With the Congressional approval of President Biden’s $1.9 trillion stimulus bill, the outsize proportions of the package are beginning to sink in. And the usual suspects are reacting as expected. The President says the giant bill “meets the challenge of this crisis.” All Republicans (and a few Democrats) are invoking the inflation card, pointing out that the package comes on top of an astounding $4 trillion in previous Covid-19 spending.

We would like to shift the focus away from the narrow debate about how many dollars to a broader one of what we do with those dollars. We have in mind structural reforms — in particular, in labor and education — that could get the most bang from all those bucks in the form of sustainable long-term growth and generate enduring improvements in living standards for low- and middle-income workers.

Actually, there’s even more at stake: spending of this magnitude without structural reforms that increase productivity is likely to create the price pressures that the born-again Republican inflation hawks in Congress are already fretting about. Reflecting such concerns, the yield on 10-year U.S. Treasuries has shot up from 0.93 percent on January 4 — just prior to the Democrats winning both seats in the Georgia runoff to the U.S. Senate — to over 1.6 percent in mid-March. If the climb continues, the correction in bonds will likely dampen the housing sector, which has been supporting the economy since the Covid-19 nosedive, increase the interest cost of servicing the federal debt and perhaps even sow the seeds for the next recession even as the Biden administration is fighting this one. 

The Perils of Short-Termism

Now, the Biden administration is not entirely ignoring structural reform. It’s just that part of their reform agenda is highly problematic, and part will require political will down the road to sustain, which the administration may not be able to muster. 

For example, doubling the federal minimum wage (in stages) to $15 per hour would certainly increase the income of the working poor. But at a price: it would accelerate the pace of automation and put large numbers of marginally productive workers at risk — especially in the low-wage South. Don’t take our word for it: the Congressional Budget Office estimated that the proposed increase would reduce employment by 1.4 million workers over four years.

Or consider the plans to write off some portion of student loans. Biden suggests $10,000, while Senate Majority Leader Chuck Schumer would raise the ante to $50,000. (Bernie Sanders would cancel every cent — but don’t get us started.) Some of that relief would go to students and former students laid low by a combination of debt and a weak labor market that transformed barista into a job for the college educated. But some of it would just make the skilled and lucky that much luckier.

Oh, this gets worse: college endowments are tax exempt, a benefit that mostly goes to a few dozen wealthy universities with huge endowments that certainly don’t specialize in educating the neediest. In 2013, Princeton University’s tax subsidy equaled $105,000 per student.

Public universities and less wealthy private universities on average fund about three-quarters of their budgets from tuition, but the 20 wealthiest universities receive just 15 percent of revenues this way. And since low- and middle-income students disproportionately attend public universities and leanly endowed private ones, most of the burden of higher education costs falls on students at those universities. As a result, they pay a greater share of the cost of their education — a significant chunk of which is funded with readily available loans.

Subsidies to the wealthiest universities provide little incentive for them to curtail spending — whether on new buildings or faculty salaries — which drives up costs at other universities that must compete for faculty and students. It is thus not surprising that tuition expenses have increased substantially faster than inflation. The rising price of higher education is driving the student loan crisis. Merely forgiving some student debt won’t change the underlying dynamic.

Some of what we would do differently than the Biden administration in terms of structural change is a matter of emphasis rather than substance. We would invest heavily in incentives for worker training and education, and more broadly revamp education to focus on marketable skills. The President, for his part, wants to add apprenticeship programs to the roster of work skill initiatives.

We would also invest heavily in the earned-income and child-care tax credits, both of which boost low-end households without the job-killing imact of a higher minimum wage. The $1.9 trillion Biden package does include substantial increases in the earned-income tax credit and the existing child-care credit. But the increases last for just two years, making them vulnerable to a less generously inclined Congress.

In for a Penny …

In any event, we see both programs as an appetitizer to the pièce de resistance: a Universal Basic Income that substitutes for myriad means-tested programs that are powerful incentives to work less. In the same vein, we would go big in structural terms by eliminating the payroll taxes that fund Social Security and Medicare and then use general tax revenues to finance the programs without putting a work-deterring wedge between wages and labor costs.

Then there are a host of ways to change federal tax laws to increase productivity and increase the demand for labor, even as they reverse the trend toward rising income inequality.

For starters, taxing investment income at the same rates as ordinary income would level the playing field between capital and labor, reducing the relative cost of labor even as it reduced America’s glaring income inequality. By the same token, it is hard to see what we got out of the big corporate income tax cut in 2017 other than profit windfalls and bigger federal deficits. In the long run, we agree with Milton Friedman that a corporate income tax distorts the economy. But in the short run, as a matter of equity and need for revenue, the corporate tax cuts should be rolled back.

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We understand that the response to the Covid-19 catastrophe must include fiscal stimulus. However, not all fiscal stimulus measures are created equal. While those contained in the Biden package will speed growth and reduce income inequality in the short term, both effects are likely to peter out along with the cash. We believe that structural changes could put the economy on a path toward sustainable growth, reduce income inequality by harnessing market forces and lift the least fortunate out of poverty without distorting labor markets.