the Blog Papers of Dr. Michael Sakbani; Economics, Finance and Politics

Dr. Michael Sakbani is a professor of economics and Finance at the Geneva campus of Webster-Europe. He is a senior international consultant to the UN system, European Union and Swiss banks. His career began at the State university of NY at Stoney Brook,then the Federal Reserve Bank of New York followed by UNCTAD where he was Director of the divisions of Economic Cooperation, Poverty Alleviation, and UNCTAD`s Special Programs. Published over 100 professional papers.

Tuesday, May 11, 2021

President Biden`s Fiscal Policies In The US`Current Economic State

 

President Biden`s Fiscal Policies In The US` Current Economic S                                            By 

                 Dr. Michael Sakbani 


Where are we?

The US have not undergone a massive infrastructure investment since President Eisenhower in the 1950`s. This is attested by the dilapidated conditions of highways, bridges, railroads as well as the outdated US electric grid.

Over the last 40 years, the US Federal Government and many state Governments have done little, if any,  investment in the human and social conditions of the population. Child poverty, lack of nursery for kids of working mothers, shortage of public-health services and insurance coverage, the unaffordable education for the vast majority of parents and students, are all salient sores in the US scene.

President Reagan famously asserted in the1980s that the Government is the problem, and not the solution. He was followed in this assertion by all the Republican and Democratic Presidents till Obama and Trump[1].

In implementing this stand, the US have reduced their Government size and cut taxes to the extent that US` taxpayers at the three levels of Governments have paid less than 27% of the GDP in taxes (Simpson – Bowels Report; Amadeo,2021 )[2], an amount far out of line with other developed economies, where social, health and education services are considered primary duties of government.

 The US Federal budget is enormously burdened, by military expenditure (21%) and social entitlements outlays(51%) which, over and above the Government`s running cost and the servicing of public debt and paying various legislated subsidies, leaves only about 6-7 % for discretionary spending. And, such a spending has been steadily declining since President Richard Nixon, 45 years ago (Wikipedia, May 2021)[3]

In the 1950s, the US` federal Government employed 5 % of the labor force to service 175 million Americans. Today, that is less than 3 percent to service 335 million (Sakbani, Zakaria, 2020)[4]

The Covid pandemic found the US with an underfunded, understaffed Federal Government, except for the military part. The US unfortunately, suffered 24 % of the world deaths while its population is only 4 % of the world population (Johns Hopkins)[5] .

Yet, when the crisis hit the land, it was the Government ,and no other body, to which the public looked for help and resolution. And indeed it has been the Government that developed the vaccine, rolled it out , extended a critical helping hand to the unemployed, to small and other affected businesses hovering on  bankruptcy and to the millions of affected Americans in desperate need for funds. All of that has sustained aggregate demand and lit up the economy. 

President Biden took the reins of a US facing an enormous accumulated neglect of social and public health spending, a gapping income distribution problem where the upper 10 % owns 90 % of the US` wealth and 40% of its income (Domhoff, 2015, Saez-Zucman)[6] According to Nobel laureate Joseph Stiglitz, 90% of the growth of the US` economy since 2009 has gone to the top10 percent of income earners.( Stiglitz,2013 )[7]. It has reached such absurdity that the six inheritors of the Walton Family (Wall Mart) own more wealth  than 145 million other  Americans (Harkinson, 2015 )[8]

Biden`s response has been three massive fiscal policy proposals, on a scale not seen since FDR.  The $1.9 trillion Covid-stimulus act is already approved and in implementation, while the other two on infrastructure-environment and family-health are now proposals.

Empirical Facts and Generalities

These two proposals, have generated opposition and raised questions even among Democrat economists of established experience (Summers, 2021)[9]. The question is then: are his fiscal action proposals on infrastructure, including the environment and on family-public health, massive and in excess of the GDP decline and hence, economically worrisome? The answer is a qualified yes on all counts. But is the right policy to turn away from such expenditures? The answer is a qualified no .

The real answer can be given first, by identifying the specific economic fears, costs  and benefits; second, by delineating the time-line of these expenditures and the differential at its various points between aggregate demand and aggregate supply; third, by exploring the financing of these expenditures, and fourth, by elucidating the respective roles of the Government and the private sector in such investments.

 With respect to the specific fears, inflation heads the list and the perennial question of the burden of more public debt is readily invoked. Other questions pertain to the supply conditions of the labor market. A gap between a robust aggregate demand and a lagging aggregate supply would have consequent repercussions on the US` balance of payments and the credibility of the US dollar.

The economic data do not now show any inflation signs, we can count on cheap imports for the rescue. This is bad for the dollar value and credibility and for the US `balance of payments. However, these problems have been with us since the Euro emerged on the scene early in the 1990s. The US ‘dollar has persisted as the key international payments currency, not on the merits of its own record, but because the rest of the world has no better alternative (European Central Bank,2020 ) [10].

Regarding the burden of the debt, it should be recalled that the three Presidents who ran the greatest relative deficits are Ronald Reagan, George W. Bush and Donald J. Trump. With the Republican politicians raising this worry only when the Democrats are in power, it is obvious that this is a partisan talking point. In fact, good investments at historic low cost should increase the growth of the GDP by a larger percentage amount than the total debt service percentage[11]. Hence, the ratio of the debt to GDP should decline.

 In the current state of the US ‘economy, Covid has destroyed both aggregate demand and aggregate supply. Thus, boosting by trillions aggregate demand from where it is now, can be  inflationary only if aggregate supply does not respond and the labor market does not expand.

There are several problems with global aggregate supply: the problem of relocating the supply - chain out of China should disturb the aggregate supply. Furthermore, it is probable that Business might want to change its capital structure in the wake of its experience of the virtual digital economy during the pandemic by increasing its capital and reducing its labor demand

The second problem is the indeterminate size of the labor force. The April employment report showed that the demand for labor was outstripping its supply. Only 266,000 jobs were created, and US ‘unemployment reached 6.1 percent (Cohen)[12].This is a great disappointment to those who were expecting a V -shape rebound in employment. Expectedly, Republican spoke-persons and some media outlets jumped on the data to argue that the generous extra unemployment benefits enacted by Biden`s stimulus package have deterred people from seeking jobs. This is only true at the lowest paid jobs. Beyond that, the data do not support this claim, There are however, some problematic features of the US` labor market. The labor force in the US has shrunk by about 4 million during the Covid turn down. Women lost close to 2,8 million jobs, making them, along with minority workers, the hardest hit by unemployment (McKinsey)[13]. It might be that they cannot get back to the labor force until their children can safely go back to schools. They and minority workers also share the health worry about going back to work while the pandemic is still in rage.

 As a matter of historic significance, the data of the Office of the President show that white- males participation in the labor force has dropped over 2000 - 2015 by15%( Sakbani, 2016 )[14]. This shrinkage in the US` labor force of able men might be a reservoir capable of rendering flexibility to labor supply. However, it adds to the uncertainty of business investment decisions. We also still do not know the extent of adjustment in the capital structure between capital and labor that business will effect. Thus, there are questions about the response of the aggregate supply and the timing of the investment decisions.

The possible net excess aggregate demand has to be qualified by the expected payoff of the acceleration of investment in environmentally friendly technology. Infrastructure investment of this type opens up new industries with vast new horizons and millions of well-paying jobs. While the balance of cost and benefits is not yet calculable, it stands to reason that the resultant increases in productivity and the spin off gains will be quite considerable.

This leads us to consider leads and lags between aggregate demand and aggregate supply over the business cycle. The size of the differential is critical for determining the inflationary consequences. This is an empirical question and theoretical pronouncements on general principles are essentially pointless.

The third facet is the possibilities of financing some of Biden`s proposals. President Biden campaigned on a platform to raise corporate taxes and individual taxes on families making more than $400,000. At this point, we do not know what tax increases will be legislated. Nonetheless, a sensible principle is that US business taxes should not be higher than foreign business taxes. The corporate tax rate before Trump was 35%. He brought down to 21%.  An educated guess is that 25- 26 percent would not place US` business at a comparative disadvantage( Simpson-Bowels)[15]. As to individual income taxes, raising the marginal tax rate to 39.6 % is only 2.6 % increase over the 37 % marginal tax rate of Trump (Tankeresley)[16].

 In this context, senators Elizabeth Warren and Bernie Sanders have proposed  a wealth tax of 3 percent as of $1 billion wealth and another wealth tax on households and trusts with net-worth from $50 million to $1 billion of 2%. According to Emanuel Saez and Gabriel Zucman of Berkley, these taxes would yield $3 trillion in a decade (Iacaraci)[17] In the US, wealth is so unevenly distributed and the wealthy pay such  low taxes that such proposals are worthy of consideration. Considering all the proposed financing possibilities,The Tax Foundation estimated that President Biden tax proposals would generate  $ 3.8 trillion over 10 years. that is 62 % of the$ 6 trillion financing his proposals entail (tax Foundation).[18]

The final point is the nature of government investment in infrastructure, in particular in physical infrastructure. The role of Government in this investment should be that of putting down seed capital and opening thereafter these areas for business investments. Investing in bridges, highways, rails transportation as well as a new grid are all well- established business practices everywhere. Therefore, Biden proposals are larger in suggestion than they might be in execution.

The Politics at Hand

Considering all the above, it is premature to sound the alarm before we know the pattern, time- profiles, and the “partnership mix” of President Biden`s proposals. Details and precise patterns are critical for a rational informed debate.

Will the Congressional Republicans come to a bipartisan agreement with Biden?

There are so far no signs of any bipartisanship on the Republican side. All the Republican declarations up till now are a repetition of the old mantras: the Democrats are burdening future generations and enlarging US government. Mr. McConnell, the Senate minority leader, has just labeled Biden fiscal proposals as socialism he will oppose 100 percent (Breuninger).[19] This is not only politics as usual but a dumb thing to say, it only shows how uninformed is the Republican leader if he were sincere and how partisan if he is not.

The Democrats might be forced to go for the reconciliation route for the second time this year so as to pass these budgetary measures by a simple majority vote. However, there are investments that are necessary and urgent in the Biden package and others that are necessary but not urgent. So, the Democrats can try to get Republican support on a part of their proposals and come back to the rest later. They have a strong public support to dangle before the Republicans if there are sensible elected official left in the Trump party of lies and conspiracies.  

 

 Geneva, 9/5/2021



                        NOTES

 

 

1 President Clinton in a famous address in 1993 said that the era of big government is gone. Almost echoing the same theme, President Obama in 2010 said that it is not the government but free enterprise that creates jobs. Naturally, the Republicans have always emphasized individual responsibility and small government as essential points to their creed. However, since Ronald Reagan famous “government is the problem and not the solution” this mantra has become an ideology beyond empirical testing. Ironically, all this advocacy was ignored by three of the four last Republican Presidents who ran the largest deficits in history.

 

[2]  The Simpson- Bowels  report was commissioned by President Obama in 2010. The report listed six detailed steps to reduce the Federal deficit and the debt to GDP ratio to 60 % by 2015.. the Congressional Republicans approved all the tax cutting proposals and the Democrats all the tax increase proposals. Thus, the report went nowhere , see Kimberely Amadeo February 2010,,for an update of the report.   

 

[3] Wikipedia, consulted on 11/5/2021.

 

[4] Michael Sakbani, Analysis of The Macroeconomic Crisis of the Pandemic; Lessons learned, in michaelsakbani. blogspot.com, October 2020.

 

[5] Mortality Analysis, Coronavirus Research Center, Johns Hopkins University, 2021.

 

[6] Damhoff, Who Rules America :Power,Politics yand Social Change,  University of California, santa Cruz, 2015..

See also, Emanuel Saez and Gabriel Zucman, Wealth Inequality in the US since 1913, University of California, Berkely, 2 015.

 

[7] Thd Atlantic, “interview with Joseph Stiglitz”, October 2o15.

[8] J. Harkinson, Mother Jones, October 2015.

[9] Lawrence Summers, the former Secretary of the Treasury under President Obama took an Op Ad in the Washington post arguing that Biden`s fiscal stimulus is double the GDP decline and therefore, it is neither needed nor economically advisable. Summers characterized Biden stimulus as “least Responsible Policy in 40 years” see Jordan Williams, Summers slams Biden stimulus as the least responsible in 40 years. The Hill, 20/ 21. It is ironic that Summers wrote just a few months before that that the US is facing secular stagnation because of lack of investment. See Lawrence Summers,, “Accepting The Reality Of Secular stagnation” , Point of View, Finance and Development,  IMF, March 2020. President Biden infrastructure proposal is precisely the thing that Summers advocated. Did Larry jump the gun on this?

[10] The US `dollar constitutes now close to 75%  of the international reserves while the US`Economy is only 21 % of the World Economy .The Euro, long expected to compete with the US dollar, has not fulfilled its promise. According to the Annual Report of the European Central Bank, the Euro accounted for19 % of the of international reserves while the EU economy is comparable in size to the US. 

[11] The yield on long-term US` Treasury  bond is now less than 1 percent. So, the cost of  servicing the new debt is acceptable and advantageous if the long-run  growth of the GDP of the US would exceed 2 percent

[12] Patricia Cohen,” Job Growth Slowed  in April, Muddling Expectations” , The New York Times, May 2 ,2021.

[13] McKinsey Global Institute, Covid & Gender Equality, 15 July 2020.

[14]Michael Sakbani Trump The President That Was Not To Be,  in michaelsakbani.blogspot.com, November 2016..

15] The Simpson-Bowels report advocated 26% as a level playing- fielx rate for US` businesses.

[16]  Jim Tankeresley,”President Biden Will Seek New Taxes On The Rich”, The New York Times, April 22, 2021.

[17] Greg Iacarci , “Elizabeth Warren and Bernie Sanders propose a wealth tax on the Rich” in CNBC,Personal Finance,  

[18] Tax Foundation, , Tax Policy 101, 2021

[19] Kevin Breuninger,” Senator Mitch McConnel Slams Tax Hikes in Biden $ 2 Trillion Infrastructure Bill., CNBC, march 31, 2021.