Biden’s massive new deal: who is going to pick up the tab?
The President of the American Club of Lisbon and author of ‘RENDEZ-VOUS WITH AMERICA, An Explanation of the US Election System’ Patrick Siegler-Lathrop gave an insightful talk last week on President Biden’s new deal for the United States economy which was also heard by members of the Harvard Club Portugal and the Rotary International Club Lisbon. While bold and ambitious in its scope, Biden’s new deal will add US$4 trillion onto America’s public deficit. But who will pay the bill and what will happen if low interest rates rise and inflation returns?
The Biden Presidency comes at an exceptional moment in US history. Its new deal promises to be “truly transformative” with the chance of fundamentally changing the economic and political narrative in the United States.
It is exceptional because of the overwhelming number and wight of crises that the US has been and is witnessing, including the worst health crisis in over a century since the Spanish Influenza pandemic of 1918-1920.
Using a term coined by economist Paul Krugman, that of “induced comas”, meaning the unprecedented restrictions and their impacts on the economy to fight the pandemic, with the attendant devastating consequences for substantial sectors of the economy and an economic downturn not seen since the Great Depression in the 1930, Joe Biden plans to kick-start the US economy through a bold €4 trillion public spending package on a scale not seen since Roosevelt’s New Deal in the 1930s.
Like that project back then, this new deal will also focus on infrastructure projects but will also focus on greening up the economy to tackle environmental issues.
In addition to the Covid-19 issue, the US is facing a number of other economic challenges including a deep schism in US society fulled by the Black Lives matters movement and the push for police reform, the apparent fragility of US democracy with risk of domestic terrorism, the pernicious effects of the hollowing out of the middle class over the past decades, and a spectacular rise in inequality.
Not only this, the two political parties have been in gridlock for the past few decades, there is the difficult issue of immigration and illegal immigration, an underfunded and increasingly dangerous transportation and energy infrastructure, the excessive power of a few dominant technology companies with unforeseen consequences, the rise of China as a serious rival to US global leadership, and the most important challenge of all, climate change.
In the face of this list of problems, the Biden-Harris administration has presented an incredibly ambitious agenda, with a multifaceted set of plans to aggressively address challenges on all fronts, starting with a two-front programme to deal head on with the health crisis and its immediate economic consequences.
This Relief and Recovery Act involves the US$1.9 trillion Covid Relief Bill (9% of US GDP) which aims to boost US economic activity by 4% in 2021 and 2% in 2022 according to estimates by the Brookings Institute.
This represents almost half of all federal government spending in 2018 and the bill has already been successfully passed and became law on March 11.
Then there is a second initiative, a Build Back Better Jobs plan which plans to create millions of good-paying jobs in a multi-year investment totalling some US$2-3 trillion for infrastructure and social transformation.
There is also the American Family Plan which will provide further immediate relief to working families, small businesses and communities. This will include massive investment in eduction, healthcare and Childcare. (US$2 trillion)
“What is immediately striking about the Biden programme, apart from its size, is that it embraces economic nationalism in a way that is very similar to what the Trump administration was suggesting that the country should adopt,” says Patrick Siegler-Lathrop.
“Without openly rejecting globalisation, the Biden agenda clearly speaks of ‘buying American’, an industrial policy promoting American sourcing of investment to renew infrastructure and to control a supply chain to be built in the United States,” he adds.
These, the ACL president argues, are echoes of what could have been Trump’s economic policy which also has some similarities to the industrial policy of China.
Patrick Siegler-Lathrop says Biden’s approach is a radical one than those usually sees from US presidents in what is probably the most significant economic change in direction since Ronald Reagan in the early 1980s.
Since the early 1990s both US parties ave subscribed to a neoliberal orthodoxy, which means that US policy promoted free markets, including international markets fostering globalisation. It also meant that governments should interfere as little as possible. Governments should, nevertheless retain fiscal authority, keeping things small but in balance.
“The Democratic Party has in the past few decades joined the Republican Party in the idea that the laws of economics warranted that market competition should be given free reign, even those who considered themselves social democrats adhered to the mantra of free enterprise,” he said.
“Both parties believed that the benefits of the free market capitalist system and globalisation would not only bring economic benefits to the United States, but foster the rapid expansion of democracy and free market economic policies around the world. None of this would require any major government intervention,” said the ACL president.
In 1996 Bill Clinton even said that the “era of Big Government is over” which was an echo of Reagan’s 1981 statement that, “Government is not the solution to our problems but the cause”.
“Yet, in 2021 a Democratic president is proposing that the federal government guide an industrial policy of spend and borrow on a scale unseen since World War II in which Joe Biden is the unexpected architect of a radical change in US government and economic philosophy that some have compared to the one launched by Franklin D. Roosevelt”.
Globalisation and small government didn’t help everyone
Biden, says Siegler-Lathrop, has understood the message that Trump raised “that not all Americans,” least of all the middle class, “benefited from globalisation, free enterprise and free trade” — despite the many successes — in the face of competition from Asia and the Far East.
While its impact on the reduction of world inequality was enormous, in terms of the US this approach has not worked for the average American whose wages have not increased during this entire time while the rich got richer and the stock market rose.
Trump said he would help the American middle class by promoting domestic manufacture, bringing back factories to the US and improve the lot of the average American. But he did nothing of the sort since he turned out to be the most incompetent president the US has ever witnessed. Incapable or mobilising and managing the US government while accomplishing very little.
Trump did, however change attitudes towards government deficits which he accurately saw didn’t matter so much during times of low interest and inflation and this is the one thing that Joe Biden will use to his advantage. Of course, it remains to be seen if these two variables stay low and if they don’t what impacts any changes would have on the US economy and the general public as a whole.
Then there is the question of how Biden’s new deal will be paid for? No doubt some or all of the infrastructure and green projects will be offset by increasing taxes on corporations, including the corporation tax from 21% to perhaps 23%.
US multinational corporations may be forced to pay more tax in the US on income earned overseas which would upset Republicans.
In all, the price tag for Biden’s new deal will be around US$4 trillion added onto the public debt. Franklin D. Roosevelt’s problems were largely solved by the Second World War and its aftermath by the rebuilding of Europe.
It is unclear how Biden’s administration will fund all his projects today without slapping taxes on those earning less than US$400,000 a year.
And it is ironic that in seeking to revitalise US industry as part of his new deal to the American people, Biden is about to deliver the unfulfilled promises from the Trump administration and would not have been able to do so had the incompetent Trump not preceded him.