Build Back Better?

During his Presidential campaign in 2020, Joe Biden ran on a ‘Build Back Better’ platform, promising to improve American infrastructure and public services in the aftermath of the coronavirus pandemic. Following its outbreak, the virus has caused a huge spike in unemployment, having risen from 3.7% prior to the pandemic to 13.5% at its peak. At the same time, the number of Americans without health insurance had been steadily rising since 2016. In 2013, 18% of Americans were without health insurance, falling to 11% by 2016; however, by 2017, the uninsured rate began to rise, reaching 12%. American physical infrastructure has also been declining for decades, having been ranked as D+ by the American Society of Civil Engineers. Biden’s Build Back Better agenda aims to resolve these issues; however, the bill is poorly timed, with the excessive spending likely to exacerbate the current inflationary spike.

Background

Biden’s $1.75 trillion ‘Build Back Better’ bill passed through the House of Representatives earlier this week. It consists of numerous provisions, ranging from healthcare to housing.

  • Healthcare
    • ‘Punishes’ drug companies that raise prices at a rate that exceeds inflation
    • Expansion of Medicare to cover hearing
    • Expansion of Medicaid to cover low-income individuals in the 12 states that didn’t opt to expand the program under the American Rescue Plan
    • Caps prescription drugs prices at $2,000 annually
    • Reduces ACA premiums by $600 per person per year
  • Education
    • Free pre-school for 3-4 year olds
    • $65 monthly grant for low-income students who are eligible for free school lunches
    • Up to $300 in monthly tax credits per child
    • An increase of 50% in spending for job-training programs
  • Environment
    • Tax credits and rebates of up to 30% for American/Union-made solar systems and electric vehicles
    • Establishment of a Civilian Climate Corps of 300,000 to work on environmental projects
    • Tax breaks to encourage clean energy in manufacturing
  • Taxation
    • 5% surtax on income above $10 million
    • 3% surtax on income above $25 million
    • 1% surtax on stock buybacks
    • 15% minimum corporation tax on foreign profits and for companies with profits exceeding $1 billion
  • Housing
    • Loosening of zoning restrictions
    • Greater down-payment assistance for low-income home buyers
    • Increased spending on public housing, affordable housing and rental programs

Drawbacks

Whilst proponents of the bill argue that it will lead to a greater economic recovery following the pandemic, it is much more likely that it will exacerbate inflation, thereby lowering living standards and economic growth. Much of the spending package will benefit pensioners and retirees as a posed to helping the younger generation, as exemplified by the various Medicare expansion provisions in the current bill. In addition, the bill fails to resolve the underlying issues regarding the education system. Despite real terms increases in education spending over the past decade, education standards have fallen dramatically. The National Assessment of Educational Progress found that the 13-year-olds of today perform much worse than those of 2011. The bill further increases education spending, however, it still fails to resolve these underlying issues that will likely only result in further declines in education standards.

This is without mentioning the tax increases that come with the bill that will undoubtedly impede growth. A recent study by the Tax Foundation that the corporate and income tax hikes will reduce long-run GDP by 0.4%, and wages by 0.3%. Whilst these figures may appear to be small, this translates to about $240 per person. A similar study from the nonpartisan Penn-Wharton Budget Model concluded that long-run GDP would decrease by 2.8% and reduce wages by 1.5% – an even worse outlook for the economy. This is unsurprising, given that tax hikes result in less investment by private individuals and firms in machinery and technology, resulting in lower productivity and slower growth.

Finally, the current version of the bill will only worsen the current state of inflation. Prices are rising quickly, with the inflation rate reaching 5.4% in September – a 13-year high. Whilst external supply-side shocks and greater demand have contributed to this, large increases in the money supply were only going to result in higher inflation. This occurred through expansionary fiscal and monetary policies; the former includes the CARES Act and the $2,000 stimulus checks, whilst the latter refers to the excessive quantitative easing conducted by the Federal Reserve. As the bill will increase government debt by an estimated 25%, the money supply will continue to increase, resulting in even higher inflation than we are witnessing currently.

Ultimately, Biden’s ‘Build Back Better’ bill won’t produce the post-pandemic economy recovery that it intends to achieve. Higher inflation and lower growth are both very likely outcomes from this bill, with further increases in educational spending failing to reconcile the underlying problems with the American education system. Higher taxes do nothing to resolve the current inflation crisis, with lower taxes and smaller government needed to fix the underlying supply-side problems and to stimulate investment and economic growth.