The Economic Consequences of Mr Biden

by John Q on March 23, 2021

When I agreed to write The Economic Consequences of the Pandemic for Yale UP, with a target date of May 2021 the idea was that it would be a polemic against austerity along the lines of Keynes’ The Economic Consequences of Mr Churchill, and the The Economic Consequences of the Peace [1] . In view of the rapid resurgence of austerity politics after the Global Financial Crisis, about which Henry and I wrote here, it seemed like a safe bet that this would be a hot topic in 2021. Even when Joe Biden won the election, and then the voters of Georgia gave the Dems a wafer-thin Senate majority, it still seemed likely, that we would see, at best, a half-baked “compromise” along the lines of the Republican counter-proposal to the American Recovery Program.

But here we are, a couple of months later. Not only has the ARP passed with the only significant cutback being the exclusion of the $15 minimum wage rise, but the Administration is already talking about an additional $3 trillion in infrastructure expenditure. If that happens, it will be after I’m due to finish my manuscript, but well before the book comes out.

All of this is great news, but it means I need to produce a different book to the one I had planned and have already written a fair bit of.

I could continue in the vein of the oppositional polemic I had planned, and talk about the inadequacies of Biden’s program, but I don’t see any benefit in that.

What I now see as the big danger is not austerian limits on spending, but shying away from the need to raise taxes on the well-off [2]. Roughly speaking that means those in the top 5 per cent of the income distribution, who account for around 25 per cent of all income, more than everyone below the median (estimates vary a lot, here’s one based on 2010 Census)

This needs to happen quite soon if it is to be in effect by the time employment returns to pre-pandemic levels. Before ARP, the Congressional Budget Office estimated that this wouldn’t happen until 2024. But with ARP and another round of stimulus, it’s reasonable to expect a recovery (at the aggregate level, though not for all places and sectors) by 2022. With that timing, the correct option is to include revenue measures as part of the infrastructure packages. That seems to be on the agenda, but will face serious resistance, as increased taxes always do.

The constraints of the pandemic, and the substantial public assistance provided to deal with have left many households flush with cash. That’s particularly true of high-income households who were able to work remotely, didn’t lose their jobs and benefited from rising asset prices. To raise substantial revenue, and avoid hitting capacity constraints, it’s necessary to tax away some of those gains, as well as reversing corporate tax cuts, the benefits of which ultimately flow to the same group.

Apart from the obvious resistance that always faces higher taxes, and the presumption of uniform opposition from the Republicans, the biggest obstacle may come from those influenced by what I’ve called the pop version of Modern Monetary Theory, which suggests that there is no benefit from taxing the well-off other than to make them not so well-off. Bearing in mind that we are talking about millions of people who regard themselves as middle-class

Correctly understood, the core of MMT (namely, the functional finance version of Keynesianism presented by Abba Lerner in the 1940s is entirely supportive of higher taxes once the expansion is well under way. The key to functional finance is that taxes should be used to ensure that aggregate demand is consistent with the productive capacity of the economy, neither too low nor too high. If we want a big increase in public expenditure, its necessary to prevent high-end private consumption and speculative investment from crowding out vital social needs.

fn1. The Economic Consequences of the Peace was not precisely about austerity, but about the same underlying thinking, that massive reparations could be extracted from Germany without worrying about the macroeconomic effects there and in the recipient countries.
fn2. I’m carefully avoiding the term “rich” here, which mostly seems to be applied to a tiny stratum typified by Bill Gates and Jeff Bezos.



Brett 03.23.21 at 5:14 am

The key to functional finance is that taxes should be used to ensure that aggregate demand is consistent with the productive capacity of the economy, neither too low nor too high. If we want a big increase in public expenditure, its necessary to prevent high-end private consumption and speculative investment from crowding out vital social needs.

The problem with that is that taxing the rich is slow and difficult, and simply targeting “high-end consumption” won’t be enough. Realistically, you need a big VAT or sales tax if you’re trying to use taxation to prevent inflation – something you can more readily dial up or down to reduce consumption if inflation starts rising too quickly.


George Michaelson 03.23.21 at 5:22 am

The rich will start hiding money. Prior to the 2020s their options were more long standing, accountancy tricks, low-doc economies and the like.

Post 2020 some number of them will believe cryptography works, and not realise the huge pseudonomous quality in moving their funds into tokens. Or, possibly, get ripped off by the less nice people who play in the space.

But these two things aside, I can’t see a real downside beyond the tactical: A Biden led administration which votes for higher taxation on the rich probably will be a one-term administration, and the taxes will be disputed, and reversed.

It might be better to lay groundwork to make it possible to tax the rich, than actually do it. I know it won’t fix the crisis we’re in, but there’s always another one.


boconnor 03.23.21 at 7:32 am

Impose a 1% tax on share trading transactions. Distribute it to people on the lower half of the distribution curve direct to their bank accounts with a description of “Wall Street Tax ~ paid to you”. Get people used to the Tax word as being a good thing. I’d like to see the Republicans take that away from voters.


eg 03.23.21 at 1:48 pm

Yes, eventually you get to the point where capacity constraints (labour in particular) are reached. The question is, how far is the US from full employment? Functional finance doesn’t require additional taxation to drain currency until you do.

Obviously, having a plan for additional taxation is necessary, and the obvious suspects are those who have more than they could possibly spend in a lifetime anyway. I suppose the political challenge is getting Congress to enact legislation which gores their donors.


Shirley0401 03.23.21 at 7:12 pm


A Biden led administration which votes for higher taxation on the rich probably will be a one-term administration, and the taxes will be disputed, and reversed.

I don’t know about this. Is there any evidence for it? I think adding a few higher marginal rates (think $800k, $1m, $2m, &c) would actually be popular. This is one area where there’s evidence that people already think we should lean harder on the rich, and it wouldn’t be a hard sell, as long as Dems can avoid falling into their habit of “pre-defending” their common-sense proposals &/or using GOP framing as they do far too often.


mary s 03.23.21 at 7:48 pm

The rich have been evading taxes for a good long time.

So among other things, the IRS needs to have some money pumped into it.


Alan White 03.23.21 at 11:57 pm

Learning a lot here John as usual–thanks.

Except for things like Biden nominees, what we’re clearly seeing is that Schumer is no McConnell when it comes to getting the party in line. (Well, Chuck has no parallel Trump boogeyman after all.) I’m pessimistic about anything getting done especially because the filibuster-buster seems out of reach.


notGoodenough 03.24.21 at 10:42 am

I am not an economist, but I seem to remember there was some good discussion regarding these sorts of points in the “Inequality and the Pandemic” series previously posted on CT by a “John Quiggin” – the chap sounds like he has some good ideas, maybe we should hear more from him ;-)

I suspect careful tailoring of a progressive tax may well help make it more popular. My concern would be that we would enter a situation where the burden falls disproportionately on the not-wealthy (if I may be forgiven for extending JQ´s terminology), and end up being neutral-to-beneficial to the Wealthy and Ultra-wealthy (the Democrats seem slightly less prone to “trickle down” approaches, but still…). I believe a tax which is “fairly applied” might well prove popular – a tax where money is collected from those least able to afford it and then distributed to the ultra-wealthy, would likely not.

At the risk of being overly tiresome, here is some nonsense I wrote on one of those threads:

“My hunch is that changing the tax rates won’t make the highest earners work less, but rather encourage them to try harder to avoid paying it in the first place. Good enforcement would, therefore, also seem to be a key component.”

There is, I believe, research suggesting that high-income tax avoidance is higher than previously thought [1,2]. If the US treated cheating tax similar to the way it treats terrorism – well, it would probably bomb the nation next to the Seychelles, but hopefully the point regarding available support and resources for enforcement remains…

And again:

“To continue the hypothetical, one wonders if what is needed is some sort of global movement which focuses on the needs and welfare of those who must sell their labours to survive? If only such a socio-political movement existed…”

While I don´t expect Biden to start singing “The Internationale” in public any time soon, if properly handled a progressive tax could represent a good way to institute an obviously “fair deal” which will help fund infrastructure, green growth, etc. Ideally, such a demonstration might well help strengthen US left wing politics. Of course, given how some people seem determined to frame politics so that the Republicans are the party of the working class (you know, what with all those massive tax cuts for the wealthy, and 0% support for increasing the minimum wage) while the Democrats are the sneering neoliberal elite (nothing say “we don´t care about the minimum wage” like a majority of your party voting for it, after all!), one cannot be all too confident.

However, I do think demonstrating the value of your policies by actually improving people´s lives generally seems to be more impactful and convincing than merely talking about the improvements you´d hypothetically like to make…maybe it is worth a shot, at least?



[2] NBER working paper series; “Tax evasion at the top of the income distribution: theory and evidence”, John Guyton et al., DOI: 10.3386/w28542


Fake Dave 03.25.21 at 1:44 am

Raising taxes on the rich is a non-starter for this congress. The Manchin/Collins corporate centrist clique will always oppose it and Shumer (who’s scarcely better) will never stand up to them. We have to win a real democratic majority with change before we can see real wealth redistribution.


John Quiggin 03.25.21 at 3:43 am

@9 Manchin is certainly willing to support it at the moment.
Whether that translates into votes remains to be seen, but I don’t think it should be hard for a Senator from West Virginia to choose lots of new infrastucture projects over tax cuts for the big-city elite.


Fake Dave 03.26.21 at 12:32 am

Manchin often says he supports progressive reforms, but then has a habit of gutting them of all ambition. Undoing the Trump tax cuts, even if it happens completely, obviously isn’t enough. Inequality was rising dramatically before those cuts and will keep rising after they’re gone. We can’t be satisfied with a return to the status quo. We need real wealth redistribution (especially clawbacks from tax cheating corporations and their stakeholders), but I think that’s going to be the bridge too far for this congress.

Comments on this entry are closed.