By Randy Myers
The Biden administration calls its proposed new fiscal stimulus program the “Build Back Better Plan.” The massive effort is aimed at, among other things, ensuring a full recovery from last year’s COVID-induced economic downturn. Owing to its size and broad scope, Megan Greene, a senior fellow at the Harvard Kenney School’s Mossavar-Rahmani Center for Business and Government, says the plan also could be called the “Go Big or Go Home” program. And, she adds, it would represent a sea change in U.S. economic thinking.
The federal government has already thrown far more money at this recovery effort than it has at any previous recession, including the Great Depression, on an inflation-adjusted per-capita basis. Its efforts include, most recently, the $1.9 trillion American Rescue Plan, which was signed into law in March 2021. The proposed $2.25 trillion Build Back Better Plan would not only further boost the economy, Greene says, but also help redress longstanding income inequality issues in the U.S. by targeting much of its help to those at the bottom of the wage scale.
Speaking at the 2021 SVIA Spring Seminar in mid-April, Greene said boosting income for the nation’s lowest earners isn’t just a direct way to address income inequality. It’s also “great economic policy,” she argued, because low earners are much more likely than high earners to spend their stimulus checks, which can be a big help to a consumer-driven economy. In fact, she said, low-income Americans have increased their spending by about 20% since the start of the COVID-19 pandemic, while their high-income counterparts have boosted their spending only about 4%.
Greene subscribes to the secular stagnation theory promulgated by prominent American economist Larry Summers, which says that a massive global savings glut is helping to keep economic growth, inflation and interest rates persistently low around the world. “One way to get out of this—to address the savings glut—is to put money into the hands of lower-income people … so they will spend some of those savings,” she noted.
To be sure, the federal government has been goosing the economy using borrowed dollars, and fiscal conservatives are understandably leery of its price tag. They worry that all this debt-funded spending could lead to two negative outcomes: higher inflation, and crushing federal debt levels relative to the nation’s gross domestic product. But Greene contends that the plan may not be the inflation trigger, or budget buster, its harshest critics imagine.
Echoing arguments made by the Federal Reserve, Greene said that while inflation may blip above the Fed’s long-term target of 2% it’s unlikely to stay there once pent-up consumer demand has been satisfied. Stimulus-driven gains in the economy are likely to be transitory, she explained. Also, a significant chunk of the stimulus money paid out is likely to be used to whittle down debts, like back rent and mortgage payments accumulated during the pandemic, and so won’t feed inflation. Finally, she noted that some stimulus money is bound to leak out of the U.S. as consumers spend money on goods imported from overseas, which means those funds won’t contribute to inflation at home, either.
As for concerns about the federal debt, Greene contended that comparing it to GDP is misguided and counter to economic fundamentals. A better approach, she said, is to compare the government’s debt-servicing costs to GDP. By that metric, current debt levels aren’t particularly high or worrisome. Because interest rates are so low, the government’s interest payments as a percentage of GDP are very low by historical standards, too. And, she noted, they are projected to go even lower.
The Build Back Better Plan has two main parts: a jobs plan built on infrastructure spending and a tax plan that would raise taxes on wealthy individuals and big businesses to help pay for the jobs plan. The jobs plan defines “infrastructure” broadly, including not just things like roads and bridges but also programs aimed helping workers, or what Greene calls “human infrastructure.” It’s a valid approach, she said, that would help support the U.S. labor force after years in which many of the jobs that have been created are low-wage, low-hour service positions.
Greene predicted the Biden administration will have to make some concessions to win approval of its tax plan in Congress, given the razor-thin voting margin held by Democrats in the Senate. The administration may secure sufficient support for its plan to increase the top individual tax rate to 39.6%, she said, and for increased taxes on capital gains and dividends for individuals earning a million dollars a year or more. But she cautioned that it may not succeed in raising the corporate tax rate to 28% from 21% as proposed, with 25% perhaps being a more realistic goal. She also questioned the prospects for a minimum 15% global “book” tax to close loopholes that allow some U.S. corporations to avoid paying income taxes in the U.S. Potentially more doable, she said, is the administration’s proposal to increase the GILTI (global intangible low-taxed income) tax rate to 21%.
If Biden’s Build Back Better Plan wins approval in Congress, Greene concluded, it will represent a sea change in economic thinking in the U.S. It would endorse the notion that the country should stop worrying about its debt-to-GDP ratio and focus instead on its debt servicing costs relative to GDP. It would support the idea of upgrading the nation’s workforce to boost economic growth and to help the U.S. compete on more favorable footing on the international stage, especially with China. Finally, she said, it would promote the idea that markets might not always be right, nor always the most efficient way to allocate capital, and that the government should play a bigger role in deciding how the country’s resources are invested.
