Economy and Business Politics and Public Policy

Democratic Economic Plans and their Long-term Implications

Caveat: I am not a Republican or a Democrat. I am writing this and other blog posts about the level of spending being proposed by the Biden administration and the associated tax and societal costs these programs present. I am producing these viewpoints to illustrate the impact the proposed spending may have on the economy and business as a whole.

The Democratic Party, led by President Biden have enacted legislation to deal with the Covid-19 crisis, proposed a multi-trillion dollar “infrastructure” bill that includes spending on things well beyond the traditional definition of infrastructure such as roads, bridges and airports. This bill introduces the concept of spending on things such as in-home elder care, museums, and affordable housing as infrastructure. They plan another large “Family Act” that is also reported to be a multi-trillion dollar proposal.

The spending enacted or proposed by Democrats is supposed to transcend $6 trillion. This is an amazing amount of stimulus to add to the economy and may spawn wide-spread inflation in the future. The associated tax plans being proposed (a subject for another blog post) to accompany this spending can have deleterious effects on capital formation in general with a large negative impact on entrepreneurial activity of all kinds (startups in technology markets as well as contractors, plumbers, electricians).

Not All Spending is Bad

The first bill signed into law included a great deal of immediate help for people who have been thrown out of work by the pandemic. This (Covid-19 relief) seems a compassionate and wise use of public funds, and does a lot of good for those affected. Workers from the hospitality and travel industries were displaced economically through no fault of their own. I fully support helping them and wish that politicians had not waited until the Biden administration came into office to help them.

The magnitude of the $1.9 trillion bill was debatable but in the end it was probably wise to make sure help was given to those in need despite the size of the bill. The bill had $350 billion for state and local aid (that many thought mainly benefited highly Democratic areas), but again with the pandemic crisis hitting tax revenues in so many places, it is probably best to err on the larger side of caution and to get help to beleaguered communities.

Some Spending is Debatable but Could be Infrastructure

The infrastructure bill is another matter. The bill contains a lot of good and justifiable projects (Amtrak, roads, bridges, electrical power grid). It also contains many things that are well beyond the definition of infrastructure. It is hard to understand how hundreds of millions of dollars for museums (even though I love museums), Native American language preservation, and underground transit in Silicon Vally (a known earthquake zone) are valid infrastructure projects.

The infrastructure plan also includes items that are aimed at environmental causes and social problems. I think it is fine to expand the definition of infrastructure to broadband network expansion, electrical grid improvements and even projects involving highway infrastructure for electric vehicle charging.

Encouraging the use of electric vehicles may best fit into a transportation bill rather than an infrastructure bill, but I can see it related to electric power grid and vehicle charging projects (which can be seen as infrastructure along with bridges, roads and airports). Including these electric vehicle projects in a transportation bill instead of an infrastructure bill could allow them to be funded out of fossil fuel taxes instead of general tax increases. This may better fit the climate change agenda by trading fossil fuel disincentives for electric vehicle incentives. It may also ease the burden on income-tax payers overall while encouraging more ecologically responsible behavior.

Some Spending is Debatable and Not Really Infrastructure Anyway

Plans that are purely social programs (elder care for $400 billion and affordable housing, the aforementioned Native American language preservation, etc.) are totally suspect and seem disingenuous (when included as infrastructure). The cost of these and the fact that they are included with infrastructure when they are clearly social programs makes we analyze the intent of including them in an infrastructure bill.

Calling elder care “infrastructure” and now coining the term “human infrastructure” to describe them seems intellectually dishonest. Arthur Brooks of Harvard University and previously of the American Enterprise Institute made that statement on CNBC on April 19th of this year.

Mr. Brooks’ point was that something like elder care should be in “other bills” and that we should fairly and honestly debate them on their own merits. Including them in an infrastructure plan and then pushing this through with budget reconciliation and Vice President Kamala Harris casting the deciding vote (should all Democrats support the plans) seems to fly in the face of true bipartisan leadership. It looks more like a calculated political strategy to push through a far-left agenda.

Including them with an infrastructure bill seems excessive and purely political. In the end the bill may get negotiated to something more traditional and less expensive.There may be some bipartisan support if the social programs are removed and the infrastructure bill is amended to include more traditional projects. But it does seem likely that Democrats will push this through which can sow the seeds of discontent that may cause political problems in the future.

We have to wait and see on the other proposal for American Families. Many of the things that have been advertised to be in the proposal for “American Families” are noble and worthy of consideration but as our country is still dealing with the economic problems of a pandemic induced recession the timing and size of these plans concern me. Many of the things in the infrastructure plan and the American Family plan seem like good things to do, I just worry about their cost and the inflationary impact that they may have in the future.

Aggressive Agenda May be “Pyrrhic Victory”

Pushing these large spending programs through with budget reconciliation “because they can” will probably come back to haunt the Democrats at a later date. The political pushback of appearing to push an agenda that seems excessive and liberal may not be worth the good they think that they are doing. Not everyone in the country buys the “invest in America” message being espoused by the Democrats. Not everyone believes that bigger government works equitably and efficiently. We have seen over time that many of these liberal ideas can be reversed in a subsequent election. So rather than getting something with a more traditional set of legislation, this “swing for the fences” and spend trillions of dollars approach can inevitably backfire on Democrats.

Overall Impact on Economy – Inflation

The impact of this kind of spending will inevitably be inflationary. Inflation hits the poor disproportionately hard as it raises costs faster than wages can raise to meet them. It seems like a wiser approach would be to propose more rationally sized bills that can garner some bipartisan support. Having more of us agree on a path even if it leads to a less grandiose outcome than envisioned by Democrats is a good idea.