President Biden’s $1.9 trillion American Rescue Plan Act (ARPA) and his $2.2 trillion American Jobs Plan (AJP) go beyond COVID-19 relief and rebuilding America’s infrastructure. They are transformational pivots away from more than 30 years of trickle-down economics, which has had the pernicious effect of widening America’s income and wealth inequality.
Theoretically, trickle-down economics gives tax breaks for corporations and the wealthy that are supposed to incentivize investment, create jobs, and stimulate economic growth for all.
It hasn’t worked.
The ARPA and AJP represent “trickle-up” economics, putting dollars directly in the hands of consumers who are most likely to spend them, creating demand for products and services that generate more economic growth than trickle-down. Consumer spending is 70 percent of gross domestic product (GDP). But the Trump tax cuts disproportionately benefited America’s wealthiest. The wealthy save rather than spend, so they don’t generate much demand and restrain corporate investment and hiring, widening America’s income and wealth gaps.
If enacted, Biden’s jobs plan would raise tax dollars to invest in schools, broadband, airports, shipping ports, transit systems, electric vehicles, clean energy, clean drinking water, the electric grid, education, health care, housing and commercial buildings. Republicans, consistent with their trickle-down rhetoric, object to the amount of spending in both Biden initiatives, want to limit infrastructure investments to roads and bridges, and warn that the 28 percent corporate tax increase Biden wants to fund his infrastructure buildout would crush economic growth.
Republican sentiment for the ARPA is virtually nonexistent. It passed the Senate without one Republican vote.
But higher taxes coupled with investment in infrastructure have had better results in terms of creating and distributing economic benefits across all income brackets, including lower earners. Following World War II, America’s marginal income tax rate was between 70 percent and 90 percent. Yet we generated enough tax revenue to fund a massive infrastructure buildout that created the world’s largest middle class. Investment was not limited to roads and bridges (as Republicans want now); it also included education, health and basic research. Three of the four largest decreases in U.S. unemployment and two of the three years of our fastest economic growth occurred in the 1950s, when the top marginal tax rate was 91 percent.
Trickle-down has failed to deliver such benefits. Indeed, over the last five decades, tax cuts for the rich have led to negative or flat economic growth and higher unemployment. It stifled consumption by transferring income from those who consume to those who save.
Most recently, Trump relied on the trickle-down economics to cut corporate, capital gains and individual tax rates, all of which primarily benefited the wealthy. So consumer spending did not generate enough economic growth to replace the tax revenues lost from the cuts. Nor did the cuts spur the business investment and hiring promised by Trump. In fact, business investment plummeted. Corporations, instead of investing in their businesses and hiring more Americans, used their newfound profits to buy back record amounts of their stock and purchase or merge with other companies, firing employees to avoid redundancies.
Republican objections to increasing U.S. deficits and debt seem purely political, disingenuous and at odds with history. Since Franklin Delano Roosevelt, Republican administrations contributed more to federal deficits and the debt needed to finance them than Democratic ones. As one viral social media post correctly put it, Ronald Reagan increased the deficit from $70 billion to $175 billion. George H.W. Bush raised it to $300 billion. Bill Clinton cut it to zero. George W. Bush brought it up to $1.2 trillion. Barack Obama then halved it to $600 billion. Donald Trump ran it back up to a trillion dollars before COVID-19.
Investments in infrastructure also yield better economic returns than most other government investments. Spending $100 billion would add roughly 1 million full-time American jobs. And each $100 invested in infrastructure would boost productivity and private sector output by $13 to $17, generating more wage growth and economic benefits across more income classes.
Every dollar invested in infrastructure under the AJP is expected to return $1.50, which is among the highest rates of return for federal government spending. And by 2024, the AJP would grow GDP by 3.8 percent and add 13.5 million jobs, compared with just 2.2 percent GDP growth and 11.4 million jobs if it doesn’t become law.
Biden seems willing to compromise and may partially walk back the corporate tax increase he proposed to pay for infrastructure spending, which Republicans are opposing. But he shouldn’t compromise the fundamental shift he has signaled from trickle-down to trickle-up. Income and wealth inequality worsens health problems, dropout rates, crime levels, political instability and overall economic risk. Given the failures of trickle-down, Biden’s pivot to trickle-up economics holds the best promise to change this equation. Republicans should give it a chance, starting with passing Biden’s infrastructure initiative.
Neil Baron advised the Securities and Exchange Commission and congressional staff on rating agency reform. He represented Standard & Poor’s from 1968 to 1989 and was vice chairman and general counsel of Fitch Ratings from 1989 to 1998. He also served on the board of Assured Guaranty for a decade.