So Now What?

Was the election outcome a reaffirmation of free market capitalism or a headlong lurch towards socialism or what Hayek termed, “The Road to Serfdom”?

Wait! Is that what this election was about?

Struggling with the daily COVID fear and loathing, people were looking for clarity. There was talk of blue waves and red waves. In the event, there were no waves at all, other than the wave of voter turnout that set records in many states.

Exit polls showed that the election was mostly about personality and disease. A Rasmussen poll showed that 56% of Biden voters actually voted FOR him, 29% were voting against the current President. With 50.8% of the vote, arithmetically we find 28.5% of the election participants casting a positive vote FOR President-elect Biden.

The flip side is also interesting with 90% of Republicans casting an affirmative vote FOR the President or 42.5% of all voters. It is complete conjecture, but we suspect they were voting on policy matters and not endorsing the President’s disagreeable governing style.

It is almost as if we bought the replacement windows because the salesperson had a great personality. Now, I suppose it is time to have a look at those windows.

With that in mind we dove into President-elect Biden’s web site to read his governing platform, actually titled the “Biden-Sanders Unity Task Force Recommendations”. It was a bit of a challenge as it reads like a long (110 pages) campaign speech but some key elements did emerge:

• The phrase “economic growth” only appeared three times, as it was not really a focus of the plan. Further, the private sector was seen as subordinate to government action in creating “union jobs”, an expression that appeared 17 times.
• Virtually all policy ideas are viewed through a prism adjusted for race and gender equity. The plan even envisions adding, “achieving racial equity” to the Federal Reserve’s current mandate of maximum employment, stable prices and moderate long-term interest rates.
• We were not surprised to find a number of ideas to combat climate change. The plan requires that all solar and wind energy systems be manufactured in the U.S. We suppose that means erecting trade barriers to block wind systems from Norway, Germany and Denmark, which currently have about 57%, U.S. market share.
• School choice is in for rough treatment. Biden does not support school vouchers in any form. The 1,700 poor minority kids in D.C.’s Opportunity Scholarship Program will once again lose their funding as they did under the Obama administration.
• The plan hopes to unwind the current “rigged economy”. It correctly targets continuing the recovery from the recent policy induced recession. This component is mostly concerned with “shoring up state and local government budgets” and adding jobs to various government sectors.
• According to the plan, the key concern in any COVID aid to the private sector is malfeasance by small business and corporate beneficiaries. The plan is clear that we should not tolerate “enriching CEOs or shareholders”. As an aside, Biden’s electoral success coupled with the vaccine news has already enriched a broad array of shareholders.
• There are many labor market elements that will affect workers and businesses. The $15 minimum wage is a component as is increasing unionization. The plan recommends that California’s AB5, which suffered a stunning rebuke by voters in Proposition 22, become the law of the land. New federal measures would override “right-to-work” laws in 27 states.
• Tax policy changes are perhaps the most detailed part of the plan. In general, there are significant increases in taxes on capital, labor and income. The one major tax reduction is focused on the wealthy with the elimination of the $10,000 cap on state and local tax deductions.

According to the Tax Foundation, there are 26 different tax measures in the plan. They estimate the plan will raise $2.7 trillion over the next ten years and reduce GDP and capital stock by 1.6% and 3.75%, respectively. The reduced capital investment will drop wages overall by 1%. The higher minimum wage and higher taxes on corporations and small business would reduce overall employment by 542,000 jobs. From a distribution perspective, the tax plan is progressive in structure. The top 1% if income earners would have 7.7%, less after-tax income and the population in general will suffer only a 1.9% loss of after-tax income.

Importantly, the Tax Foundation does not consider the significant economic impact of other parts of the plan such as changes in regulation and energy policy. Thirteen famous Nobel-laureate economists heartily endorsed the totality of Biden’s program. Unfortunately, their support came in the form of a simple letter rather than a detailed analysis. This might be because, they too were focused mostly on personality.

For a more complete analysis, we turn to a 52-page study prepared by a group of Hoover Institution economists*. This team used a neo-classical growth model for the analytical framework rather than the more antiquated Keynesian model. That model is dynamic in that it incorporates changes in consumer and management behavior that result from new policies.

For example, will businesses make a more rapid shift to automation to accommodate new higher labor costs? Will increasing the U.S. tax disadvantage with respect to other developed countries again push trillions of profits into offshore investments?

The Hoover Institution economists considered the four major aspects of the Biden plan: reversing the 2017 tax reform, reversing the recent regulatory reforms, setting new environmental standards, and expanding subsidies for various sectors.

Their conclusion is that the plan will reduce long-run real GDP per capita by 8%, employment by 3%, capital stock by 15% and total factor productivity by 2%.

Compared with the Congressional Budget Office 2030, baseline, the analysis suggests there will be 4.9 million fewer employed, $2.6 trillion less GDP and $1.5 trillion less consumption in that 2030, end year. Median household income for a family of four would drop by $6,500, over the next ten years.

Once again, tax policy changes play a heavy hand is these adverse outcomes. Taxes on pass-thru business will rise from less than 40% to more than 50% (not counting state taxes). This 12.5 percentage point increase in marginal tax rates will jeopardize some of the 64 million people employed in these small businesses.

Other elements are more difficult to quantify. For example, the present value benefit for an individual household of a smaller carbon footprint is difficult to measure against their much higher energy costs. But then, as environmentalists are fond of pointing out, it does not matter how much it costs to save the planet.

The distribution effect is important because the goal of the Biden plan is not economic growth but, rather, economic equity. Unfortunately, the Stanford economists skip over this important part of the analysis. They make no value judgment about distribution effects, as the study never mentions race, gender, or union jobs.

Post vaccine, our hope is that the current tax regime might remain in place at least until minority unemployment reaches the record low levels of February and that wages in the two bottom quintiles can begin to grow again as they had over the last three years. Saddling a recovering economy with large tax increases and expensive regulations will likely delay the recovery as we saw in failed recovery of 2009 – 2012. A return to the policies of “secular stagnation” is not in anyone’s interest.

But then, two years is a long-time and it is hard to imagine that the new administration can be that patient. They made certain ideological commitments and it is time to deliver.

* An Analysis of Vice President Biden’s Economic Agenda: The Long Run Impacts of Its Regulation, Taxes, and Spending Timothy Fitzgerald, Kevin Hassett, Cody Kallen, Casey Mulligan. https://www.hoover.org/sites/default/files/research/docs/president_bidens_economic_agenda_hassett.pdf