The Biden team is doing a good job on pandemic rescue & green investment, but should do more to protect the job-creating multilateral trade & investment system the U.S. helped erect after WWII…
By Roger Scher
American Jobs Plan
Quick out of the gate, the Biden administration has done a commendable job funding health care and the prudent opening of schools, replacing aggregate demand, down due to the pandemic, helping the neediest and reducing inequality, and now rolling out an infrastructure plan, fully funded, that would drive productivity and GDP growth higher.
Well, nearly fully funded.
First, the higher corporate taxes are back-loaded over 15 years to fund investment front-loaded over 8 years. So, on a net present value basis, there is a shortfall. But, as long as interest rates remain low, this shortfall will be less evident.
Furthermore, there is much more uncertainty over whether the Ds and the Rs will approve the tax hikes, while the trip to the spending trough will be approved by all hands.
Still, the Biden team is brave and should be commended for being straight with the American people about taxes. The last time I can remember this level of frankness on taxes from a politician, it came from the likes of H.W. Bush and Walter Mondale, both who paid for this honesty at the ballot box.
With their latest tax proposal, the Biden team is showing itself to be clear-eyed about America’s rising debt burden. The Trump-Paul Ryan team of 2017–18 was much less forthright about the financial realities, when they so irresponsibly cut taxes to the bone.
Still, much more will need to be done to ensure that America doesn’t experience a “loss of confidence in U.S. fiscal policy” scenario in the financial markets in the coming years. Read a recent post on this topic.
How do President Biden’s infrastructure and tax plans (the American Jobs Plan, or AJP, and the Made in America Tax Plan), as well as the upcoming American Families Plan, compare with the Strategic Plan for the U.S. that I co-authored, titled Ten Point Plan?
How Ten Point Plan Compares
Ten Point Plan, like the Biden tax plan, proposed hiking the corporate tax rate to 28% (p. 20), as a way to raise revenues while remaining competitive on taxes with other countries. Ten Point Plan called for closing tax loopholes and eliminating all fiscal benefits to fossil fuel, like the Biden plan.
But, we also recommended higher taxes on wealthy individuals and measures to staunch tax avoidance by limiting pass-throughs and carried interest. We also proposed a carbon tax that would increase every year toward levels seen in some Western European countries, making high-emission activities unprofitable and raising revenues. Senator Manchin opposes a carbon tax, but it is not quite the stuff of wizards to conjure up a few Republican senators who might support one.
Nevertheless, a return to sustainable government finances will not be possible without action on the spending side, as suggested in Ten Point Plan. We proposed means-testing most government programs in order to free up spending for green investment and basic research, priorities also emphasized by the Biden team. Ten Point Plan also put considerable emphasis on deploying resources for skills acquisition — i.e. increasing the budgets for education and job training.
There is room to cut back some spending items found in the American Jobs Plan (AJP). Less-pressing infrastructure spending (especially “non-green” investments) as well as other spending items that may be far afield from public investment, could be pared back or at least postponed.
The argument the Democrats make for bold and big actions now is a powerful one. It is the classic tradeoff between political feasibility vs. economic logic and sound finances. Get it all done well in advance of the midterms. You won’t be able to top up infrastructure spending in 2022, so do it now. But, beware the “loss of confidence in fiscal policy” scenario, sayeth the soothsayer.
Better focused anti-poverty programs
Regarding the American Rescue Plan, we argued in a recent post that it could have been cut down to $1.1 trillion by reducing giveaways to the middle class (i.e. the massive tax rebate). The expensive tendency in American politics to offer benefits to the middle class in exchange for support on other priorities, such as poverty alleviation, drove the American Rescue Plan.
The AJP seeks to address inequality and racial justice as part of the infrastructure plan. This is laudable because speedy action to correct these injustices is required. However, it may make more sense to directly increase funding for income support, tax credits, education and job training, and increased health care coverage, programs that more directly target the neediest.
Team Biden, please be careful with the rhetoric and appeals to populism as regards globalization and, specifically, China.
Granted, we are nowhere near the problem experienced during the Trump years — the demonization, the appeals to nativism — but, still, care with words is needed. Anger at globalization and a preference for national autonomy, aggravated by the pandemic, fuels populism around the globe.
China is a competitor. It is fair to have a robust discussion about foreign policy toward China. It is likewise prudent to actively deploy the tools of multilateralism, such as by taking disputes to the WTO’s Dispute Settlement Mechanism. Applying pressure, multilaterally, to countries like China that are not always playing by the rules, is good policy.
George W. Bush famously called China a “strategic competitor”, taking issue with the Clintonian notion of China as a “strategic partner”. The Biden White House said that the AJP is designed to staunch the “ambitions of an autocratic China”, which is upping the ante a bit.
Sure, the Biden team’s language on China is not even close to Trump’s accusing China of “raping the country”. Moreover, President Xi’s China has lurched in a more authoritarian direction. And, I get it, you need to be tough on China in the face of rebukes from Marco Rubio or Lindsey Graham, not to mention Chuck Schumer. But, care should be taken so that the genie of demonization is not let out of the bottle. It is a dynamic that is hard to stop and it could lead to conflict with a foreign adversary. This is in no way excuses the humanitarian offenses committed in Xinjiang and elsewhere.
The AJP has taken issue with globalization itself, a process we, the U.S., set in motion after the disastrous retreat from global engagement during the Great Depression and WWII. Globalization since that time has been a process from which Americans have benefitted enormously, though this is almost taboo to say today in our nearly history-phobic times.
The AJP proposes to “require that goods and materials are made in America and shipped on U.S.-flag, U.S.-crewed vessels.” Sounds patriotic and not unreasonable, but if every nation insists on the same, this will undermine the open trading and investment regime that has underpinned American prosperity for nearly a century.
Anti-globalization rhetoric and action has increased around the globe, as has xenophobic behavior. The U.S. knows better — Joe Biden knows better. We have been the prime mover, and long-term beneficiary, of globalization.
The IMF has estimated that U.S. productivity and GDP growth are higher as a result of trade with China. A report of the U.S.’s own International Trade Commission indicates that the U.S. is wealthier, and jobs more plentiful, as a result of the trade deals the country has negotiated with other nations.
Globalization can cause some workers to suffer job loss or lower earnings. But, the best way for a nation to address this, and to benefit from globalization, is retrain and retool the affected workers, providing them with adjustment assistance, in order to get the country into higher value-added economic activities. And, yes, robust multilateral action to penalize cheaters is required, which is built into our rules-based system. Cooperation with likeminded nations to pressure cheaters is the way to go. America First is just an applause line.
Trade and Supply Chains
The chart at the top of this article illustrates the setbacks to globalization sustained in recent years. Global trade has expanded at a slower rate — 2.3% per year in the 5 years to 2019, compared to a 30-year average growth rate of 4.3%, which includes 2020, when merchandise trade fell 5% in volume terms due to the pandemic. Trade in services — a traditional strength for the U.S. — fared even worse in 2020, contracting by 20%, after growing over 5% per year (in value terms) in the 5 years to 2019.
The AJP also seeks to “spur domestic supply chains”, bringing more production on shore. The pandemic pointed up multinationals’ vulnerability to interruptions in global supply. The response around the globe unfortunately, including by the Biden team, has been to on-shore more production. Initially, in the heat of the pandemic, this was unavoidable. Now, it is bad policy.
The logic of globalization is to locate different economic activities around the globe where it is most efficient and least costly. For example, the iPhone is designed in California, but assembled in China, with parts imported from around the world. On-shoring will raise costs by relocating away from the most efficient locales, and it will attract activities back onshore through subsidies and protection, which will be costly to taxpayers and consumers. As a result, supply chains become less, not more, resilient.
McKinsey Global Institute last summer analyzed global supply (aka value) chains in the era of the pandemic, noting that trade in intermediate goods, the lifeblood of the global value network, has tripled since 2000 to over $10 trillion per year.
23 industrial value chains were assessed by MGI on their exposure to disruption from various shocks. They concluded that one of the most effective ways a company can improve the resilience of its supply chains is by “building more redundancy into supplier networks,” rather than by seeking greater domestic production. “Relying on a single source for critical components or raw materials can be a vulnerability,” according to McKinsey. Multiple (and backup) sources, not all domestic, increase supply chain resilience.
Worth reading on this topic as well is the excellent leader from the Economist, “Message in a bottleneck,” from March 31, 2021, which is cut and paste below:
“Message in a bottleneck
Global supply chains are still a source of strength, not weakness
Resilience comes not from autarky but from diverse sources of supply
Mar 31st 2021
For the best part of a week, the Suez canal was blocked by a 200,000-tonne metaphor. The Ever Given is not just one of the world’s biggest container ships, it is also the emblem of a backlash that accuses globalisation of going too far. Since the early 1990s supply chains have been run to maximise efficiency. Firms have sought to specialise and to concentrate particular tasks in places that offer economies of scale. Now, however, there are growing worries that, like a ship which is too big to steer, supply chains have become a source of vulnerability.
A semiconductor shortage is forcing car firms to idle plants all over the world. China has imposed a digital boycott of h&m, a Western retailer that appears unwilling to source cotton from Xinjiang, where the Communist Party is locking up Uyghurs and pressing them into forced labour. The European Union and India have clamped down on vaccine exports, disrupting the world’s efforts to get jabs into arms. As they battle the pandemic and face up to rising geopolitical tensions, governments everywhere are switching from the pursuit of efficiency to a new mantra of resilience and self-reliance.
It makes sense for supply chains to be more robust. When national security is at stake, governments have a role in making supplies more secure. Yet the world must avoid a stampede back from globalisation that would not only cause great harm, but also create unforeseen new vulnerabilities.
One complaint against globalisation is that it concentrates production and eliminates buffer stocks. Supply chains encompass some of the most sophisticated forms of human endeavour. The iPhone relies on Apple’s manufacturing network, straddling 49 countries; Pfizer, a vaccine champion, has over 5,000 suppliers. But the relentless pursuit of efficiency has led to low inventories and choke-points. At the start of the pandemic, voters and politicians were horrified by the scramble for foreign-made face masks and testing-kits. Over half of advanced semiconductors are made in a few plants in Taiwan and South Korea. China processes 72% of the world’s cobalt, used in electric-car batteries. McKinsey, a consulting firm, reckons that a single country has monopolised the export of about 180 products.
Such dependence is particularly threatening when geopolitics is becoming more confrontational. The decay of international trading rules makes countries more wary of relying on each other. During the pandemic, countries have passed over 140 special trade restrictions and many have quietly tightened their screening of foreign investment. Following the neglect of problems such as how to tax tech giants abroad and whether to impose levies on carbon-intensive imports, countries are tempted to take matters into their own hands. As the contest between America and China intensifies, there is a growing threat of embargoes, or even military conflict. Under Donald Trump, America undermined the global trade regime and President Joe Biden is unlikely to expend much political capital on rebuilding it.
Against such a backdrop, governments have a role in securing supplies — but it is a limited one. They can support research and development, including for new energy sources. Beyond this, subsidies and domestic preference are justified only when a vital input relies on a monopoly supplier that is subject to potential interference by a hostile government. Some rare minerals fall into this category, hand-sanitiser does not.
The risk is that countries go beyond minimal intervention — that, in the slogan of Narendra Modi, India’s increasingly protectionist prime minister, they get “vocal for local”. On February 24th Mr Biden ordered a 100-day security review of America’s supply chains. On March 9th the eu said it would double its share of world chipmaking by 2030, to 20%, which followed a pledge to be self-sufficient in batteries by 2025. Last year Xi Jinping launched “dual circulation”, aimed at insulating China’s economy from outside pressure. Such pledges are vague, but the preference for domestic jobs and manufacturing and promise of subsidies could mark a point at which the world shifts away from free trade and open markets.
Such a lurch towards autarky would not be justified. One reason is that government-administered, domestic supply chains are even less resilient than global ones. For all its drama, the saga of the Ever Given will be only a blip in the trade statistics. As demand surged in the pandemic, China’s mask output rose by ten times. After the panic buying of beans and pasta, the $8trn global food supply-chain rapidly adapted, keeping most supermarkets stocked. While arguments rage over how to allocate doses, global networks stand to supply 10bn shots of brand new vaccines this year. Self-reliance sounds safe, but politicians and voters must remember that their meals, phones, clothes and jabs are all the product of global supply chains.
The call for self-reliance also misconstrues the balance between the costs of interdependence, which are brief and visible, and its benefits, which trickle in month after month unheralded. The lost efficiencies and expense of duplicating shared production chains would be ruinous: firms have $36trn invested abroad. The build-up of costs, as domestic firms were protected from competition by subsidies or tariffs, would be a hidden tax on consumers. And after all that, a policy of self-reliance would end up penalising countries too small or poor to host advanced industries. If manufacturing ends up concentrated at home, even big economies would be exposed to local shocks, lobbying and the shortcomings of their own producers, as America may discover with Intel.
Strength in numbers
Resilience comes not from autarky but from diverse sources of supply and constant private-sector adaptation to shocks. Over time, global firms will adjust to even long-term threats, including tension between America and China and the effects of climate change, by gradually altering where they make fresh investments. This is a perilous moment for trade. Just as globalisation begets openness, so protection and subsidies in one country spread to the next. Globalisation is the work of decades. Do not let it run aground.” ■ [from The Economist, March 31, 2021]