Biden’s Spending Plans Could Start to Tackle Inequality
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The coronavirus pandemic has threatened to rapidly widen the yawning gaps between rich and poor, kick low-income service workers from their jobs, cost them incomes and limit their ability to build wealth. But by relying on large government spending to pull the economy off the sidelines, United States policymakers could limit this fallout.
The $ 1.9 trillion economic aid package signed last month and put into law by President Biden encompasses a wide range of programs that can help poor and middle-class Americans offset lost income and save money. This includes monthly payments to parents, facilities for renters and help with student loans.
Now the administration is rolling out additional plans that would go further, including a $ 2.3 trillion infrastructure package and approximately $ 1.5 trillion in spending and tax credits to support the workforce by investing in childcare , paid vacation, universal preschool garden, and free community college. The measures are specifically designed to help backward workers and color communities who have faced systemic racism and entrenched disadvantages – and they would be partially funded through taxes on the rich.
Forecasters predict that government spending – even the one passed so far – will fuel what may be the fastest annual economic growth of a generation this year and next as the country recovers and the economy reopens from the coronavirus pandemic. By starting the economy from the bottom and the middle, the response could ensure the pandemic recovery is fairer than it would be without a proactive government response, analysts said.
This is a big change since the 2007-2009 recession. Then Congress and the White House passed a $ 800 billion stimulus plan that many researchers believe was insufficient to fill the void the recession was causing of economic activity. Instead, lawmakers relied on the cheap monetary policy of the Federal Reserve to pull the United States economy on the sidelines. What followed was a halting rebound, marked by mounting wealth inequality as workers struggled to find work while the stock market rose.
“Monetary policy is a very aggregated policy tool – it’s a very important economic policy tool, but it is on a very aggregated level – while fiscal policy can be more targeted,” said Cecilia Rouse, who oversees the White House’s Council of Economic Advisers. In the pandemic crisis that disproportionately hurt women of all races and men of skin color, she said, “If we tailor relief to those most affected, we will fill racial and ethnic gaps.”
From day one, the pandemic set the stage for a K-shaped economy in which the rich worked from home without much income disruptions while the poorer struggled. Low-paying service workers were much more likely to lose jobs, and among racial groups, blacks experienced a much slower labor market upturn than their white counterparts. Globally, the downturn has likely lowered 50 million people who would otherwise have qualified as the middle class to lower income levels, based on a recent analysis by Pew Research.
However, data suggests that US policy responses – including relief bills passed under the Trump administration last year – helped alleviate the pain.
“The CARES Act on the American Rescue Plan has helped support more households than I imagined,” Charles Evans, president of the Federal Reserve Bank of Chicago, told reporters this month during a phone call, referring to the passed pandemic – Aid packages in early 2020 and early 2021.
Prosperity has recovered almost across the board after the slump early last year, foreclosures have remained low and household consumption has been supported by repeated stimulus controls.
While the era was full of uncertainty and people slipped through the cracks, this downturn looks very different for poorer Americans than it did in the post-financial crisis. That recession ended in 2009, and America’s richest households recovered until 2012 before the crisis, while it took until 2017 for the poorest to do the same.
The government’s political response makes all the difference. In the 2010s, Republicans spearheaded deficit concerns and cut spending early, at a time when the economy was far from healed from its worst downturn since the Great Depression. Interest rates were already close to zero and did not represent a major economic upturn. As a result, the Fed made several rounds of large bond purchases to bolster the economy.
Fed policy has helped. However, low interest rates and huge bond purchases slowly propped up the economy, initially by raising the prices of financial assets that wealthy households are much more likely to own. When companies get access to cheap capital to expand and hire, the workers who secure these new jobs have more money to spend, and a happy cycle emerges.
By 2019, that prosperous loop was in gear and unemployment had dropped to half-century lows. Black and Spanish and less educated workers worked in greater numbers, and wages at the lower end of the income distribution had steadily increased.
Poverty was falling and there were reasons to hope that if this had continued, income inequality – the gap between the annual earnings of the poor and the rich – could soon decrease. Lower income inequality could theoretically lead to lower wealth inequality over time as households have the means to save more evenly.
It took nearly a decade to get to, however, and when the 2020 pandemic broke out it almost certainly disrupted the trend. The data will be published with a delay.
As these different trends between labor and capital played out, the rich rebuilt their savings – which are heavily invested in stocks and companies – much faster. Eventually poorer households reap benefits over the years and people got jobs. The bottom half of America’s wealthy population was better off than before the crisis, but further behind the rich.
At the beginning of 2007, the bottom half of the wealth distribution held 2.1 percent of the national wealth, compared with 29.7 percent for the top 1 percent. At the start of 2020, the bottom half had 1.8 percent while the top 1 percent had 31 percent.
Researchers debate whether monetary policy actually worsens wealth inequalities in the long run – especially since there’s the hairy question of what would have happened if the Fed hadn’t acted – but monetary policy generally agrees that its policies follow a pre-existing trend can never stop – worse wealth inequality.
By giving a more targeted push from the start of the recovery, fiscal policy can do this. Or at least it can prevent the wealth gaps from deepening so much.
Monetary policy “naturally deteriorated,” said Joseph Stiglitz, Colombian economist and Nobel Prize winner. “Fiscal policy can work from the bottom up.”
This is what the Biden administration plays on. Along with packages from December and April last year, the latest package from Congress will bring the amount of economic confidence Congress approved during the pandemic to more than $ 5 trillion. That dwarfs the amount spent on the latest recovery.
The legislation is a mosaic of tax credits, economic reviews and small business support that could give families at the lower end of the income and savings distribution more money in the bank and, if its provisions work as advertised, a better chance of getting back to work early in the recovery .
There is no guarantee that Mr Biden’s broader economic proposals totaling roughly $ 4 trillion will clear a tightly divided Congress. Republicans defied his plans and this week made a counterproposal on infrastructure that is a fraction of the size of what Mr Biden wants to spend. A non-partisan group of house moderators is pushing the president to finance infrastructure spending through an increased gas tax or something similar, which affects the poor more than the rich.
Still, the president’s new proposals could have long-term implications by aiming to retool workers’ skills and strengthen color communities in hopes of making the economy more equitable. The president will outline his so-called American workforce-centered family plan before his first address to a joint congressional session next week.
While details are not yet finalized, programs like the Universal Preschool Garden, expanded childcare subsidies, and a national paid vacation program would be paid for in part through tax increases for investors and wealthy Americans. This could also affect the distribution of wealth, transferring savings from the rich to the poor.
The plan, which must win support in a Congress where Democrats have little wiggle room, would raise the highest marginal tax rate from 37 percent to 39.6 percent and raise taxes on capital gains – the proceeds of the sale of an asset like one Share – for people who earn more than $ 1 million, from 20 percent to 39.6 percent. If you factor in a tax related to Obamacare, the taxes they pay on profits would rise over 43 percent.
The new policies will not necessarily reduce wealth inequality, which has been on an unstoppable upward trend for decades, but it could prevent poorer households from falling as far behind as they would otherwise have.
It is a gamble to bet on fiscal policy to get the economy going again. If the economy overheats, as some prominent economists have warned, the Fed may need to hike rates quickly to cool the situation off. In the past, rapid adjustments have led to recessions that repeatedly drive vulnerable groups away from their jobs.
But government officials have repeatedly said that the bigger risk is undercutting it, and that millions are on the edge of the job market to fight their way through another tepid rebound. And they say the spending clauses in both the bailout and infrastructure could help resolve longstanding divisions along racial and gender lines.
“We see investing in racial justice and equity in general as a good policy, a period and an integral part of everything we do,” said Catherine Lhamon, deputy director of the Home Affairs Council, in an interview.