Biden administration policies threaten to restrain recovery

Raymond Keating
Raymond Keating

Americans are a resilient bunch — including entrepreneurs and their employees and investors.

According to the latest numbers reported by the U.S. Bureau of Economic Analysis, gross domestic product growth accelerated in the first quarter as the climb out of the deep economic hole dug during the COVID-19 pandemic continues.

Yet, President Joe Biden serves up a series of policy measures that will only serve to restrain the recovery.

GDP, the broad measure of goods and services produced in the country, grew at a seasonally adjusted annual rate of
6.4 percent in the first quarter. That was faster than the 4.3 percent growth rate in the fourth quarter of 2020.

Even after a 33.4 percent jump in the third quarter of 2020, the massive declines in the first two quarters mean GDP remains below pre-pandemic levels.

For the first quarter of 2021, personal consumption expenditures rose 10.7 percent as a result of business reopenings and government aid. Looking ahead, it’s critical consumer spending is rooted in expanding business investment and jobs, not assorted government aid programs. Government aid amounts to redistributing resources — with real costs now and in the future — and not wealth creation.

While gross private domestic investment declined 5 percent in the first quarter, that largely was about a transient drop in retail inventories. Nonresidential investments increased 16.7 percent for equipment and 10.1 percent for intellectual property products. Residential investment grew 10.8 percent, a reflection of the hot housing market.

Unfortunately, the recovery in trade stalled. Real exports declined 1.1 percent in the first quarter. Growth in imports continued for the third consecutive quarter, but at a slower pace than the previous two quarters.

It’s important to note where key areas of GDP stand compared to the pre-pandemic fourth quarter of 2019. As of the first quarter 2021, real business investment, residential investment, exports and imports rebounded to higher levels than the fourth quarter of 2019. In terms of the private sector, only personal consumption expenditures in the first quarter 2021 were below the fourth quarter 2019 level.

If strong growth continues, overall GDP could fully recover by mid-2021 with the economy then shifting to an expansion mode. Of course, that would still leave a considerable amount of lost growth in the economy to make up for, and much work would remain in terms of job creation, which is a lagging measure.

The need to foster the best possible environment in which the entrepreneurship and private investment that drive economic, income and employment growth can flourish should be apparent to all. Unfortunately, President Biden’s policy push would restrain or even derail recovery. Growth would be undermined by plans to:

Increase personal income taxes on upper-income earners.

Increase capital gains taxes.

Increase corporate income taxes.

Expand the regulatory burdens of the federal government.

Vastly expand federal spending in a variety of arenas — trillions of dollars in new spending on top of trillions of dollars already being spent.

Engage the federal government in industrial policy.

President Biden is trying to ride the wave of vaccines working to stop this pandemic and the economy reopening to impose a breathtaking expansion of government seemingly in all corners of life. But Biden can’t repeal the laws of economics.

A vast expansion of government means draining resources away from more productive enterprises and endeavors in the private sector. Whether financed by more debt or taxes, more government spending crowds out the private sector. Higher taxes reduce incentives and resources for starting up, expanding and investing in businesses. That, in turns, means further restraint on innovation, productivity, income and job growth. For good measure, elected officials and their appointees don’t possess the knowledge or incentives to guide or direct investment and industries.

The Biden administration also is absent in unwinding the protectionism of the Trump years and returning the U.S. to a leadership role in advancing free trade.

As almost any small business owner will tell you, the regulatory costs of government are just as real and burdensome as taxes. Gearing up the federal regulatory machine means inflicting serious harm on businesses of all types and sizes.

The tax, spending and regulatory policies emerging from the Biden administration are anti-growth. Let’s hope Congress possesses the wisdom to say “no” to such misguided measures and instead focuses on reducing government burdens on the true sources of growth — entrepreneurship and investment.