Build Back Better better...
A US Action Plan
By fixing our finances and investing to reduce inequality, to accelerate our low-carbon transition, and to advance our knowledge-intensive, high value-added economy, country success in the United States would be assured.
Graph above shows General government debt (GGD) to GDP, defined as federal, state & local debt, presented under three scenarios to 2051, using CBO forecasts adjusted to include Bipartisan Infrastructure and Build Back Better (BBB): the Base case relies on CBO & IMF forecasts; the Downside scenario includes an interest rate shock and a shortfall in BBB tax hikes; and, the Reform scenario assumes the government in power after the 2024 elections, and subsequent governments, implement fiscal reforms that reduce deficits. In the Base case, GGD is forecast at 130% of GDP in 2021, rising to ~230% in 2051. Sources: CBO, IMF
Former professors and current newsletter readers have pointed out to me over the years that my writing and analysis, while data-rich and often interesting, sometimes gets into “the weeds.” They say I risk losing my audience, except perhaps for the most ardent policy wonks.
My solution is not to scrap the “in the weeds” pieces entirely — some readers like them and I love them — but to adhere to a new dynamic: from time to time I will follow up a longer piece with a shorter, bulleted action plan.
I did so in September with deep dives on the WTO and trade, followed by bullets in a US Action Plan on Trade. A few days ago, I got deep into the weeds on Build Back Better, thank you very much. Below please find key points on how to improve Build Back Better (BBB).
The Reform scenario illustrated in the chart above could allow the US to sidestep unnecessary financial stress in the years ahead. This scenario involves finetuning Build Back Better and obtaining broader fiscal reforms for the future.
Action Plan on US Fiscal Policy:
Mobilize revenues. Raise taxes — a full 5% of GDP — not all at once but in modest annual increments. This is a bigger tax increase than in BBB. The US tax climate will remain favorable because taxes are currently low relative to peers.
Deploy additional revenues 50–50 to: Build Back Better and reducing the government deficit. Build Back Better can be scaled back to better focus on a lower-income cohort, postponing middle class initiatives to a time when America can afford it.
Support growth-enhancing reforms contained in Build Back Better. Worker productivity would increase with higher funding of the nation’s social safety net, education and training, basic R&D, the low-carbon transformation, and infrastructure.
Means-test, means-test, means-test. Traditionally, American politics has required a bargain between the middle class and the poor as the price to advance anti-poverty legislation. Middle class support is locked in by coupling legislation that focuses on the poor and communities facing racial injustice with middle class goodies. Examples include: education reform in the 1960s — funding for low-income schools agreed in exchange for college loans targeting the middle class; and, the annual farm bill’s food stamps for farm subsidies. The American Rescue Plan and BBB contain large middle class giveaways. Focus BBB on a lower-income cohort — channel spending to the neediest. And eventually, as the CBO suggests, means-test Social Security and Medicare.
How to raise revenues: Implement carbon taxes applied on fuel; a federal VAT (sales) tax; a higher marginal income tax rate for the rich; hike the corporate income tax rate back to 25–28%, which keeps the US competitive within the OECD; close loopholes for the rich (carried interest, passthroughs); end tax preferences for fossil fuels and other carbon-intensive activities. Offset regressive aspects of tax reform with enhanced tax credits for the poor (already included in BBB) and higher food assistance (to mitigate the VAT).
Don’t cut the climate provisions in BBB, but make them more efficient and budget-friendly. First, scrap the Buy American and union-made provisions contained in tax credits. Pursue the goals of strengthening American labor and industry by rejoining the Trans-Pacific Partnership (and supporting the WTO) in order to pry open foreign markets, as well as through job training and adjustment assistance for disadvantaged workers. Second, implement carbon pricing, as the IMF suggests, to deter dirty energy consumption and promote renewables, while cutting back on expensive tax credits and subsidies to do the latter. The IMF proposes a rebate / feebate scheme that rewards / punishes low / high emitters in transportation and power. Cutting subsidies for fossil fuel and ag is critical. Don’t neglect carbon capture and negative emissions technologies, although some on the left do not support them. Building resilience against extreme weather is important. But, also important, as this year’s energy crisis shows, are: building energy buffers and utilizing gas over coal as a transitional source. The approach outlined here may be asking too much from politics at the moment. So, at a minimum, please ask Senator Manchin to do one for the grandkids — support BBB climate provisions, despite your and your state’s financial interests in coal.
How to combat political polarization: To get fiscal reforms done, you need bipartisanship: implement rules changes in Congress that reward bipartisan majorities; counter gerrymandering; require greater transparency of campaign financing; send lawyers into the courts to counter “money as free speech”; pass voting rights legislation; expand mail-in voting and the use of ranked voting and open primaries; and, regulate internet platforms so they better police extremist user content. Finally, deliberative negotiation is needed between the two major parties — such as was deployed in the past in the Congressional “gang” approach. Hammer out bipartisan agreements among party leaders and present them for an up-or-down vote to Congress.
The US needs a Strategic Plan. Strategic planning, led by government and partnering with the private sector, is international best practice. Successful countries from Singapore to Germany deploy it for success. See the US Strategic Plan I rolled out a year ago with a co-author. It establishes the country’s priorities for sustainable and equitable growth. Strategic planning can contain fiscal costs by requiring that spending adhere to the strategic plan.
The US remains the world’s hegemon, or leading economic and military power. But, China and other powers are rising. This transition could be disruptive and painful to the US and its allies, or it could produce a still-powerful and scrappy US of A. By fixing our finances and investing to reduce inequality, to accelerate our low-carbon transition, and to advance our knowledge-intensive, high value-added economy, country success in the United States would be assured.