I promised last month that I would post Casey Mulligan and my op/ed The Wall Street Journal After the 30 days waiting period is over. Here it is.
Biden is practically a recession engineer
His regulatory and tax agendas seem designed to negate the good things going on for the economy.
By David R. Henderson and Casey B. Mulligan
Jun 22, 2022 at 4:27 pm ET
Much of the discussion about the potential for recession has focused on the Federal Reserve’s monetary policy. But there are also factors on the supply side of the economy that could push the US economy into recession. These include the Biden administration’s tax and regulatory policies.
A recession is sometimes defined as a decline in employment. Other times it is defined as a decline in real gross domestic product for two quarters or more. A strong labor force and productivity growth are supply-side factors that make recessions less likely, as is recovery from pandemics. But increased regulation and increased taxes on capital—two policy priorities of the Biden administration—are supply-side headwinds that make a recession more likely.
Adult population growth is usually an economic tailwind. But it has declined significantly, from over 1% between 1980 and 2018 to around 0.4%. Even President Trump’s restrictive policies on legal immigration are partly to blame for the decline. President Biden has done little to reverse those policies.
Recovery from the pandemic has also been a tailwind. It will continue to lift employment, but most of the recovery in employment has already occurred. During the pandemic, workers lost skills and capital lay idle. These are being recovered, although from a strictly accounting point of view, their recovery will not be fully recognized in the growth data.
GDP and productivity levels were exaggerated during the pandemic because many products were unavailable or of poor quality in ways that GDP data did not capture. Although public-school teachers stayed home, for example, national accountants assumed they were as productive as ever simply because they continued to be paid. As they return to traditional education, this will not be officially recognized as economic progress for the same reason that epidemic regression has never been recognized.
In typical years, worker productivity increases by about 1%. This alone is a strong economic tailwind that causes GDP growth, which by definition is lower GDP than it would otherwise be. Unfortunately, Mr. Biden’s economic policies will cause productivity growth to decline. A 2020 analysis by one of us (Mr. Mulligan) and three co-authors concluded that Mr. Biden’s economic agenda could result in 3.1% lower full-time equivalent employment per capita and 8.5% lower real GDP per capita than otherwise. If that effect were spread out over five years rather than otherwise, the decline relative to baseline growth would be 0.6% and 1.7% a year, respectively. That in itself creates the possibility of a recession within those five years.
Mr. Biden’s regulatory agenda appears to be proceeding as expected. The good news is that the Senate rejected David Weil, the president’s nominee for the Labor Department’s Wage and Hour Division. But Mr. Biden’s mask mandates offset that good news by disrupting hiring and employee retention at a time when supply chains are already strained. His regulatory agenda is likely to reduce employment growth by 0.2 percentage points a year and real GDP growth by 0.7 points a year.
Although Mr. Biden’s Build Back Better bill would raise capital gains taxes, it is unlikely to pass. But high inflation is taxing capital without any action by Congress. Mr. Biden is almost certain to let the temporary capital-tax provisions in the 2017 tax cut law expire. This would have the effect of reducing real GDP growth by about 0.4 percentage points annually.
The combined effect of increased regulation and increased taxation of capital is about 0.25 percentage points a year in employment growth and about 1.1 points a year in real GDP growth.
Taxation of labor is a wild card. The $300 weekly unemployment bonus created an implicit tax on work: if you got a job, you lost the bonus. Since that bonus expired last summer, the underlying tax rate on work has fallen. Unfortunately, when the economy enters a recession, politicians from both parties, wanting to “do something,” usually extend unemployment benefits. If it happens this time, it can easily and quickly reduce employment by 1% or more. On the other hand, various federal health-insurance subsidies are about to expire. Letting them die will encourage work.
Viewed only from the demand side, a recession seems reasonably likely. Unfortunately Mr. Biden’s supply-side policies seem designed to encourage one.
Mr. Henderson is a research fellow at the Hoover Institution at Stanford University and editor of the Concise Encyclopedia of Economics. Mr. Mulligan, a professor of economics at the University of Chicago and a fellow on the Committee to Unleash Prosperity, was the 2018-19 Chief Economist for the White House Council of Economic Advisers.