State of the Union Address (Part 2)

President Biden spent a fair amount of his speech bragging about the American Rescue Plan. That massive wealth transfer and stimulus plan did what you would expect. It stimulated consumer spending, and the economy in general, and contributed to reducing unemployment. It also contributed, in concert with an accommodating Federal Reserve Board (Fed), to a spike in inflation. Was it good public policy? Maybe, but, with the benefit of hindsight it might have been too large.

Biden’s proposed remedies for inflation are not remedies at all but opportunities to push the Build Back Better agenda that failed in the face of resistance from members of his own party.

If Biden really wanted to attack inflation he would encourage the Fed to reverse its accommodating monetary policy and raise interest rates. He might do that by nominating Board members who support this policy. I’m not sure, but he seems to be doing the opposite with his current nominations. If he also wanted to curb inflation, he might acknowledge that now is not the time to expand the deficit with new unfunded social welfare programs like those included in the Build Back Better legislation.

What Biden did talk about as cures for inflation were mostly a series of subsidy programs, that if inadequately funded, would make inflation worse. This is not meant to be an argument against these programs but to suggest that they need to be fully funded with increased taxes or they will exacerbate inflation.

He also suggested that enabling Medicare to negotiate with drug companies would limit inflation. This really has painfully little to do with inflation, properly understood, but it might, within limits, be good public policy. It is really important that we understand that those vaccines and anti-viral drugs, that were so important in taming the pandemic, were the result of decades of research, most of it paid for by private sector firms. If we get carried away with demonizing drug manufacturers, we risk killing the golden goose.

Biden spent some time on the bi-partisan infrastructure bill, which was a very good thing. I wish he would not think about infrastructure spending as an opportunity for job creation, rebuilding American manufacturing, and strengthening unions. We are at full employment. Infrastructure spending, to be cost effective, needs to focus on real infrastructure: roads, bridges, the electric and communications grids, and pipelines (especially water). It’s even reasonable, in my mind, to include building out the infrastructure for charging electric vehicles in this list. This spending also needs to be efficient. It is, therefore, a bad idea to use infrastructure spending as a way to subsidize unions or to overpay for domestically produced materials.

Biden mentioned “Buy American First” a number of times during the speech. The last couple of years have made it clear to private firms and the government that it is important to have diversified supply chains and stockpiles of critical materials. This does not mean that we should abandon the huge benefits of international trade for a protectionist strategy. It probably does mean that some manufacturing activities will increase in the U.S. There are certainly cases where the increased costs of transportation and the costs of maintaining stockpiles will exceed the labor cost advantages of outsourcing to foreign countries. This is far different from a conscious policy of intentionally overpaying for materials produced in the U.S.

A final note-Biden repeated his assertion that his tax plans would not hurt anyone making less than $400,000 a year. That would only be true if you ignore the impact of higher corporate income taxes on the value of the 401Ks and IRAs held by these people and the possible effects of those taxes on employment and/or prices.

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