Biden rights the economic ship, but rough waters could loom in the distance

Vaccine distribution, stimulus checks and reopenings have helped to revitalize the economy in the face of the pandemic. But challenges remain, including vaccine reluctance, inflation and the capital gains tax, says University of Delaware economist Jim Butkiewicz.

As the 2020 election neared the finish line voters began to shift from Donald Trump to President Joe Biden as the better choice to handle the economy. 

Now that Biden has the top job, has he delivered?

So far, so good, says University of Delaware economics professor Jim Butkiewicz. The good news is that President Biden has made great strides in tackling his greatest economic challenge: get the pandemic under control. In his April 28 speech to Congress and the nation, the President emphasized positive developments: the rapid, efficient distribution of the vaccine; the stimulus bill that sent checks to many Americans; and the rapid job growth resulting from the reopening of the economy. 

But concerns remain, Butkiewicz said. Unemployment is up, but businesses are having difficulty finding employees. There’s a possibility that his pricey jobs and family plans won’t hold up in the long run. Economists also fear the impact of a capital gains tax and inflation.

Below are some more observations from Butkiewicz. 

  • The biggest problem at the moment is vaccine reluctance. People who refuse a vaccine pose not only a health risk to others, but are also slowing reopening that slows the economic recovery, and thus are imposing an economic cost on others.
  • Reopening and stimulus checks are revitalizing the economy. Critics argue that the $1.9 trillion American Rescue Plan legislation, passed in March, and its accompanying debt were more than was necessary. But that hasn’t been the case. First quarter real GDP grew at an annual rate of 6.4% during the first three months of the year. Household income grew at a 21.1% rate in March, while real consumer spending grew at a 10.7% rate during the first quarter.  Forecasters expect very strong economic growth for the remainder of the year.
  • In spite of the high measured unemployment rate, help-wanted signs seem to be everywhere. The March unemployment rate was 6%, with the April figure scheduled for release on May 7. A partial explanation may be that the labor force still has a net loss of 4 million workers since February 2020. Many of the lost workers are women who are at home assisting children with virtual schooling. They may be able to return to working assuming schools fully reopen next term.
  • The $2.3 trillion American Jobs Plan focuses on rebuilding the nation’s infrastructure. The plan takes a broad view of infrastructure, including spending for green energy, high-speed broadband and affordable housing in addition to repairing and rebuilding roads, bridges and the electric grid. His focus on jobs echoed past presidents including Franklin Roosevelt and Richard Nixon. His jobs plan includes incentives to buy American, a $15 minimum wage, pro-union, and blue-collar jobs. Biden’s critics argue that much of the spending is not for infrastructure narrowly defined, and Republican lawmakers want to increase the spending for traditional infrastructure and reduce spending in other areas. It is uncertain whether a compromise agreement can be reached.
  • The price tag for his $1.8 trillion American Families Plan is high, and it is uncertain whether tax increases will cover the costs of a fully implemented plan. Spending will occur within a ten-year period, while the projected revenue will be collected during a fifteen-year period. A future President and Congress could reverse the tax increases, resulting in deficits and increased debt. Also, the White House projecting of revenue from greater enforcement and audits is higher than some analysts believe will be collected.
  • The proposal to tax capital gains of high-income individuals at a 39.6% rate could create a serious revenue problem for certain state and local governments. Combining the 39.6% rate with the 3.8% Medicare tax, and state and local income tax rates exceeding 10%, the marginal rate on high-income individuals will exceed 50%. Wealthy individuals would have an incentive to leave New York City, California, Illinois and other high tax localities for no-income-tax states such as Florida. An exodus would result in higher taxes on remainders. Fiscal hawks worry about the further increases in the national debt that already exceeds 100% of GDP.
  • Higher corporate taxes could lower wage growth. Economic research shows that higher corporate taxes lower investment and worker productivity, resulting in lower wages for workers.
  • Some economists are expressing concern about inflation. Their concern is not just about the fiscal spending, but also the massive increase in money due to Federal Reserve policy. The Federal Reserve hopes that their preferred measure of inflation rises to 2.4% this year. Historically, the CPI averages about 0.4% higher than the Fed’s preferred measure, so if the Fed’s measure reaches 2.4%, CPI inflation will be close to 3%. However, some economists fear inflation could increase even higher, possibly to 5% or more.  
  • The important question is whether the president will try to pass his plan along strict party lines or if he wants bipartisan support. The latter will inevitably require compromise that modifies his plan. Certainly, there are areas of agreement. Our infrastructure is badly in need of repair. Education beyond high school is needed for workers to find jobs that provide an income and benefits leading to a quality lifestyle. Access and affordability of healthcare are serious problems. Hopefully, progress can be made on these important issues.