Executive Summary:

• On June 28, President Biden touted in a Chicago speech his administration’s economic approach dubbed “Bidenomics,” a strategy centered around the pillars of smart public sector investments, empowering workers, and promoting competition.
• In past administration policies, the White House and its approach to Bidenomics have typically understated the costs of public sector investment, including numerous inefficiencies and the crowding out of private sector investment.  
• The Biden Administration should seek to strike a more effective balance between public and private sector investment to better promote long-term economic growth. 

Introduction:

Inside Chicago’s Old Post Office and flanked by signs with the word “Bidenomics,” President Joe Biden outlined his economic vision on June 28^th—a vision that rewrites the economic orthodoxy of the last four decades: Reaganomics or “trickle-down economics,” as Biden calls it.

President Biden has repeatedly criticized “trickle-down economics” for leaving the middle and lower classes behind in economic growth. While Reaganomics was centered around relatively low taxes, deregulation, and free trade, the President is attempting to rewrite the script through a strategy centered around the pillars of smart public sector investments, empowering workers, and promoting competition. In the administration’s words, his plan will “grow the economy from the middle out and the bottom up—not the top down.”

Public Sector Investment Strategy:

In the last 60 years, public sector investment as a share of the economy has fallen from 6.9% in 1963 to under 3.5% today. The Biden administration believes that this figure is fundamentally too low and is a central factor in the slow economic growth seen since the Great Recession. A core tenet of Bidenomics is that targeted public sector investment can help boost economic growth and attract more private sector investment, rather than crowd it out. To quantify this relationship, we can look at a study completed by economists at the Levy Economics Institute of Bard College which found that each additional percentage point increase in public infrastructure and government investment spending is associated with an increase of approximately two-fifths of a percentage point in private equipment investment per year.

Acts such as the Bipartisan Infrastructure Deal, which will allocate an estimated $1.2 trillion in funding over 10 years, demonstrate the administration’s commitment to creating growth through the public sector. But is expanding the government’s balance sheet the right decision?

Long-Term Costs of Public Sector Investment:

Despite the administration’s unwillingness to mention any drawbacks to Bidenomics, public sector investment comes at a cost. As American Action Forum President, Douglas Holtz-Eakin, wrote: “In its analysis of infrastructure legislation, the Congressional Budget Office concluded that moving $1 of investment from the private sector to $1 of government investment means giving up half of the rate of return. Is that ‘smart’?” The President’s proposed 2024 budget includes increasing federal investment by 2.6% to $862 billion. By continuing to move private sector funds to the government, the administration is hurting long-term growth prospects despite what they insist.

Furthermore, an increased federal debt also has a crowding out impact on private capital formation. When the government issues debt, they collect money from U.S. households and firms. Unfortunately, some of the funds they collect had once been earmarked for private sector investment. Through the decreased capital formation that occurs as a result of this process, a 2021 model from the Wharton School of the University of Pennsylvania shows that an additional $1 trillion in debt could decrease GDP by as much as 0.28% in 2050. With current Congressional Budget Office (CBO) projections showing that cumulative deficit projections have increased by over $6 trillion since President Biden was sworn into office, the costs of Bidenomics are enormous.

The Infrastructure Issue:

A driving factor in the increased government spending present in Bidenomics is infrastructure investment. In his Chicago speech, President Biden restated his dedication to improving the country’s infrastructure and even said, “How can you have the best economy in the world without the best infrastructure in the world?” His policy track record certainly proves that his commitment goes beyond just rhetoric. To defend this massive influx of government spending, the President often points to studies, such as one completed by the World Economic Forum’s Global Competitiveness Report in 2019 that found, out of 141 countries, the United States ranked 13^th in quality of overall infrastructure, 17^th in quality of road infrastructure, 23^rd in electricity supply quality, and 30^th in reliability of water supply. While infrastructure investment is needed to improve both quality of life and the economic situation within the United States, Bidenomics incorrectly tasks the government with almost all the improvement.

As part of Bidenomics, the administration has heralded the $1.2 trillion Bipartisan Infrastructure Deal as “a once-in-a-generation investment in our nation’s infrastructure and competitiveness,” but the deal’s actual impact is much more complicated. In his analysis following its passage, American Action Forum Vice President of Economic Policy, Gordon Gray, found the deal would increase the deficit by $399.9 billion over the next decade. Moreover, back in 2021, the CBO published a report on the effect of physical infrastructure spending on the economy under different scenarios. The Bipartisan Infrastructure Deal best models the third scenario they present where the financing of infrastructure spending is split equally between reductions in noninvestment purchases and increases in federal borrowing. Under this scenario, the CBO estimates the budgetary effects over 30 years would have a negligible impact on the net cost of funding. In more clear terms, the CBO is projecting that the Bipartisan Infrastructure Deal will not result in any increased economic growth. Therefore, the $1.2 trillion in spending comes with little to no benefit.

Instead of trying to solve the infrastructure problem through government funds, the private sector should lead the charge. In 2019, the United States had $40 trillion in nondefense, nonresidential fixed assets, which is a broad measure of infrastructure; the private sector owned 65% of it. Not only does upgrading infrastructure require private sector investment, but the private sector is also better suited to fix the problem because they are profit motivated. While the government can invest in unsuccessful projects largely without consequences, private corporations are more efficient because they rely on monetary incentives. In its infrastructure plan, Bidenomics misses the mark entirely and may harm development as the administration soaks up funds that would otherwise be left to households and corporations.

Conclusion:

Ultimately, Bidenomics represents a short-sighted approach to solving underlying issues in the economy. Although government spending will help patch over issues such as the nation’s crumbling infrastructure, low labor force participation rate, and energy crisis, it is limited to just that. Instead of addressing the root of the problem, Bidenomics is akin to putting a bandage over a deep incision. The more government spending the administration pumps into the economy, the longer the wound will fester and the more damaging the long-term impact will be.

The solution to the problems the President correctly addressed in Chicago lies within the private sector. Instead of crowding private corporations out and pushing them to the sidelines, the administration should work to pass policies that spur the private sector into action. Sure, some level of government spending is still needed to address market failures, but Bidenomics should yield more to the private sector and allow Adam Smith’s “invisible hand” to do the rest.