Biden’s Budget
Some analysts suggested that the administration is essentially admitting that its proposed surge in federal spending which administration officials hope to offset over time with higher taxes on the rich and corporations — won’t actually boost the economy much at all.
“They clearly don’t understand the implications of what they’re putting out,” said Richard Bernstein, founder of investment advisory firm Richard Bernstein Advisors. “The 2 percent trend is real [after inflation] growth. So, if they think there’s only going to be 2 percent trend real growth with a $4 trillion spend, then they must believe either the $4 trillion will be impotent or will result in a lot of inflation and therefore substantial nominal growth instead of real growth.”
When the White House rolled out the $1.8 trillion “American Families Plan” to add to its roughly $2 trillion infrastructure proposal, the administration boasted that it would “yield significant economic returns – boosting productivity and economic growth, producing a larger, more productive, and healthier workforce on a sustained basis.”
The underlying idea was that providing universal preschool, adding two years of free community college, and extending paid family leave and child tax credits — among other things — would increase productivity and drive more people, especially women, back into the labor force.
But the $6 trillion budget proposal released today doesn’t show much of a growth burst from all the proposed spending, including the infrastructure investments in the American Jobs Plan.
Instead, the sub-2 percent annual growth prediction is little different from current models like the one from the Congressional Budget Office. The CBO forecasts that after the bounce-back from the Covid-19 crash fades, growth will return to about 1.6 percent per year.
On a conference call with reporters to discuss the budget proposal, Council of Economic Advisers Chair Cecilia Rouse said the economic forecasts were made in February by the CEA, the Office of Management and Budget, and the Treasury Department. That was before the White House formally introduced the American Jobs Plan and the American Families Plan.
Rouse said the forecasts assumed some of the proposed spending policies but not all of them, adding that the economic climate has improved significantly since February. She also said growth hitting 2 percent in 2030, as the budget predicts, would produce significant gains beyond most current forecasts.
“Seemingly small differences in real GDP growth can end up having enormous effects on the output and income that our economy generates over time,” Rouse said. She added that the difference between the CBO’s 1.6 percent forecast and the White House’s 2 percent would result in the economy producing $4.8 trillion more in inflation-adjusted dollars over 10 years, or $1 trillion more than the annual GDP of Germany.
Other people close to the administration cited other reasons for the conservative numbers. They said some elements of Biden’s infrastructure and families plans — such as increased spending on green technology — could stoke the economy more than the budget proposal suggests but that current models cannot account for this potential growth.
And the White House wanted to err on the side of caution, they said, after President Donald Trump’s administration repeatedly issued rosy forecasts suggesting that tax cuts and deregulation would produce years of 3 percent growth or more. The Trump administration hit 3 percent growth in only a single year of his presidency.
Economists supportive of the administration’s approach echoed Rouse’s argument that what on paper looks like small increases in growth would actually mean a lot on a 10-year time horizon.
“Estimates of potential growth are generally around 1.7 percent or 1.8 percent for the entire decade,” Jason Furman, chair of the Council of Economic Advisers under Obama, said in an email. “If their plan added 0.1 or 0.2 percent per year to the growth rate that would actually be very large in macroeconomic terms.
Furman added in a tweet that he was “glad to see what appears to be a return to responsible economic assumptions in budgeting.” And he said “a lot of the benefits of the President’s policies are improving inclusion, opportunity, climate, etc. So even if they didn’t add anything to growth they would still likely be an improvement.”
Officials from the last administration were sharply critical of the White House budget as well as its relatively tepid growth forecasts.
“If that’s all you get, why do it?” said Larry Kudlow, director of the National Economic Council under Trump. “In case they haven’t noticed, there’s a Trump boom going on. If it ain’t broke, don’t fix it.”
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