Wednesday, May 5, 2021


President Biden is betting big government can boost long-term growth and vanquish inequality and racism.

His infrastructure and social spending proposals would increase the federal deficit well above last year’s crisis-driven $3.1 trillion. A pandemic bounce will yield 6.5 percent GDP growth this year but longer term, Mr. Biden’s policies will bequeath higher interest rates, inflation, fleeing private investment and many fewer good paying jobs.

Fed Chairman Jerome Powell says the likes of Kimberly-Clark hiking prices on Huggies is a temporary phenomenon, but he is already tightening monetary policy. The 10-year Treasury rate, which provides the benchmark for everything from credit cards to mortgages, has jumped precipitously.

The dismal science and the financial press say higher interest rates reflect expectations for some combination of higher growth and inflation but whatever happened to supply and demand?

In 2020, the Fed purchased Treasuries and other securities approximately equaling the massive federal deficit, but this year its stated policy is to purchase half as many.

Without the Fed mopping up all the bonds the Treasury is spilling, demand is tanking. Longer-term interest rates must rise, and new home construction, auto purchases and shaky businesses propped up by junk bonds will eventually falter.

Raising corporate and capital gains taxes to some of the highest in the world are a biblical imperative for progressives with their disdain for thrift, enterprise, hard work and success.

Along with more government spending, higher interest rates and taxes will crowd out private investment and discourage risk taking on new products — the mother’s milk of productivity growth, higher living standards and international competitiveness.

Mr. Biden’s public investments are a child’s sugary drink when the economy needs Grade A Fortified. His infrastructure programs do too little — and do it badly.

To catch up with years of underinvestment, more than $2 trillion should be invested in roads, rails and the like. Congestion and delays reduce productivity and GDP at least $400 billion annually. At best, Mr. Biden’s proposals would spend about half that amount — the rest are for industrial policies, social programs and racial and gender justice.

Hundreds of billions are for electric cars, semiconductor foundries, Green New Deal stuff and redistribution schemes like affordable housing, publicly-funded child care and Black Lives Matters payola. Those will do much to re-carve the national economic pie but make it smaller in the bargain.

Rising interest rates and higher taxes would move dollars for investing from the hands of private businesses and families who save to the progressive think tank intelligentsia that populate the Biden White House. Who would make better choices?

The premise behind industrial policy is that governments can boost capital spending where the private sector faces barriers too large but that would yield enormous social benefits — the Rocky Mountains and the Union Pacific. Or where foreign governments have stolen our industry with high trade barriers and generous subsidies — steel and semiconductors.

Mr. Biden’s program would seed a national network of EV charging stations by financing 500,000 units to hasten the transformation of the auto industry and boost a U.S. semiconductor industry at grave risk from Chinese targeting. But so much of what he wants to do will make private investment too expensive.

The Davis-Bacon Act effectively requires federally funded infrastructure projects to hire workers at union wage rates and work rules and imposes regulatory burdens that raise costs for public works projects by an estimated 20 percent. Mr. Biden wants to fold into the infrastructure bill the  Protecting the Right to Organize Act, which would generalize those burdens throughout the private sector.

Raising the corporate tax rate higher than in Canada, Japan and Germany will reawaken Obama-era tax inversions — American companies moving abroad headquarters, intellectual property and attractive jobs.

The combination of higher federal tax rates for successful, risk-taking Americans on capital gains and estates and pilfering politicians in places like California and New York would raise intergenerational tax rates on productive investment to more than 70 percent.

Older affluent Americans will be taking fewer chances on new ideas and cruising the Caribbean more because if they make smart business decisions, the government will grab virtually all the profits before they or their kids even see it.

When we talk of federally financed child-care, woke journalists piously pronounce every other civilized nation has some version of it — they really dream of the feminist paradise, France or broader EU.

I don’t care to have European ossification, youth unemployment and pandemic paralysis but apparently our president thinks it’s worth the price to pave the way for Kamala Harris in 2024.

• Peter Morici, @pmorici1, is an economist and emeritus business professor at the University of Maryland, and a national columnist.

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