This week President Biden unveiled the American Families Plan, which expands access to education, reduces the cost of child care and supports women in the work force. It calls for federal spending and tax credits of $1.8 trillion over this decade that will be financed in part by taxes on high-income households.
The stated objective is to help millions of Americans gain the skills and work flexibility to support middle-income families. The plan extends entitlement programs by providing universal pre-K education and free tuition for community colleges. It also extends the child tax credit through 2025 and provides additional support for child care and for paid family/medical leave.
This proposal comes on the heels of the American Jobs Plan, which totals $2.3 trillion to fund public infrastructure and create millions of new jobs. Including the $1.9 trillion COVID-19 relief plan enacted in March, the three major initiatives of the Biden administration total more than $6 trillion.
One common feature stands out: Namely, the guiding principle in each case has been to be as expansive as possible rather than targeting spending where it is most needed.
The COVID relief bill, for example, provided support payments to many families that were not adversely impacted by the pandemic and that saved a good portion. Similarly, the majority of the proposed infrastructure plan contains spending on areas that are not traditionally thought of as infrastructure. In the case of the American Families Plan, free tuition is offered for all who attend pre-K and community colleges, irrespective of their families’ incomes.
The logic behind these proposals seems to be that there is public support for them, and that more is better than less. Listening to Biden articulate the goals of his administration this week, the clear message is that the United States can do it all. This is reminiscent of the mid-1960s, when President Johnson embarked on a “War on Poverty” while also fighting the Vietnam War in the belief that the U.S. could have more guns and more butter. But, as we subsequently learned, this does not make for good public policy.
One problem with the failure to prioritize spending is it invariably leads to poor resource allocation. When federal spending took off in the 1960s, Johnson required the use of Defense Department’s Planning Program Budgeting System (PPBS) throughout the executive branch to assess spending priorities. But this experiment ultimately failed in the face of strong agency resistance.
Since then, there has been no systematic effort to assess the costs and benefits of government programs. Consequently, it is difficult to determine whether federal programs are meeting their stated objectives in an efficient manner. Presumably, this should be easier to assess for public infrastructure projects than for social programs, but the Biden administration has not revealed how it will do so.
Another problem is Biden’s proposals are not fully funded and will expand the federal budget deficit, which currently is at a post-war high of 14 percent of GDP.
Republicans object to them on the grounds that they are being financed by tax increases on U.S corporations and high-income taxpayers. But if the corporate tax rate is increased to 25 percent rather than 28 percent to get the legislation passed, corporate tax hikes would only cover about half of the outlays of the infrastructure bill. Similarly, the proposed increase in taxes on households above $400,000 of annual income will cover only about half of the funding the American Families Plan. Most of the remainder is projected to come from increased IRS tax enforcement.
Proponents have argued that now is a good time to augment federal spending, because interest rates are unusually low. But unlike COVID relief, the spending for the infrastructure bill and American Families Plan will occur over a decade and require ongoing financing. Treasury bond yields already have risen by about 80 basis points this year, and they are likely to rise to more normal levels in the future as the economy takes off and inflation pressures emerge.
A third problem is political in nature. Namely, Biden is seeking to enact the most comprehensive spending plan since the 1960s when Democrats have only razor-thin majorities in the House and Senate. According to Cornerstone Macro (April 29), Biden is trying to have it all: “he is ordering everything on the menu.”
This strategy poses several risks. One is that the complexity of the two plans put forth will take longer to pass legislation than the summer timetable the president envisions. The other is that the bolder and more controversial the agenda is, the greater is the risk that legislation will not be enacted.
In the end, good public policy requires balancing the needs for personal responsibility and social responsibility. Although there appears to be popular support for increased government programs today, swing voters could change their minds if they determine that the pendulum has swung too far.
As President Biden will find out, the easy part of governing is identifying worthy public needs; the hard part is paying for public programs and making sure they deliver on their objectives.
Nicholas Sargen is an economic consultant and is affiliated with the University of Virginia’s Darden School of Business. He has authored three books, including “Investing in the Trump Era: How Economic Policies Impact Financial Markets.”