What Will Happen?

The editors of the Wall Street Journal express great concern that Joe Biden will win the election and is actually serious about his plans for taxes, spending, and reregulation:

The issue is whether Mr. Biden’s policies will nurture this strong recovery, or slow it down as Barack Obama’s policies did after the 2009 recession. This is where the Hoover study comes in, as it examines the Democrat’s proposals on health insurance, taxes, energy and regulation. The authors are economists Timothy Fitzgerald, Kevin Hassett, Cody Kallen and Casey Mulligan. Messrs. Hassett and Mulligan were members of the Council of Economic Advisers in the Trump White House, but then the boosters of Bidenomics are veterans of the Clinton-Obama Administrations.

Mr. Hassett has done pioneering work on the impact of corporate taxation and Mr. Mulligan of the University of Chicago on the impact of government subsidies that raise the marginal tax-rate barriers as workers try to climb the economic ladder. The 50-page Hoover study is valuable because it examines policies for their incentive and supply-side effects, rather than merely macroeconomic demand-side spending.

Overall, the authors estimate that the Biden agenda, if fully implemented, would reduce full-time equivalent employment per person by about 3%, the capital stock per person by some 15%, and real GDP per capita by more than 8%. Compared to Congressional Budget Office estimates for these variables in 2030, this means there would be 4.9 million fewer working Americans, $2.6 trillion less in GDP, and $6,500 less in median household income.

The analytical details are especially helpful on energy costs and the “labor wedge” against hiring that have received little attention. Mr. Biden denies he supports the Green New Deal, but his plans to promote electric vehicles and phase out fossil fuels go far beyond anything Mr. Obama proposed.

To take only one example, the electrification of most passenger cars would increase the per capita demand for electric power by 25% even as more than 70% of baseline electric power from fossil fuels would go offline. Bridging this supply-demand gulf would require enormous subsidies and far more investment and labor to achieve the same energy output. Mr. Biden’s energy plans would cut total factor productivity by 1%-2% across the entire economy.

I don’t know whether VP Biden will be elected, whether he is serious about what he has said, or what impact all of his new taxes and spending would have but for the umpteenth time Keynesianism does not mean that government spending always stimulates the economy. What Keynes actually wrote is that an increase in deficit-financed government spending can make up for a shortfall in aggregate product. But you can’t simultaneously increase aggregate demand and cap aggregate product and expect to stimulate the economy yet that is what we are doing. To take a single example we cap the number of physicians and hospitals. We do that in dozens of ways. When those resources are at 100% of capacity additional health care spending will not increase the amount of care. It will have the perverse effect of increasing the price of care.

The editors’ electric power example illustrates the same principle. Increasing demand while reducing supply will have perverse consequences.

In my view what we need is much more basic and secondary production in the United States but that has become heretical both for progressives and conservatives. As long as that’s the case I think it’s quite unlikely we’ll see the sort of economic growth we need so much.

However, I feel confident in making this prediction. If Joe Biden is elected president and the economy tanks in 2021, it will be blamed on Trump.