American Action Forum President analyzes Biden's new $1.75T framework

Douglas Holtz-Eakin, American Action Forum President breaks down potential headwinds for Biden's new plan.

Video transcript

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- President Biden giving some details or new details, I should say, for social spending bill earlier today, the slimmed down version. He hailed it as a historic Bill, saying that not everyone or no one got everything they wanted. We want to bring in Douglas Holtz-Eakin, he's American Action Forum's president, for a little bit more on this.

And Doug, it's good to see you again. We were just talking to Heather Boushey, one of the President Biden's economic advisors in the last block, about this slimmed down version but I'm curious just to get your take. What's your assessment of the Bill?

DOUGLAS HOLTZ-EAKIN: Well, I think there are a couple of different perspectives, first from a macro perspective. What we've seen happen over the past couple of weeks is they have tried to reduce the top line costs of the Bill by frontloading the spending. Having, for example, one year of a child tax credit but none in the last nine years and the pay go for 10 years.

And so you've got front loaded spending with the taxes at the back end that looks more and more like the deficit finance American Rescue Plan that generated not much growth and a lot of inflation, and I think that's a macro risk that's shaping up as they put this into play. The second thing is we'll have to see the details, but there are a lot of things in here that are not particularly attractive policy.

The tax on book income, mixing books and tax income, is a mystery to me. Why would you give control of the tax base to fast be, the Accounting Standards Board? A Ways and Means in the senate finance committee normally just wouldn't do that. And it's never the case that corporations have zero tax liability because they're breaking the law, it's because they're following the law.

They have put into place incentives for expensing investments and a clean energy, R&D, they do that and then they bring in a different concept, book income, which is an accrual not a cash flow. They really doesn't hang together and it's going to cause a lot of problems.

- Going back to what you said about inflation, it sounds like you think that this Bill could potentially make inflation much worse. How much worse could it make it?

DOUGLAS HOLTZ-EAKIN: Well, we saw the American Rescue Plan, $1.9 trillion pumped into the economy at a time when the real time indicator said we were growing at 6%, so timing was bad. We were something like $400 or $500 billion below potential GDP so the size was completely inappropriate, and we got a lot of inflation.

Year to date we're running CPI inflation top line at a little over 7% annual rate, this would be about $1.7, $1.8 trillion more taxes, not zero but some taxes, so not quite as stimulative, pumped into an economy that is closer to potential GDP than it was in the spring and exacerbating an ongoing inflation problem.

I mean, if you look at pipeline producer price index inflation, double digits for finished goods and higher for intermediates and commodities. That's got to be a concern in 2022 and this would make it worse.

- Doug, one thing we heard Heather say just a few minutes ago, she was hoping that this bill would get bipartisan support. I think a lot of, we have yet to see a member of the GOP party come out in support of this. Are you at all hopeful that this could potentially gain bipartisan support?

DOUGLAS HOLTZ-EAKIN: Well, I don't think there's a real chance of that. There was no consultation with Republicans on their priorities, there was no accommodation for their reservations about the incentives in these proposals, and some of them I think really are quite questionable.

So, no, I don't think Republicans have any particular interest in supporting a piece of legislation that will exacerbate macro problems, doesn't address the policy priorities they see in the economy on which they had no consultations.

- Although if this doesn't get any bipartisan support, it's only passed with a Democratic support, I guess, to what extent is this going to further strain party relationships? And what do you think this makes the road map look like in Washington over the next, at least, year?

DOUGLAS HOLTZ-EAKIN: Well, we've now seen this movie too many times. So the Affordable Care Act finished in reconciliation, becomes a political target for Republicans, tax cuts and Jobs Act finish and reconciliation becomes a political target for Democrats, here we go again, Build Back Better reconciliation.

I think the lesson here is that reconciliation, which was intended for budgetary purposes to enable Congress to do tough things like raise taxes and cut spending, is being abused and the procedures really should just be eliminated.

They should have to get to a deal that reflects the broad views in the society and which because they've done the deal making, is more durable and permanent. The idea that we do these big things then unwind them is just not something that's good policy.

- Doug, what's your biggest worry when it comes to this Bill? Because it's a slimmed down version, it sounds like President Biden obviously is going to push some of his priorities out into the future. So we could see some of those things that were not included in this $1.75 trillion Bill potentially put into another Bill in the future. How are you looking at the potential of this and what do you think that means for the recovery?

I have two big concerns, one concern is just it doesn't hang together fiscally. I mean, these programs are intended-- so the idea that the child tax credits around for years is fooling nobody, and so you go back to the original structure, it was five and 1/2 to $6 trillion in spending financed by $2 trillion of taxes and a big structural deficit.

We already have a structural deficit, we haven't done a thing to fix the existing financial problems in Social Security and Medicare and so I think this is a fiscal misstep of very big proportions. And I'm concerned about that and I'm concerned that it's being done in this party line fashion that really no one has any buy in on the Republican side.

The second is, OK, suppose we spend all this money and it doesn't accomplish much, this is supposedly a climate bill and climate is supposedly the administration's top priority, $555 billion in spending for climate. If you look at the resource commitment of a carbon tax, which is the gold standard for addressing climate, it would be something between $5 trillion and more.

And so it's a year's worth of real climate policy, so it's not going to accomplish very much, plus $5 trillion to build the generation transmission and distribution for renewables electricity sector, this isn't going to come close to that. So it will disappoint those who support it and if you have this kind of a big structural deficit and don't get anything out of it, what have you accomplished?

- Now, one of the other big issues when we talk about what's needed in order to boost this recovery, of course, the issue that we're seeing with labor shortages, millions of Americans remain out of work. Now, we have seen some people come off the sidelines as we've seen some of those enhanced unemployment benefits all expire but what do you think is needed in order to address the shortages that we're seeing today?

DOUGLAS HOLTZ-EAKIN: I think it's a number of things. The first and biggest priority should be further progress in containing the coronavirus. It is in the end the source of our economic woes and the public health mission remains the number one domestic policy and the number one international policy, we have to address this and that will help.

Because that'll take some of the uncertainty out of whether the schools will or will not be open, parents of children can make commitments to work that they might otherwise not be comfortable making, it will remove the fear of infection itself to some extent. And so I think that's the number one thing.

And then secondly, make no more policy errors, no more American Rescue plans that put the Fed in a terrible position. I mean, if you look at today's GDP report, this is the worst report a central banker can get.

Nominal GDP growth of about 8%, not quite but close to 8%, a quarter of it real, 3/4 of it inflation, which problem do they deal with? They've got a really tough situation now and that kind of economic uncertainty is not going to help, people unwind these supply shortages and people unwind these labor shortages.