Reflections on the Biden Administration Economic Proposals

By Lorenzo L. Perez*

The economic proposals of the Biden Administration to address the impact of the corona virus pandemic, the shortcomings in infrastructure in the United States and the growing inequalities in the country envisage a much larger role for the public sector than the one envisaged during the last 40 years.  Beginning in 1980, the newly elected Reagan administration began a campaign to reduce the size of government and reduce taxes. This approach continued in general after the Reagan administration to the present time. President Biden has taken the opposite approach and calls for the government to use its expenditure and tax powers to address what are perceived as the urgent challenges of offsetting the negative impact of the pandemic, a deficient infrastructure, the problems associated with climate change, and shortcomings in education and childcare. 

The Biden Administration engineered the passage of a coronavirus relief package (the American Rescue Plan) shortly after taking over in January 2021. The package amounted to $1.9 trillion in benefits and included funding for state and local governments, money for vaccinations and  the reopening of schools, and $1,400 in direct payments to individuals.  This followed the two relief packages passed in 2020 under the previous administration that amounted together to almost $3 trillion.   

At the end of March 2021, the Biden administration unveiled the American Jobs Plan to create millions of jobs and rebuild the country’s infrastructure. The United States has fallen behind other countries in the quality of its physical infrastructure, and many lack access to affordable, high- speed Internet, and quality housing. Meanwhile, the pandemic has unmasked the fragility of the caregiving infrastructure, and research and development (R&D) in the United States has been declining compared to other countries. Biden’s American Jobs Plan is supposed to address these shortcomings and meet the challenges of the climate crisis and the ambitions of an autocratic China. The plan calls for investment in traditional transportation infrastructure; promotion of electric cars; the rebuilding of clean drinking water infrastructure; the renewal of the electric grid; the expansion of high-speed broadband internet; the retrofitting of some two million homes and commercial buildings and the modernization of school buildings; the upgrading of childcare facilities and the building of new care facilities in high need areas; and investment in R&D. The cost of this ambitious plan is projected to be $2.3 trillion but it would be implemented over a number of years. To address long-standing racial injustices, the plan is supposed to target 40 percent of the proposed benefits of climate change programs and clean infrastructure investment to disadvantaged communities.


The proposal of the American Jobs Plan proposal was followed at the end of April 2021 by a separate proposal for an expenditure program on education, childcare, and paid family leave called  the American Families Plan. The program is an attempt to ensure a more equitable recovery and it will be also would be scheduled to be rolled out over a number of years. The proposal would also extend or make permanent enhancements to several key tax credits that were contained in the American Rescue Plan. About $1 trillion, for example, would be in expenditures and $800 billion in enhanced tax credits. Under this program, community college would be free, and universal preschool would be provided for all 3-and-4-year-olds. The proposal calls for having low-and-middle-income families pay no more than 7% of their income on childcare for kids younger than 5. Parents earning up to 1.5 times the median income in their state would qualify. Resources would also be provided to childcare providers, and the American Families Plan would provide workers with a total of 12 weeks of guaranteed paid parental, family, and personal illness/safe leave by the 10th year of the program. Wages would be partially replaced under these leave programs. The Affordable Care Act subsidies would be beefed up permanently, and the proposal calls for making permanent the child and dependent care tax credits contained in the American Rescue Plan.  

The objectives of the American Jobs Program and the America Families Plan can be defended from the points of view of the common good and solidarity, as well from the emphasis it puts in favoring the more disadvantaged members in society to address the rising problem of inequality in the country. Opposition to a larger government is not a sufficient reason to ignore the real problems that the Biden Administration is trying to address. The details of Biden’s proposals still need to be fleshed out in negotiations with Congress, and the programs finally approved may differ in substance and size from the original proposals. Goodwill critics will have an opportunity to propose changes to the Biden proposals.

Two economic issues are being debated in connection with the Biden proposals. One has to do with the size of the packages and whether their size could prove to be destabilizing to the economy by increasing the fiscal deficit. The other issue has to do with the tax proposals to partly pay for the new programs. The American Rescue Plan was criticized when it was unveiled as being too large, not well targeted, and for reducing too much of the fiscal space available to carry out public investment programs. Critics, including Democratic economists, were concerned that the economy was already in recovery and that carrying out the large, approved expenditures could overheat the economy, forcing the Federal Reserve Board to increase interest rates which could eventually lead to a recession. 

Indeed, the economy appears to be on the way to full recovery as the Covid pandemic is increasingly under control in the United States with vaccinations becoming more widespread and the economy reopening. Recently released information for the first quarter of 2021 shows annualized real GDP of 6.4 percent and, for the year as a whole, projections are being revised to exceed 6 percent. This would mean that the economy would have pretty much closed the output gap caused by the pandemic by the end of 2021.  At the same time, the unemployment rate continues to decline, but inflation has picked up. Consumer prices rose at the 12-month rate of 2.6 % percent in March. These results emphasize that funding for state and local governments (given that many were managing quite well their finances earlier in the year) and the direct payments to individuals could have been more restricted in the American Rescue Plan.


On the other hand, to assess the macroeconomic impact of the Jobs and Families Programs, we will need to have the information on actual details of the Programs — both on the spending and revenue sides — after they are approved by Congress (particularly their pace of execution). The macroeconomic impact of the Jobs and Families Act will need to be assessed in a 10-year horizon as is normally done for this type of programs and taking into account the long-term baseline budget scenario to which the new expenditures and tax increases will be added. To partially pay for the Job and American Families Plans, income taxes would be raised on wealthy taxpayers, the capital gains tax rate would be raised for those making more than $1 million a year, and administrative measures (such as increased enforcement of existing income tax legislation and more tax audits of high-income taxpayers) would be carried out. Estimates derived from the White House and Treasury Department indicate that over 10 years, the tax increases would yield $3.25 trillion, compared to about $4 trillion in spending in the Job and Families Plans. The Biden administration claims that this deficit would be eliminated during years 11-15 years of the plan after the infrastructure investment program has been implemented, assuming that the enacted and the tax increases remain in place. These projections would need to be confirmed by the independent Congressional Budget Office, which vets spending and revenue estimates of legislation. 

Different business groups critical of Biden’s tax proposals have called them outrageous and archaic, arguing that the current administration would make tax rates spike so high from a historical perspective that they would hurt the chances of a strong, sustained economic recovery. The defenders of Biden’s proposals counter that these reforms would address the scandal of hundreds of large and profitable corporations not paying any income taxes; the proposals’ supporters also argue that from an economic perspective, they would not actually raise taxes on the rich to high levels.  According to an academic study reported by The New York Times, if all of Biden’s proposed tax increases passed — on the corporate tax rate, as well as on investment taxes for top earners — the total federal tax rate on the wealthy would remain significantly lower than it was in the 1940s, ‘50s and ‘60s.  It would also remain significantly lower than the rate during the mid-1990s. From this historical perspective, the Biden tax plan is not radical and would be unlikely to produce the harmful effects predicted by its critics.  

In the 1990s, the last time tax rates were as high as the ones Biden has proposed, the economy boomed. From the basis of solidarity and fairness, the Biden tax proposals are well grounded.  In addition, the Biden administration is well aware that in the globalized world in which we live, tax policy must be coordinated among countries to ensure that corporations do not move the booking of profits around to lower tax countries and that they pay at least a minimum tax. Secretary of the Treasury Janet Yellen is leading a well-received effort to reach international agreement on this respect. 

Finally, something that has not been emphasized enough in the political debate so far is the need that the spending packages be accompanied by strong oversight measures to avoid waste, mismanagement, and corruption. A proper balance must be achieved between appropriate oversight measures and not unnecessarily delaying the implementation of projects. All in all, the objectives of the President Biden’s economic proposals merit support.  They are ambitious but this is necessary given the challenges that the United States is facing.  However, much more work is needed to flesh out better specific proposals and to ensure that the implementation of these programs do not destabilize the economy.

*Lorenzo Perez, Ph.D.– Received a Ph. D. in economics from the University of Pennsylvania in 1972 and worked at the US Treasury, US Agency for International Development and the International Monetary Fund (IMF) in Washington, D.C.  He was also an Adjunct Professor at the George Washington University for several years.  He retired from the IMF in 2009 after working there for more than 30 years and leading IMF missions to countries in South America, the Caribbean and the Middle East. He is a parishioner of the Church of the Incarnation in Charlottesville and a member of the Agrupacion Catolica Universitaria and the Association for the Study of the Cuban Economy.