Building Back Better As The Economy Booms

4/5/2021

My weekly comment on America’s political economy, until now, has been delivered to you on the Constant Contact platform. Starting this week it is being delivered on the Substack platform instead. The format might change slightly but, for better or worse, the content will not. And it will remain available without charge.

As always, I welcome comments directly to me on irwin@irwinstelzer.com

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The American economy is on a roll, adding 916,000 jobs in March, driving the headline unemployment rate down to 6.0 per cent. Job estimates for January and February were revised upward by 156,000. The manufacturing sector is growing rapidly as new orders flow in, auto sales approach pre-pandemic levels on the back of double-digit growth in March, and orders flow into Boeing for the 737 MAX:  the manufacturing sector added 53,000 jobs in March. The housing market is red-hot, with a shortage of houses for sale pushing up prices at the fastest pace in fifteen years: the construction sector took on 110,000 workers in March. Airlines are increasing flight schedules as planes fly with all middle seats occupied, United is hiring 300 pilots, and smaller airports in resort areas are bursting at the seams: leisure and hospitality industries added 280,000 workers. 

       More good news is in store. Forecasters are racing to up their forecasts – from 4% to 6% to 7%, with whispers of 8% being heard in the corridors of investment houses.

Consumer confidence in March recorded its sharpest one-month gain in nearly 18 years, which has retailers predicting a sales jump of as much as 8.2 per cent. With consumers sitting on $2.8 trillion more in savings than they had before the virus arrived – that’s 13 per cent of GDP – they are poised to party as the vaccine is rolled out and restrictions on their movements are rolled back. About 35% of Americans plan to spend more on travel in the next twelve months than they did a typical year according to a survey conducted for The New York Times by online search firm SurveyMonkey.  “We are in an acceleration phase,” says Goldman Sachs’ Jan Hatzius.

The Union Guy Spends

       None of that has deterred the President from proceeding with his $2.25 trillion multi-year infrastructure programme, the American Jobs Plan, announced by Biden from a carpenter union’s apprentice training center, after an introduction of the “union guy” President by a lineman with the local utility, himself a union guy, of course. Biden is focused on the 9.7 million workers yet to find work, some 4 million more than in February 2020. Roads, bridges, transit and transport systems, water systems, airports and ports, the electric grid are to be rebuilt, affordable housing refurbished and greened, 500,000 electric vehicle charging stations built, high-speed broadband service made available to all, and prices cut for internet access. Some $80 billion is allotted to improving Amtrak service, on which senator, vice president, and then citizen-commuter Biden relied before switching to choppers and acquiring a D.C. residence. That should not obscure a major shift in emphasis from support for auto travel to public transportation systems.

All this creating millions of good-paying union jobs (6.3% of the private-sector work force). “Not a plan that tinkers around the edges”, says the President. Throw in $400 billion for caring for the elderly and disabled, the first shot in a war to redefine “infrastructure”. More to come in the $1-2 trillion American Family Plan, due in a few weeks.

Up Go Taxes

       The corporate tax rate of 21 per cent is to be raised to the pre-Trump level of 28 per cent, which is at the high end of the range for industrialized countries, taxes on overseas operations upped, and tax breaks ended that allow Amazon (cited by the President, who has been warning the company not to oppose unionization) to avoid all federal income taxes. That will pay for his plan says the President. Not quite. The spending will occur during the eight years in which Biden says he expects to occupy the White House, the new tax revenue will flow to the treasury over fifteen years. The difference between the time of cash out and cash in will be bridged by borrowing -- another increase in America’s massive deficit, at $28 trillion already above our $21 trillion GDP. And since corporations do not pay taxes – their shareholders (lower dividends), workers (smaller wage pool) and customers (higher prices) do – some of the burden will be borne by families Biden has promised to protect, those earning less than $400,000 per year.

The Battle Begins

       The two plans are “not nearly enough” says Alexandria Ocasio-Cortez, (or AOC as she is known, carrying forward the tradition of FDR, JFK and LBJ), a leader of the sniper squad  on the President’s left. “I’m going to fight them every step of the way,” promises Mitch McConnell, leader of the outmanned, outgunned Republican troops on Biden’s right. Several moderate Democrats are demanding changes, with senator Ron Wyden (D-Ore) leading the charge for including replacement of tax breaks for the energy industry with breaks for greener energy sources.

The business community, represented by the Chamber of Commerce, generally supports the spending, but is opposed to the new taxes that would pay for it. Since the Chamber also opposes increasing the deficit, it will have to develop new methods of accounting or find other taxpayers to bear the burden of a program that will massively benefit its members. Should be interesting.

Big Government is Back

Like the economy, the Biden revolution rolls on. Bill Clinton’s end of the era of big government has been consigned to the dustbin of history. No Democrat considers “I’m from the government and I’m here to help”,  a terrifying sentence, as did Ronald Reagan. Those words are now proudly emblazoned on the banner under which the Bidenistas march. “Government must be a powerful force for good in the lives of Americans,” says Brian Deese, Biden’s choice of director of the National Economic Council. 

Deficits Are Good

The revolution has also jettisoned old ideas about fiscal policy. We are far from the day when Franklin Roosevelt felt the need to promise to balance the budget in order to get elected, and from the time when Republicans considered themselves deficit hawks, rather than enablers. Deficits, once acceptable only when needed to right an under-performing economy, now are considered necessary stimulants even when the economy is growing. Borrow-spend-print, at least until inflation rears its ugly head, in which case revert to tax-and-spend, is now the order of the day. John Maynard Keynes’ more conservative approach has been cancelled. And his acolyte, Larry Summers, has gone from hero to zero in Biden’s inner circle for suggesting that printing money in the economic circumstances in which the economy finds itself might unleash “inflationary pressures of a kind we have not seen in a generation…”.

This Isn’t Your Old Fed

The day when it was the responsibility of the Federal Reserve Board to maintain full employment and restrain inflation, nothing more, nothing less, is gone. The Fed has expanded its mandate to include full employment for specific groups – moms, ethnic minorities – and will allow inflation to run above two per cent. And surrendered much of its vaunted independence by taking a position on fiscal policy, a highly charged political issue it has historically avoided, prompting Christopher Waller, a new member of the Fed’s board of governors, to announce that it will not “succumb to pressures” to keep interest rates low to make it cheaper for the government to borrow. Wanna bet?

Or The Old Market System

The day when consumers expressed their preferences through their spending, and private companies responded by making the investments necessary to meet those demands, is also gone. Industrial policy has arrived in America, notwithstanding the fact that many of the green “winners” picked by Biden to receive taxpayer handouts when he was in charge of President Obama’s $831 billion stimulus package went bust.

There’s more. Biden is determined to restructure the labor market by re-empowering trade unions and raising the federal minimum wage; to sidle towards a government-centered health care system by adding billions to Obamacare subsidies; to direct government investment away from fossil fuels and towards green renewables, and pressure lenders to do the same; to subsidize American manufacturing rather than rely on the globalized trading system to allocate resources in our national interest; to redistribute income to reduce inequality; to relax border controls to create a demographic more favorable to the Democratic Party in the long term.

Choose Your Label

If the word “revolution” is too extreme for your taste,  use the staid formulation of The Wall Street Journal: Biden’s is “an attempt to recalibrate assumptions that have shaped economic policy of both parties since the 1980s…”. The President prefers “transformational … change the paradigm”. A revolution by any other name tastes as sweet to triumphant Democrats.