the national interest

Biden’s Two-Part Economic Strategy Was Years in the Making

Photo: Bloomberg via Getty Images

The most surprising thing about Joe Biden’s presidency is how surprised everybody seems to be. His critics on the right are dismayed, and his erstwhile critics on the left are pleased that he is laying out a transformative domestic agenda. The fact is that he is trying to implement the program he ran on, which is simply more ambitious than anybody seemed to realize at the time. His economic speech Wednesday night is simultaneously familiar and historic.

But his program follows a fairly clear economic strategy. His goal is to increase wages for working-class Americans by pumping trillions of dollars into the bottom half of the labor market, stimulating both the demand side (that is, how much employers are willing to pay for workers) and the supply side (the value of the labor workers can do). Biden’s vision is the product of years of research that may finally have a governing majority with the will to implement it.

The demand side of the equation is already in the pipeline. The American Rescue Plan shoved nearly $2 trillion in economic stimulus into the economy, on the calculation that labor markets have more slack than official forecasts believe. Most Democratic party economists, with the notable exception of Larry Summers, have come to believe the economy has more potential to grow without triggering an inflationary spiral than anybody in power used to think. The strongest evidence for this theory is the economy in 2018 and 2019, which pushed unemployment below the level many experts believed would start to trigger rising prices, without any sign of higher inflation. A growth target that used to be seen as irresponsible now appears safe. Crucially, Federal Reserve Chair Jay Powell has come around to this point of view and supports this experiment in running the economy hot.

If it works, the hydraulic pressure of a red-hot labor market will push up wages and draw discouraged, marginalized or intermittently employed workers back into the workforce. The rising demand for workers will push up their pay, and give businesses an incentive to invest in training to give existing workers the skills to move up the ladder and fill vacancies.

The American Families Plan, which Biden has just unveiled and hopes to push through Congress, deals with the supply side of the equation. Some of the investments will go toward more traditional things like education. Biden proposes to implement two years of universal free community college, a proven channel to give more skills and earning power to working-class kids. The same holds true for proposal to make pre-K education for 3- and 4-year-olds universally available. The strategy is to extend the coverage range of public education on both ends of the age spectrum. Free school will begin at 3 and end at 20.

Other elements in Biden’s plan to upgrade the human-capital supply are a bit more novel. The plan is to support children through a range of social spending: $225 billion in support for child care, another $225 billion for paid family and medical leave, plus funding for an expanded Earned Income Tax Credit and child tax credit, nutrition, and premium supports for people buying health insurance they can’t get through work.

Democrats traditionally conceive of programs like this in humanitarian terms. But liberals have increasingly made the case for social welfare spending as an investment in human capital. Studies have found that poor children in households that relieve higher EITC and child tax credit payments perform better on reading and math tests. When parents experience stress during their childrens’ formative years, or even during pregnancy, those kids suffer cognitive damage and have worse health outcomes. Basic income-support programs like food stamps and pensions produce income gains for children living in those households decades later.

Biden’s vision of a welfare state that provides workers with child care, health care, a safety net, and broader educational avenues for their children is very consistent with liberal social goals. But the plan to help create stable households is also designed to help develop the skills of low-income children. The demand-side agenda and the supply-side agenda, if all goes well, will work in tandem. A hot labor market will pull more people into the workforce and help them move up the ranks, while the supply-side agenda pushes them up by increasing their skills and readiness.

What about the political strategy to get it implemented? Republicans are complaining that Biden’s agenda is, as Mitch McConnell put it, a “bait and switch,” having campaigned as a moderate and then governing as a left-winger. Biden “never sought a mandate for any of this,” argues The Wall Street Journal editorial page, “He talked about it only in the most generic terms, and then only when pressed in debate. Donald Trump made the election all about the pandemic and Donald Trump.”

But Biden ran openly on all the policies he is trying to pass now, and all of them are extremely popular. Voters support the child tax credit by a margin of over 30 points, free pre-K by more than 40 points, and paid family and medical leave by more than 50 points.

Sure, all those generous social benefits probably sound nice in theory, but what about the trade-offs? Well, the trade-off is that, to be made permanent through the Senate rules, they have to be paid for. But Biden is paying for them by raising taxes on extremely rich people. Not only are those measures popular, they are more popular than the spending itself.

No wonder that, while Republicans are painting Biden’s proposals as generically extreme, they are shying away from criticizing the actual policies themselves. A National Republican Senatorial Committee poll purports to show Biden’s agenda repels the voters, and has been reported as such, but in fact avoids questions about any of the policies in the American Families Plan. Instead, the poll tests questions like capitalism versus socialism, raising the gasoline tax (which Biden opposes), or permissive immigration policies. The absence of any part of Biden’s actual agenda from a poll claiming to show its unpopularity is the strongest evidence that even Republicans realize the public supports it.

It’s true that the media gave Biden’s policies little coverage during the campaign. But that wasn’t a favor to Biden. It was a favor to Trump. Trump’s personality may be polarizing, but his actual policy agenda has always been less popular than his personality. Trump’s efforts to repeal Obamacare drove the backlash that allowed Democrats to win the House, and his tax cut for business owners proved so unpopular he barely mentioned it. A campaign centered on Biden’s well-liked populist agenda against Trump’s plan to take away health insurance and cut taxes for the rich would have been much more favorable for Democrats.

As ambitious as it is, Biden’s proposals slim down or jettison several of his campaign proposals. Because Senate rules require a supermajority for any legislation that isn’t related to the budget, non-fiscal proposals like labor-law reform or a higher minimum wage are going to go. Because he has to pay for all the permanent spending and also won’t raise taxes on the middle class, the size of his permanent social spending is bounded by the amount of revenue he can raise exclusively from the rich; squeezing the size of his child-care subsidies (which are about half as generous as a truly universal program) and forcing him to give up a federal program to extend Medicaid coverage to people whose Republican-led states refused to give their residents coverage. His agenda is also bounded by the demands of his thin Congressional majority, which is why it omits prescription-drug price controls and a lower Medicare eligibility age (which infuriate the drug lobby and insurers, respectively.)

But even once you’ve thrown out everything that isn’t spending, can’t be paid for by taxing rich people, or alienates any Democrats in Congress, you’re still left with a transformative agenda. While the very affluent would pay much higher taxes, everybody else would enjoy more security and opportunity. Children of the poor and working class would have a better shot to improve their station in life. The country would become a fairer and more decent place.

That America would not be an earthly paradise. But it would be exactly what Biden promised.

Biden’s Two-Part Economic Strategy Was Years in the Making