Biden’s First 100 Days: Solid COVID Vaccine Rollout But The White House Gets A Failing Mark On Fiscal Policy

Assessing a US president in his first 100 days in office is a tradition that goes back to 1933. So how is President Joe Biden performing so far?

Biden inherited a once-in-a-century global pandemic and his handling of what turned out to be the biggest killer of 2020 will likely be a leading talking point ahead of next year’s mid-term elections. But so will the economy. 

While Biden seems to be winning the vaccination race, his administration is failing on fiscal policy. So far, the administration’s actions have run contrary to the president’s stated objective: a more inclusive and equitable economy.

The US$ 1.9 trillion stimulus package signed into law in March could push the projected deficit higher than any deficit on record since the end of World War 2.

Yet with the virus in the rear-view mirror, the US economy is expected to be more unequal, less competitive, and with less fiscal space to help Americans left behind by the current economic recovery. This is because so little of this spending will secure re-training and jobs for workers who were disproportionately affected by the pandemic – workers who often take years to find stable employment. Instead, much of the stimulus was poorly targeted – essentially wasted on cheques to many households that had not even experienced any COVID-19 related job loss. In addition, state and local government revenues had already recovered from the pandemic and yet they received nearly one-fifth of the stimulus package.

With only half of the American adult population having received just one dose of a COVID-19 vaccine, demand is already surging. Labour shortages, upticks in price increases and business costs all point to higher inflation. As virus fears dissipate, the mad rush to part with trillions in “excess savings” will strain economic resources.

In his first address to Congress, President Biden aimed to promote his newest plans – the American Jobs Plan and the American Families Plan totaling US$4.1 trillion - to usher in a new era of big government.

Under the most generous assumptions, the Biden administration would likely have to borrow another US$2 trillion to advance needed infrastructure and an education package that would help the poorest Americans. But the current administration is likely to run out of fiscal room before this happens. A too-hot economy could force a strong reaction by the Federal Reserve, temporarily ending the expansion well before American workers displaced by the COVID-19 pandemic are able to find new opportunities. But even if the US economy does not overheat, policymakers may face increasing opposition to further spending, leading to inaction on the most pressing issues.

To mitigate these risks, the Biden administration wants the new package to be at least partly paid for by higher taxes. However, the tax hikes could be counter-productive. On top of higher corporate rates, the tax hikes preferred by the administration would take aim at capital gains and estates. The proposed tax hikes will likely reduce risk-taking by entrepreneurs, new business formation, and the accumulation of productive assets by Americans. Biden’s tax plan would encourage spendthrift behaviour, fuel tax avoidance and evasion, and pour more money into politics to undermine the US democratic process.

Instead, Biden’s focus should be on promoting economic dynamism. That means policies that incentivise business formation and fuel innovation.

Investments in worker training and re-training would speed up the jobs recovery, help to reduce inequality – one of Biden’s goals – boost entrepreneurship, raise labour productivity and economic potential. In addition, immigration reform would increase the size of the American workforce and provide a boost to innovation and technological advancement.

High Marks For The Quick Distribution Of COVID-19 Vaccines

Most economists agree that successful vaccine distribution will be the global economy’s most potent stimulus package. This is because the efficacy of the trillions spent in government stimulus crucially depends on individuals being able to go out and spend.

On that front, Biden has delivered so far. The United States ranks fifth in the world in new per capita daily vaccinations, and consumer sentiment is on the rise, according to the University of Michigan’s consumer survey[1].

As a result, economists expect US gross domestic product to exceed 6 per cent according to the Wall Street Journal economic forecasting survey[2] – a survey of more than 60 economists. The US Congressional Budget Office projects 4.6 per cent growth in 2021.

Unfortunately, most of this growth is likely to favour the top of the income distribution, leaving low-income Americans behind.

Poorly Targeted Stimulus Likely Exacerbated Inequality And Reduced Dynamism

One year after COVID-19 arrived on US shores, 33 per cent of US businesses remain closed.

Pandemic fears and mandated government closures led to shuttered businesses and surging joblessness. Unfortunately, the effects disproportionately affected low-income households and Black Americans, many of whom were workers whose jobs could not be performed at home.

The new administration and congressional Democrats pushed through a US$1.9 trillion stimulus package in early 2021. The package included direct cheques to millions of Americans – including those who had not suffered income loss due to COVID-19 – enhanced unemployment benefits, and aid to state and local governments, among other things.

But the stimulus package was poorly targeted. It was not limited to the unemployed and struggling businesses experiencing a revenue crisis. COVID-19 exacerbated inequality but the policy response worsened the problem.

Economic research published in the Review of Financial Studies[3] shows that a one-standard-deviation increase in wealth inequality in metropolitan areas leads to an approximate 12 per cent decline in new establishments’ entries and exits per capita.

Public health policy and fiscal and monetary policy in response to the pandemic contributed to enrich high-income and wealthy Americans. While low-wage American workers lost their jobs, the stock market soared and annual home price growth accelerated.

The labour market recovery was also uneven. One year after the first US COVID-19 case, high-wage employment had nearly completely recovered to its pre-pandemic level. Yet middle-wage employment was still down 7 per cent, and nearly 30 per cent of low wage workers were still out of work, according to data collected by the Opportunity Insights[4], a team of Harvard Researchers led by economist Raj Chetty.

While the stimulus cheques raised the incomes of middle- and high-income Americans in 2020, those who lost their incomes during the pandemic are using their stimulus  cheques to catch up on bills and just get by. The national mortgage delinquency rate is still close to 7 per cent, a level only surpassed by the 2008 housing crisis.

In January, even before the additional stimulus, Americans – mostly those at the top of the income distribution – were already sitting on close to US$3 trillion in aggregate savings. This is why the most recent poorly targeted stimulus package is likely to have caused inequality to increase by more than under any previous administration.

The increase in wealth inequality due to the pandemic and the subsequent policy response will lead to less market competition and less economic dynamism, meaning fewer opportunities for American workers long after COVID-19 is in the rear-view mirror.

Tax Hikes Would Be Counter-Productive

To make good on campaign promises, Biden now wants to deliver an additional US$4.1 trillion package in new spending.

It is clear that public health expenditures, relief for the jobless as well as investments in infrastructure and education should have made up the bulk of Biden’s massive US$1.9 trillion stimulus package. This is because investments in education and fixing America’s broken infrastructure would have helped to employ and to increase access for poorer Americans. Unfortunately, these crucial investments may never be realised.

While the Biden administration rejects concerns of economic overheating, a too-hot economy could force a strong reaction by the Federal Reserve that would cause borrowing costs to increase to crowd out new investment.

In order to hedge their bets, the president’s team has proposed tax hikes to finance the new spending. But political constraints as well as the impact that the proposed taxes would have on economic behaviour suggest that the president’s tax hikes wouldn’t raise much revenue and most of the new spending would be borrowed.

The key measures under discussion include raising the highest personal income tax rate from 37 per cent to 39.6 per cent; raising the corporate tax rate from 21 per cent to 28 per cent; increasing the global minimum tax paid from about 13 per cent to 21 per cent; ending federal subsidies for fossil fuel companies; and forcing multinational corporations to pay the US tax rate rather than the lower rates paid by their foreign subsidiaries.

The Biden administration is also calling for taxing long-term capital gains income as ordinary income, bringing the maximum tax on capital gains from slightly more than 20 per cent to the proposed top rate of 39.6 per cent. The administration also wants to reduce the threshold for the estate tax exemption.

If enacted, the corporate tax hike could raise the US federal-state combined tax rate to 32.34 per cent, the highest among the most developed economies.

Although Biden’s team claims Americans who earn less than US$400,000 will not see a tax increase, research shows workers themselves bear much of business tax increases.

Research[5] reveals that individual income tax hikes reduce the probability that an entrepreneur hires workers. Conditional on hiring employees, taxes also reduce the wages paid to workers.

The combination of higher corporate taxes and higher personal income taxes would harm US economic competitiveness. On the other hand, replacing personal and corporate income taxes with a low flat tax would raise the amount of entrepreneurial activity[6].  A plan to tax the consumption of the wealthy and not their wealth would also generate more revenue.[7]

Biden Gets A Failing Mark On Fiscal Policy

Biden’s economic agenda is full of holes. On one hand, he rightly claims that rising inequality is a drag on growth. On the other, his stimulus package was less focused on Americans who needed it most, contributing to growing the gap between the haves and the have-nots.

In addition, Biden also wants to remove the cap on state and local tax deductions, a policy choice that disproportionately benefits the richest Americans.

The state and local tax  (SALT) deduction cap was introduced as part of the Tax Cuts & Jobs Act as a means to partially fund reductions in federal income tax rates. It was expected to collect roughly US$670 billion more from high-income Americans during the next decade.

Previously, individuals could deduct unlimited amounts of state and local taxes from their federal taxable income. The SALT deduction was a bigger benefit to the rich. The deduction also reduced mobility to states that offer a better price for government services.

Removing the cap on state and local tax deductions would curb tax competition so that politicians in states and localities can raise taxes to fund wasteful projects that tend to benefit a few at the expense of everyone else without losing important political contributors.

Take the US state of Illinois for example. In Illinois, increases in tax receipts don't flow to the poorest Illinoisans. Tax hikes go to rapidly rising public employee retirement costs. Since 2000, the state has increased pension spending by more than 500 per cent while education spending has gone up only 21 per cent during that time. All other spending, including social spending for the disadvantaged, fell 32 per cent. It’s perhaps not a coincidence that Illinois also maintains the second highest number of public corruption convictions in the country.

Research[8] shows that higher state and local taxes disproportionately fall on the poorest. This is because local governments fail to accurately assess property values. More expensive properties are under-valued while less expensive properties are over-valued. The result is that less affluent homeowners pay a higher price for the same public services.

A policy that curbs tax competition hurts economic dynamism because it eliminates a powerful government accountability mechanism. The cap on SALT deductions encourages reforms in US states in order to deliver higher public sector efficiency. Higher government efficiency[9] would boost economic growth. Removing the cap would only encourage more government waste and corruption, disproportionately harming the poor.

Immigration Reform Could Be A Lifeline For Biden And The US Economic Future

As the share of older Americans increases, growth in the working-age population and labour force is slowing, causing productivity to decline, eroding business dynamism, and lowering economic potential.

America’s demographic challenges will cause the federal budget deficit to continue to soar, with the US debt-to-GDP ratio hovering around 110 per cent by 2023 – the highest in the nation’s history.

An increase in the size and quality of America’s workforce would replenish the labour force, create new jobs, increase productivity, promote innovation, and foster competition to increase the pace of real economic growth.

The increase in the economy’s productive capacity could also combat rapidly rising prices from trillions of deficit spending and an aging population that consumes more and produces less.

On day one of his presidency, Biden sent a bill to Congress that would boost skilled worker immigration into the United States. The bill aimed to clear employment-based visa backlogs, to reduce lengthy and costly wait times, to eliminate arbitrary per-country caps, and to make it easier for highly skilled workers and STEM graduates to stay and work in the United States.

Estimates[10] by the Washington DC based Cato Institute suggest that the green card backlog of skilled immigrants is likely to exceed 2.4 million by 2030, with Indian nationals having the longest wait times of 89 years for a green card to be available.

In addition, Biden currently faces a crisis at the southern border.

While US immigration rules are too restrictive and less suited to attract talented workers than its northern neighbour, Biden has the opportunity to reform a broken system and stoke America’s economic engine.

Immigration reform focused on making the United States competitive again would earn President Biden high marks.

“It’s the economy, stupid” Is Still As True Today As In 1992

Unfortunately, the Biden administration fiscal policy choices will harm the US economy.

A repeal of the SALT cap would free up states and localities from their duties to taxpayers, resulting in a less efficient government sector.

Biden’s stimulus package was a missed opportunity that will likely stand in the way of investments that would have contributed to a less unequal US economy. And if Biden wants to tax his way to delivering on campaign promises, he runs the risk of causing further economic pain.

Instead, the administration’s next move should be actions on immigration that allow the United States to compete with its northern neighbour for international talent. This is because there’s almost no evidence that immigration displaces jobs or depresses wages in the receiving countries. It is quite the opposite, actually: immigrants are generally more entrepreneurial, create jobs for locals, and have a positive net fiscal effect over their lifetimes.

If the administration can abandon harmful tax hikes and wasteful spending to focus instead on fixing the country’s archaic immigration rules, President Biden could set the United States on a path to more inclusive and sustainable economic growth.

Footnotes:

[1] https://data.sca.isr.umich.edu

[2] https://www.wsj.com/graphics/econsurvey/

[3] https://academic.oup.com/rfs/advance-article/doi/10.1093/rfs/hhaa097/5897425

[4] https://tracktherecovery.org/

[5] https://www.nber.org/papers/w6578

[6] https://www.nber.org/digest/nov02/taxes-and-entrepreneurial-activity

[7] https://thehill.com/opinion/finance/428819-soak-the-filthy-rich-by-taxing-their-consumption-not-their-wealth

[8] https://propertytaxproject.uchicago.edu

[9] https://www.gla.ac.uk/media/Media_43670_smxx.pdf

[10] https://www.cato.org/publications/immigration-research-policy-brief/backlog-skilled-immigrants-tops-1-million-over

Dr Orphe Divounguy
Orphe Divounguy is a Senior Economist at Zillow Group Inc. Divounguy is the former Chief Economist at the Illinois Policy Institute. Divounguy is also the founder of the Quantitative Research Group and the co-host of the Everyday Economics podcast. Divounguy’s columns and articles cover fiscal policy, labor economics, and quantitative methods for programme and policy evaluation. Contact: orphe@policyquants.com. The views presented here do not necessarily reflect the views of his employers.