect the cost of financing the federal government and even the international price of the dollar.
However, the high bill left by COVID, in addition to those large investments that the country plans to undertake, raise the need to increase collection to increase spending and meet what was promised. For this reason, there are many citizens who support these tax increases to increase the strength of the State, as well as its ability to deal with situations of a similar nature.
In any case, advocates of Keynesianism today are excited about what many see as a 21st-century reissue of the New Deal. Thanks to these measures, millions of families and companies will be directly benefited by a veritable torrent of public money. However, the most skeptical point out with concern that a plan that has failed once will probably do so again.