For years, the United States has lamented its decaying infrastructure. Both the Democratic and Republican parties seem to agree that something should be done, and Donald Trump even made it a cornerstone of his 2016 presidential campaign. Yet when the opportunity presented itself, he and his fellow Republicans had other priorities — the 2017 tax cut for billionaires and rich corporations. Now President Biden is poised to take action on this and other fundamental weaknesses in the structure of the economy.
The timing of Biden’s $2 trillion infrastructure plan, as well as his upcoming $2 trillion American Families Plan — coming near the end of the coronavirus pandemic crisis — is no accident: COVID-19 exposed structural deficiencies in the economy and society. Private markets were not as resilient as champions had claimed, and a healthy economy will grow feeble without a healthy and well-trained labor force.
But here’s the rub: We’ll have to pay for these investments partly or largely through increased taxes on individuals and corporations. Some worry that these taxes will dampen the still-fragile recovery. To the contrary, such investments, accompanied by well-designed taxes, could unleash a period of growth that we have not seen for a long time.
These investments in America are true supply-side measures — increasing the productivity of the economy, even increasing returns to private-sector investments, and thereby encouraging this complementary spending.
What matters of course is not just the “quantity” of growth but its quality — whether it is inclusive, leading to shared prosperity, and whether it’s economically and environmentally sustainable. For the past 40 years, growth has been anemic compared with the decades after World War II, and the fruits of the limited growth went overwhelmingly to the rich, all while despoiling the environment.
The Biden administration’s commitment to making investments in the “caring economy” makes sense from the perspective of the quality and quantity of growth. We can’t expect to have a strong economy in the future if 20 percent of young people grow up in poverty without a good pre-K education or adequate health care. And it is a matter of basic decency that caregivers, teachers, and nurses are paid wages that reflect the invaluable services they provide rather than the appallingly inadequate amount that’s the legacy of discrimination and market exploitation.
Now the Biden administration is offering another way forward that’s more reminiscent of the era of Dwight Eisenhower than Ronald Reagan, with high growth and shared prosperity, along with heavy public investments in infrastructure, education, and technology, and the taxes to finance these investments. Trump’s so-called supply-side measures led to neither sustained growth nor investment, and this in spite of the pillage of the environment. The measures did, however, lead to unprecedented share buybacks — almost a trillion dollars in one year — further enriching those at the top.
Tax reform could actually lead to a stronger and better economy. Environmental taxes provide incentives to reduce environmental degradation. Well-designed financial transactions and capital gains taxes can encourage productive investment rather than wasteful and destabilizing speculation. Eliminating the special treatment of income from capital and the loopholes through which so much corporate and capital income escapes taxation will create a fairer tax system — one that discourages the wasteful effort of tax avoidance. These measures could raise trillions of dollars over 10 years, more than enough to pay for the public investments the country needs.
The additional taxes, combined with the additional spending, would stimulate the economy in what economists call a “balanced budget multiplier.” It is well established that even if taxes have some contractionary effect, it’s outweighed by the expansionary effect of the increased spending.
The American Rescue Plan is on target to get the economy back to full employment, with the Federal Reserve anticipating growth of 6.5 percent for the year, and Goldman Sachs estimating growth of 8 percent. There is, of course, considerable uncertainty ahead and, hopefully, the new programs will have built-in flexibility about the timing of spending. Combined with adroit monetary policy, this kind of flexibility can ensure a Goldilocks recovery — a tight-enough labor market that we draw long-marginalized groups into the labor force and drive up wages of the lowest earners, but not so tight as to have unmanageable increases in prices.
For years, economists have been worried about the economy being caught in a trap marked by low growth and high inequality. Biden has at last provided a way out — one that simultaneously begins to address numerous longstanding problems. There is light now not only at the end of the COVID-19 tunnel but also at the end of the far longer and darker tunnel in which we have been traveling for the past four decades.
Joseph E. Stiglitz is university professor at Columbia University, the 2001 Nobel Prize laureate in Economic Science, and former chief economist of the World Bank.