Build Back Better: The Economic Implications
While the Biden White House recently celebrated a win on infrastructure, passing a trillion-dollar bipartisan package, they are still working to pass Build Back Better (BBB), the centerpiece of Biden’s agenda. While the bipartisan infrastructure package focused more on hard infrastructure such as roads and bridges, BBB aims to address “human infrastructure” with proposals to expand access to childcare, healthcare, and education. With a price tag closing in on two trillion dollars, it is worthwhile to examine how the current framework will impact the US economy now and in the future.
Although the BBB framework calls for a substantial increase in government spending, its long-run economic effects may be relatively muted. The Penn Wharton Budget Model (PWBM), predicts that the long-run impact on GDP will be minuscule, contracting GDP by 0.1% and increasing the federal debt by 2.0%. GDP is expected to decrease because transfers that disincentivize work (i.e. expanded child tax credit) or crowd out private capital will not be fully offset by human capital investments (i.e. universal childcare). Similarly, public debt will increase due to the fact that BBB is not fully paid for, with projected outlays of $1.85 trillion dwarfing the $1.56 trillion expected to be generated from a 15% minimum tax on corporate book income and greater IRS enforcement, among other funding vehicles. Notably, however, long-run hourly wages are projected to increase by 0.3%, as transfers are expected to tighten the labor market.
However, it should be noted that projections about the impacts of BBB are not monolithic. The Tax Foundation provides a much more bearish outlook, projected that BBB will decrease long-run GDP by 0.48%, with wages declining by 0.35% and over 100,000 jobs being lost. Their analysis focuses on the tax provisions of BBB, projecting that the 15% minimum tax on corporations alone will reduce GDP by 0.1%. However, they do not appear to account for the potential human capital effects of BBB’s childcare provisions or the potential increase in labor supply associated with its immigration reform provisions. The progressive Economic Policy Institute (EPI) focuses on the more immediate employment effects of BBB, predicting that it will support 2.3 million jobs over the next five years, which is particularly notable given that the US is still 5.5 million jobs below its pre-pandemic trajectory.
Ultimately, the magnitude of BBB’s effects will likely be determined by which programs are made permanent. While most of the programs are expected to expire within the next decade, it is possible that allowing them to expire could be incredibly politically contentious, leading to them being extended. If this were to occur, BBB’s impact will be much more profound, with the PWBM predicting a 2.8% reduction in GDP and a 25.2% increase in public debt. Notably, both hours worked and hourly wages are projected to decline as well. However, this assumes that none of the funding streams for BBB are extended; if they were, the impact on public debt would certainly be far less substantial.
In time, political decisions regarding which programs to extend or cancel will have much farther reaching impacts than BBB itself. With expiration dates on most of its policies, BBB will likely have a fairly muted economic impact, although it may slightly tighten the labor market and enhance human capital. For the average American, the most salient effect will thus be the substantial increase in the social safety net offered by BBB, rather than any macroeconomic fallout. However, should its provisions be extended without sufficient offsets, public debt will balloon substantially, dragging the American economy considerably in the process.
