President Joe Biden’s economic program is becoming fairly clear and as expected it imposes severe costs on the U.S. economy. There are however also some positive nuggets, which we should welcome and hope to keep for better times ahead. Even with those nuggets, however, the economic outlook is grim, largely because of policies on which all Presidents for the past two decades have been agreed.
Biden last week produced a $1.9 trillion “stimulus” plan, an opening bid of spending, supposedly to relieve the short-term pain of the Covid-19 pandemic. The least objectionable item in the plan, costing about $400 billion, is to give $1,400 cash grants to all U.S. citizens, on top of the $600 grants authorized at the end of 2020. Cash grants to citizens get spent on items citizens want and need, which results in better resource allocations than governments spending the same money. $400 billion given to the people is $400 billion not dropped without trace into the inefficient maw of government, at whatever level.
This additional grant brings Biden in line with President Trump and shows how futile was Mitch McConnell’s gesture in stopping Trump’s amendment of the last stimulus plan, preventing the $600 from becoming $2,000 just before the Georgia Senate run-offs. The critical factor in those run-offs (apart from any possible shenanigans) was a decline in turnout in heavily Trump rural areas – for whom $2,000 is a lot of money, which Republicans were preventing them from receiving. McConnell’s obstruction was thus the ultimate in futile gesture politics, that may well have cost him the Senate majority. Trump’s tantrums were unfitting to the leader of the free world, but you cannot say that on this occasion he was not justified in his annoyance.
The other item in Biden’s wish list that gets to actual people is the increased supplemental unemployment compensation to $400 per week and its extension to September from March. The problem with this is that the economy should have reopened well before September and, in a reopened economy, a supplemental $400 in unemployment insurance is simply an incentive not to find a job. The Obama administration made a similar mistake in 2010-12, when the extended unemployment insurance coverage to 99 weeks; in a dull job market, all too many people took full advantage of the extension.
The remainder of the spending items in Biden’s list are modest supplements to the funding for vaccines and their rollout and an entirely unnecessary $540 billion subsidy to state and local governments and education, a key item on the Democrat wish list, subsidizing inefficiency and under-funded, bloated state pension schemes. That is pure money down the drain; it will just encourage more bloat in the state governments that are most bloated. There are also increases in child allowances, expensive, but with little economic effect.
Finally (for this package) Biden wants to increase the minimum wage to $15 per hour. This will have little effect in the major coastal cities, where costs are so high that this is the minimum needed for subsistence. In Mississippi, however, where $15 per hour is the median hourly wage, it should in principle make close to half the workforce unemployed. Presumably its effect won’t be quite as bad as that, although combined with the $400 per week unemployment subsidy, it may come close to that level. It is thoroughly damaging economic policy, but being Democrats, the Biden administration will need to find this out the hard way.
Outside the “stimulus” package, there are several other Biden economic proposals that will affect the U.S. economy. On tax, he proposes to reverse partially the Trump corporate and high-income tax cuts of 2017. On the corporate side, this is largely fair; this column said at the time that there was no case for taking tax rates on large corporations below those on individuals. An increase from 21% to 28%, below the pre-2017 35%, thus seems sensible. In addition, Biden would impose a global Alternative Minimum Tax of 15% on the largest corporations, with income over $100 million – this is long overdue; there is something truly sick-making about the global tax games of such as Apple (NASDAQ:AAPL). The cut in corporate taxes was in any case largely used to increase share repurchases, a thoroughly pernicious operation that leaves corporations without the means to withstand a downturn, as will shortly be demonstrated.
Biden’s proposals on individual tax make less sense. He proposes to increase the top rate of individual income tax to 39.6%, a modestly damaging reversal of the 2017 cut. However, he then proposes to add both employer’s and employee’s social security contributions of 12.4% to the tax rate for incomes above $400,000. That will be hugely damaging to incentives, especially in states with substantial state income tax rates, which are currently not deductible from Federal taxes – marginal income tax rates well above 60%, applying at upper-middle incomes will cause a huge surge in tax avoidance and evasion. He also wants to increase the capital tax rate from 28% to 39.6%, another provision which will produce more evasion than revenue.
Biden would limit itemized deductions to a 28% tax rate (about half the 52% imposed under his new system), but he misses on a much better provision, to abolish the charitable tax deduction entirely, or cap it at a modest dollar amount. The charitable deduction is a loophole, through which billionaires pay very little tax; it also subsidizes the worst kind of leftist politicized market-damaging economic activity. It may be impossible to get George Soros, with his international holdings, to pay the same rate of tax as an average worker, but we should least try to impose this rate on the income of Bill Gates, Mitt Romney and Donald Trump. Abolishing the charitable tax deduction would go far to achieving this.
Biden’s tax increases would yield about $300 billion a year, but that is a drop in the bucket comparing with the yawning gap in the Federal budget. Biden would undoubtedly make budgetary matters worse, through the economic effects of his fanaticism on regulation, which would return us to the stasis of the Obama years, or worse. If he indeed withdraws permission for the Keystone pipeline, 140 miles of which has already been constructed, he will raise the effective cost of capital in the U.S. for all large projects, whose property rights can be so disgracefully violated. That should knock out growth altogether, even without the major recession which I expect.
Finally, there is Biden’s immigration policy, where he is likely to amnesty 11 million illegal immigrants, giving them a path to citizenship in 8 years. This will bring us further damaging Democrat administrations in the future, doubtless the objective. It will also cause a further surge of the world’s unwashed to swarm the pitiful border barriers erected by Trump. Wages and living standards of unskilled U.S. workers will decline to the level of the Democratic Republic of Congo, without the nice warm climate at this time of year.
The fate of the U.S. economy looks bleak over the next four years, but that is primarily the result of mistakes made by all Presidents since 2000. All of them have widened the Federal budget deficit, exercising no reasonable control over spending and government bloat. All of them except Trump have been regulation-happy, using the chimera of global warming to impose regulations that kill jobs, kill productivity and result in hundreds of billions of mindless eco-investment. Finally, all of them, including Trump, have taken a Gosplan approach to interest rates, believing that governments can set interest rates by fiat, as if they were Russian steel prices.
The result is an economy that is poised to go into inflationary collapse, with budget deficits pushing up inflation even as the bursting of gigantic 20-year asset bubbles collapses stock and bond markets. Biden will make this worse, but even the re-election of President Trump could probably not have avoided it. At some time, the piper must be paid for two decades of reckless Keynesian expansionism, monetary and fiscal.
The combination of Biden’s foolish policies and the impending market collapse will hurt everybody. Least hurt will be the dozy suburban housewives in professional or bureaucratic operations, not quite rich enough to be zapped by Biden’s higher taxes. This is a pity and iniquity, because it was their betrayal, apart from larger-than-usual electoral shenanigans, that lost President Trump the election. The rich, with higher taxes and collapsing values of real estate and other assets will suffer more, but most of them voted for Biden and contributed to his campaign; they will get the economy they voted for. Worst affected however, will be the noble blue-collar souls who remained true to Trump, and who will not only lose their jobs, but will be swamped by the low-wage competition from all Biden’s illegal immigrants. As in 2009-17 but more so, their fate will be the cruelest, and they will have done nothing whatever to deserve it.
One can understand why Ashli Babbitt stormed the Capitol!
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)