Update 526 — Biden Economic Policy Plan
Outline of a New Social Contract on Offer?
In his first address before a joint session of Congress on Wednesday, President Biden proposed an ambitious and progressive domestic economic policy agenda for the months ahead. He declared trickle-down economics dead and offered what amounts to a redefinition of the prevailing social contract — the expectations that citizens have of their government and the obligations they agree to.
Since the Reagan era, presidents of both parties have governed assuming that most voters prefer small government. But Biden’s agenda looks to institutions of government to stimulate long-term economic growth and ensure a more equitable distribution of wealth. Does public opinion — supporting large-scale spending and opposing the last major tax cut bill — show voters may seek or at least be ready to accept a 21st Century form of social contract? More below…
Good Weekends all,
Evaluating Biden’s First 100 Days
When Biden took office, he inherited uniquely perilous circumstances. In the midst of the largest surge of the pandemic, the economic outlook was uncertain and the strength of our democracy was in doubt. 100 days later, the problems and aftermath remain. But Biden and Democrats in Congress scored a big legislative win, passage of the American Rescue Plan Act, and have begun reshaping the debate about the federal government’s role in the economy.
The ARP’s passage was a substantial win for Biden. He asked Congress for $1.9 trillion and got it, with the final bill largely resembling the initial plan Biden proposed before he took office. Passage of a bill that size would have been unimaginable before the pandemic. But the bill’s provisions polled exceptionally high, indicating that the public and their representatives in Congress have accepted the expanded governmental role the act provides.
Biden has enjoyed early success presiding over the economy. The unemployment rate is declining, consumer confidence is rising, and over 200 million vaccine shots have been administered. Gross domestic product grew 1.6 percent in the first quarter of 2021, which translates to an eye-popping 6.4 percent on an annualized basis. To the chagrin of his critics, Biden and his administration have stayed on message, and the public has rewarded him so far with a solid approval rating.
The American Families Plan
The centerpiece of Biden’s speech to Congress was his proposed $1.8 trillion American Families Plan (AFP), which seeks to support low-middle income families and boost long-term economic growth. The AFP includes around $1.5 trillion in tax increases on the wealthy by raising the top marginal income rate to 39.6 percent, closing the stepped-up basis loophole, and increasing IRS funding to strengthen enforcement and collection. The plan invests $500 billion in education and provides free universal preschool and community college. Child care and paid leave programs are funded at $225 billion each, ensuring families and care workers more financial security. Extending the American Rescue Plan’s one-year increases to the Child Tax Credit and Earned Income Tax Credit would alleviate poverty on an unprecedented scale.
Biden intends to make substantial direct investments in the American workforce and middle class. If enacted, the proposals would reshape the economy and set a precedent for an active government role in the economy. His education plan centers around new funding for universal pre-K and sustainable career paths for those unable to obtain a four-year degree, and the proposed funding for child care and paid family leave would most benefit low-income families. The tax increases on the wealthy and credits for low- and middle-income Americans would shift the balance of economic inequality by transferring wealth from the top one percent to those who do most of the working and spending.
The Next 100 Days — and Beyond
Now, Congress will move to pass the AFP and other parts of Biden’s ambitious legislative agenda. Despite a strong start to his administration, success is not guaranteed. Biden must convince Congress, which has already authorized $6 trillion in stimulus spending since the start of the pandemic, to turn its attention to long-term economic investments paid for by fixing an inequitable tax system.
It is becoming increasingly clear that Republicans will not support the plan. Democrats will likely again turn to budget reconciliation, which only requires simple majorities. All congressional Democrats support new infrastructure spending to some degree, meaning an infrastructure bill will likely pass later this year since most of the provisions should qualify for reconciliation.
But federal infrastructure policy is more complicated than the cash assistance and grant programs that made up ARP. Reconciliation, because of the Byrd Rule, will dictate how the proposals are crafted, and the provisions will likely see more open disagreements among Democrats — particularly when it comes to taxes. As the economy continues to improve, critics will argue that additional fiscal spending is unnecessary. Biden will have to maintain the sense of urgency and make the case that these concerns are misguided.
A New Social Contract?
Four years of Trump laid bare the inadequacy of denial and distraction. Biden has restored normalcy to the West Wing. Yet in recent decades, “normalcy” implied a social contract characterized by a national consensus regarding the proper scale and scope of the federal government.
Biden has offered a progressive domestic agenda that, if enacted, would be on par with those of FDR and LBJ. Republicans, meanwhile, have struggled to define a coherent objection to Biden’s policies. After 40 years of national politics shaped by Ronald Reagan’s anti-tax, anti-spend economic ideology, its residual support is vanishing slowly from the GOP. “Washington schemes and socialist dreams,” warned Sen. Tim Scott, who delivered a vapid and diversionary Republican rebuttal. Does that still scare voters?
This could all end in tears: it’s risky in that it might not work. But market operations, as well as federal investment, make that unlikely. Instead, Biden’s embrace of the federal government’s power to improve people’s lives could signal a major sea change in American politics.
We will debate whether the spending is enough, too much, or not enough, what is spending and what is investment, if capital should continue getting preferred shares and labor subpar ones in the tax code. But if Biden passes a significant amount of his legislative agenda, a new social contract will take shape — under which voters can expect an active government working to promote a more just economy and society.