Shooting for the moon: can Biden transform the US economy?

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This is the first in a series on Joe Biden’s first 100 days in office

When Joe Biden was sworn into office on January 20, the US economy was struggling to emerge from a winter slump and his ability to enact a big fiscal response to the pandemic downturn was mired in doubt.

As he approaches his 100th day in office and this week’s joint address to Congress, the US president can say he has achieved his primary goal: a rapidly accelerating recovery on the heels of a swift vaccination rollout and passage of his $1.9tn stimulus bill.

Yet the next stages of Biden’s economic agenda are expected to be far more fraught than the first one, with more resistance on Capitol Hill, tensions with corporate America and Wall Street, and a complicated message to the public about the need for sweeping government intervention. 

“I’m not worried that they will lose their mettle. I am worried that the political path is really difficult,” said Felicia Wong, president of the Roosevelt Institute, a think-tank, who served on Biden’s transition advisory board. “Biden’s next economic plans are fundamentally transforming the economy in a way that we haven’t seen in the last 50 years and that’s going to be a lot harder”.

Biden and his top officials appear emboldened by the popularity of their economic policies so far, and ever more determined to plough ahead with plans to spend billions more on infrastructure, education and childcare, which have been compared to Franklin Delano Roosevelt’s New Deal after the Great Depression. The president wants to pay for further huge increases in spending by sharply raising taxes for corporations and the wealthy.

“The American people are now able to breathe easier and sleep better,” Kamala Harris, US vice-president, said at a technical college in North Carolina last week. “The president and I are ready to keep going. And we are not going to take it slow, and we are not going to take it one step at a time. Nope. We are going to take a giant leap into the future.”

Whereas Biden’s $1.9tn stimulus delivered a massive new dose of funds to help low-income households weather the latter stages of the pandemic, Biden’s next plans are focused on long-term investments to bolster chronically weak spending on public goods, address climate change and narrow income inequality and racial disparities.

They are split into two packages, which both face uncertain prospects on Capitol Hill. The first, unveiled last month, would fund $2tn in new infrastructure spending over the next eight years, along with big increases in corporate taxes.

This week, Biden is expected to propose a further $1.5tn in spending on education and child care initiatives, paid for by a string of tax increases on the wealthy, including on capital gains for people earning $1m or more, raising the hackles of many in the US financial sector.

Biden’s spending plans

$1.9tn

Value of the stimulus plan, which helped mitigate effects of the pandemic for poorer households

$2tn

Value of new infrastructure spending over the next eight years, to be funded by corporate taxes

$1.5tn

Spending on education and child care initiatives, to be funded by taxes on the wealthy

Democrats and their allies believe the plans and many of their components, including the tax increases, are broadly popular with voters after decades of middle-class stagnation, and with low-income households that were hit much harder by the pandemic than affluent investors and large companies.

“Poll after poll shows that [the public] supports raising taxes on wealthy people and profitable corporations. And of course raising taxes is never easy politically, but the idea that we can’t raise revenues is not a view that is held by the public,” said Sharon Parrott, president of the Center for Budget and Policy Priorities, a left-leaning economic think-tank.

But Republicans believe that over time the urgency and desirability of Biden’s plans will wane, shattering Democratic unity on the proposals, which is critical to ensure their passage since Biden’s party has exceedingly slim majorities in both houses of Congress.

“They seem to have a strategy that they’re going to shoot the moon [really go for it] while they’ve got control . . . people who are not particularly partisan are inclined to give a new president a chance: 100 days is a relatively short period of time and we’re coming out of a completely unprecedented pandemic and economic catastrophe,” said Pat Toomey, the Republican senator from Pennsylvania. “But I think over time, the radical excesses are not going to age well.”

“I think right now we’re in a very, very strong expansion and very strong recovery. But I do think that the Biden administration is jeopardising some of that growth. The tax increases that they seem determined to inflict on our economy will create a lot of headwinds when they kick in”.

The biggest political headache for Biden is that any new economic legislation would have to pass muster with a cohort of moderate Democrats, such as senators Joe Manchin of West Virginia and Kyrsten Sinema of Arizona, who are more sceptical of Biden’s sweeping agenda.

Among the fears of Democrats and their allies is that the Biden economic team may ironically end up being a victim of its own success. The sharp rebound from the pandemic — including job growth of nearly 1m positions last month, with possibly more to come in April — could itself dampen momentum on Capitol Hill if politicians judge more aggressive spending to be unnecessary.

The White House has also already tried to stamp out concerns that the economic bounce already under way would lead to a sustained and potentially risky spike in inflation, as suggested by former Treasury secretary Larry Summers. Biden’s top officials are stressing that the economy is still 8.4m jobs short of employment levels in February 2020, arguing that it is too early to say the recovery is secure and complete.

“Demand is picking up sharply because people are being vaccinated and they have plenty of financial resources at this point to go out. It’s a step further to have the labour market recovery,” said Karen Dynan, an economist at Harvard University and a former senior Treasury official under Barack Obama.

So far, Biden has managed to avoid the kinds of internecine battles between opposing factions that often rattled Donald Trump’s economic squad but also marked Obama’s economic team, particularly in the early years.

But as the recovery proceeds and the next economic packages are negotiated, a split could emerge between Democrats who are more willing to compromise with Republicans on issues such as taxes and those who will hold the line.

So far, many of the Biden administration’s supporters have been pleasantly surprised by the fearlessness — critics dub it recklessness — with which the White House has brushed aside concerns about future deficits, rising consumer prices, and a backlash from business and markets to pursue bold action.

But they also believe the biggest economic stakes lie ahead, if Biden can pull it off. “The next phase of policymaking is really about attacking longstanding problems, and recognising that they are large but solvable,” said Parrott.

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