John Heasley

John Heasley
TBA General Counsel

Will Biden become the new FDR? And what are the risks for inflation?

They may have not considered the threat that a spike in interest rates will lead to fewer working-class jobs and more of our GDP devoted to federal debt service.

When Joe Biden was a candidate, he hewed toward the center left in his policy positions. With the help of Black congressional leaders, he became the eventual nominee due to concerns that the Sanders/Warren wing of the party could not get enough votes to beat Trump in the general election. 

Now, six months into his administration, Biden has veered toward the hard left and is getting accolades from the same progressives who were skeptical of his leadership. His executive orders and appointments show an agenda consisting of global warming alarmism, racial justice and income redistribution.

In his first attempt to bridge the wealth gap, Biden got his first victory with the passage of the $1.9 trillion COVID relief bill, which added even more spending to the $5 billion allocated during the Trump years. Only a fraction of the bill was directly related to COVID-19. Most of the funds will go to the poor and middle class with monthly payments to parents, renter relief and help on student loans.

The progressive economists driving this are concerned that in the aftermath of the Great Recession 10 years ago, the economy improved and employment numbers increased in all groups. The overall result, however, was that after trillions were spent by the Fed, the wealth gap increased. 

They point to statistics indicating that in 2007, the bottom half of the nation held 2.1% of the wealth, while the top 1% held 29.7%. In 2020, the bottom half held 1.85%, while the top held 31%. 

The economists and Biden folks believe that while monetary policy can work at the macro level, with $3.5 trillion spent by the Fed 10 years ago and $120 billion currently spent in monthly bonds, Congress needs to act to provide direct benefits to the poor and middle class. The $1.9 trillion was just a start. Biden would like an additional $2.3 trillion for the American Jobs Plan and $1.8 trillion for the American Families Plan.

How will we pay for all of this new spending? Increasing our national debt, already more than $26 trillion, will be the main source of this funding. Biden is proposing a raise in the top marginal income tax rate from 37% to 39.6% and an increase in the capital gains tax from 20% to 39.6% for those making over $1 million. 

Taxing the rich won’t pay for these new proposals. To pay for a safety net that touches most of their populations, European countries use a value added tax and income taxes that reach into their middle classes.

These massive spending proposals are even more troublesome when you consider that existing federal obligations are not being budgeted for. Entitlement trust funds are running out while debt is exploding. Health care programs (Medicare, Medicaid and Obamacare) and interest payments on the debt are our biggest problems. With Boomer retirements, Social Security spending will increase as well.

What about inflation? If you look at increases in commodity prices and the markets’ reactions to stimulus spending and an improving economy, more inflation looks inevitable. Secretary Yellen and Fed Chair Powell say that everything is under control, and many economists believe that increases in deficit spending and inflation are justified in the quest for economic equity. They may have not considered the threat that a spike in interest rates will lead to fewer working-class jobs and more of our GDP devoted to federal debt service.

Can Biden pass the additional spending bills? He was able to pass the COVID bill with no Republican votes using the special rules of the budget reconciliation process. That process can be used again, but to get most of what he wants, he needs 60 votes in the Senate or an end to the filibuster. 

A 50/50 split Senate, especially considering one or two Democratic dissents, makes it harder to pass major legislation. Early in their terms, both Roosevelt and Obama enjoyed supermajorities in the House and Senate. Like Obama in 2010, Biden’s party may lose the House to Republican control next year.

Debate over spending bills and new taxes will continue for the next two years. This progressive administration will also be pushing for their versions of social justice in legislation involving the environment and financial services.