President Biden has said for months that his infrastructure bill, which the House passed Friday, and his “Build Back Better” deal, which has new momentum, will boost the economy for years to come. Economists largely agree that the bills would probably strengthen prosperity and job growth over time, even if there is less certainty about what the measures would add to U.S. debt and what they would mean for the economy in the short term.
Now that the infrastructure bill is becoming law and the other measure appears to be advancing, Biden’s vision for how to remake the economy is coming into sharper focus.
The White House has frequently touted the bills as historic investments. The initial versions pitched in the spring were massive and often seemed aspirational with so many initiatives. The final deals, while about half as big as Biden’s initial $5.5 trillion vision, are still expected to be transformational.
Taken together, they would total about $3 trillion in spending over the next decade, a sum that in some ways eclipses the total spending of even the New Deal and greatly increases the government’s role in the U.S. economy. He has had to pare back many of his campaign ideas, such as a sweeping overhaul of Medicare, and Biden’s policy impact may not prove as lasting as that of Franklin D. Roosevelt or Lyndon B. Johnson. Also, many of Biden’s policies, especially in the Build Back Better Act, are funded only for a few years to keep the bill’s price tag down. Biden would essentially be leaving his legacy in the hands of a future Congress.
At heart, Biden’s sweeping policies are an attempt to boost the productive capacity of the nation, increase the number of Americans working outside the home, and create a more fair and equitable economy after decades of struggle for low-income and middle-class Americans.
In recent decades, the wealthiest Americans have pulled further away from everyone else, and the pandemic made these disparities even more striking. Biden and Democrats have called for a more balanced economy that helps lift more people. This political and economic experiment will now be put to the test.
The infrastructure bill is a significant investment in roads, bridges, ports, pipes and more that is widely expected to make business, deliveries and commuting easier in the United States. The Build Back Better bill invests heavily in child care, preschool education for 3 and 4-year-olds, paid parental leave, and elder care. These initiatives are expected to make it easier for Americans, especially moms, to work outside the home because they know their young children and older relatives will have good care.
Estimates from independent groups such as Oxford Economics and Moody’s Analytics predict the pace of growth will be higher and the number of people working will increase in the coming years if these bills are signed into law, largely because their models forecast that the gains from higher productivity and more women working will be greater than any drag from the tax increases to pay for the initiatives.
Oxford Economics predicts 0.5 percentage point higher growth in 2022 and 0.9 percentage point higher grow in 2023, according to economist Gregory Daco. In a report released Thursday, Moody’s Analytics predicts stronger growth and 2.4 million jobs by the end of 2025 as spending ramps up on road construction and in preschools.
“Combined with additional infrastructure investment, Build Back Better is quite a significant boost to economic activity,” said Daco, chief U.S. economist at Oxford Economics.
The infrastructure bill will now become law. The Build Back Better package, which ranges between $1.75 trillion and $2 trillion depending on what survives, still must clear more hurdles, but many Democrats are newly optimistic that they can push it into law.
Not all models agree that Biden’s agenda will result in big gains. The Penn Wharton Budget Model from the University of Pennsylvania predicts the Build Back Better bill would have a slightly negative impact on growth over the coming decade, largely because it estimates that some proposed — but not agreed to — tax hikes on big corporations and wealthy individuals will be a drag on the economy.
A major reason the House and Senate have not passed the Build Back Better bill yet is because moderate Democrats want to see the nonpartisan Congressional Budget Office’s assessment of its costs and benefits. The CBO said in August the infrastructure bill would add at least $256 billion to the debt over the next 10 years. Biden has said his bills are “fully paid for,” but the CBO has not had sufficient time to parse the 2,135-page climate, child-care and health-care plan yet. Senate Democrats, meanwhile, have not said whether they would even agree to the House bill, suggesting that key details could change in the coming weeks.
The Build Back Better bill is widely expected to be close to — if not fully — paid for when the CBO runs its final tally. The bill includes a 15 percent corporate minimum tax on big companies, a new tax on firms that perform stock buybacks, and a new “surcharge” tax on Americans with incomes above $10 million. These initiatives, along with heftier enforcement of tax cheats, should be close to covering the costs. The nonpartisan Joint Committee on Taxation found the new tax provisions alone would raise $1.5 trillion in revenue.
In total, Biden’s initiatives would add only a small fraction to the debt compared with the 2017 GOP tax cut that is on track to add $1.9 trillion over a decade.
But there are a number of gimmicks in the bill that will probably make the real price tag larger. The generous Child Tax Credit expires in one year, the credits to make health care more affordable expire in four years, and the sweeping new pre-K programs last for only six years. The true cost of the bill would probably be closer to $4 trillion if these programs were extended the full decade, according to nonpartisan analysis from the Penn Wharton Budget Model and the Committee for a Responsible Federal Budget.
“When you add in the costs of making all of these short-term programs permanent, you will see that we’re adding a whole new structural deficit to the federal budget,” said Tori Gorman, policy director for the Concord Coalition, which advocates for a balanced federal budget. “It seems a little ridiculous to pass legislation that’s not fully paid for, when we haven’t even paid for the promises we already made.”
Other policy experts argue that these big investments are needed to make the U.S. economy competitive against China and other large economies. They point out that it is incredibly cheap for the nation to borrow money right now because interest rates are at historic lows, making it a wise time to invest.
“This is about doing what’s right for our economic future in terms of climate change and in terms of investing in our children,” said Betsey Stevenson, a University of Michigan economist and former member of President Barack Obama’s Council of Economic Advisers. “This is a historic investment in child care.”
Sen. Joe Manchin III of West Virginia, one of the last hold-out votes that Democrats need, has raised concerns about whether inflation could get worse from all of this government spending. Americans are already on edge about inflation, which is at a 13-year high.
Biden promised Friday the bills would lower costs. In the long-term, many economists agree. For example, 17 Nobel laureates in economics signed a letter saying Biden’s policies would “ease longer-term inflationary pressures.” Many of Biden’s investments — roads and transit, building more affordable homes, lower drug costs and reducing child care costs — should result in a more productive economy and lower prices. But it takes time to implement these programs, and the results may not be felt right away.
The U.S. economy is suffering from severe supply chain problems, and many businesses are struggling to hire all the workers they need. Additional government spending runs the risk of pushing inflation up in the next year, some warn.
“If a home builder can’t find a construction worker, how will we find a person to repair a road or fix the bridge? They are going to experience the same constraints,” said Peter Boockvar, chief investment officer of Bleakley Advisory Group.
But the details of the bills matter. Many of the tax and fee increases start right away, which should help contain inflationary pressures gripping the broader economy. The Child Tax Credit should also help alleviate the burden of higher gas, food and rent prices on low- and moderate-income families. Families earning up to $150,000 a year receive a credit of $300 a month for each child under 6 and $250 a month for each child 6 to 17. Subsidies for child care and health care should make those payments more affordable for many families.
“Overall inflation might be a bit higher, but for low- and middle-income households, inflation will probably be lower,” said Mark Zandi, chief economist at Moody’s Analytics.
The infrastructure deal has been widely praised and passed with bipartisan support. It will be the largest boost in spending on infrastructure in decades. The Build Back Better package continues to be negotiated in the House and Senate. In the latest version of the deal, more than half of the money goes to addressing climate change and investing in young children through a universal pre-K program, the monthly Child Tax Credit payments, and a cap on child care expenses for many families at 7 percent of income.
At a fundamental level, economies grow because there are either more workers entering the labor force or because the existing workers are more productive. For much of the past decade, the nation struggled with weak productivity gains, one of many factors holding back the recovery from the Great Recession. There has been a recent boost of productivity from rapid digitization during the pandemic. The hope is, these major bills will drive further improvements in productivity that can pay off for years to come.
On the workforce side of the equation, the United States was a leader on women’s participation in work outside the home in the 1980s and ’90s, but now the United States is lagging behind many other advanced economies in Europe, Canada, Australia and Japan. Many economists predict a boost in working women from the Build Back Better plan, especially if the final version includes both paid parental leave and expanded child care.
“We know from a lot of empirical research that these policies will boost labor supply. They will help people who have care responsibilities fully participate in the economy,” White House economic adviser Heather Boushey said at a recent Washington Post Live event.
As Democrats debate the final details, the House added a controversial increase in the state and local tax deduction, known as SALT, to $72,500 from $10,000. This change would allow wealthy homeowners to deduct more of their property taxes and expenses. It is a popular change in states like New Jersey and New York where there are many expensive homes and high property taxes.
But critics across the political spectrum have blasted the SALT change as a giveaway to the rich, running contrary to Democrats’ message that this bill is supposed to tax the wealthy and big corporations to make much needed investments in young people, climate change mitigation and the care economy. According to the Committee for a Responsible Federal Budget, the SALT change would be the third most expensive proposal in the Build Back Better bill.
“Why are they doing this?” tweeted Jason Furman, former head of Obama’s White House Council of Economic Advisers. “This increase alone will go almost exclusively to households making over $1 million.”
While the final details are being worked out on the Build Back Better plan, the emerging consensus is that these bills are a major attempt to address barriers that have long held back the U.S. economy from its full potential.
“If you put the process to the side and focus on the policy from a cumulative view, the Democrats are on the verge of historic fiscal policy,” Chris Krueger, managing director at Cowen and Company, wrote in a note to clients.