Category: COVID relief

• The Biden administration plans to push forward massive fiscal stimulus bills.
• But there is a danger that some of the economic benefit from these bills could “leak” out of the US economy.
• In order to prevent this “leakage” and capture the most economic benefit, the stimulus should be designed intelligently.
• Dan Alpert is an adjunct professor at Cornell Law School and a founding managing partner of the New York investment bank Westwood Capital LLC.
• This is an opinion column. The thoughts expressed are those of the author.
• Visit the Business section of Insider for more stories.

Today and tomorrow, thanks to my very accommodating editors at Business Insider, I present you with two columns approaching the same subject from two different – but very much related – angles. Enjoy!

The Biden administration plans to greatly increase the federal government’s role in the US economy to help the US economy recover from the COVID-19 pandemic and make up for the country’s lackluster economic performance for much of this century. The increased government involvement is to come in the form of a substantial increase in federal spending.

While both the COVID recovery and long-term spending programs will involve the government incurring substantial fiscal deficits, this column will not address the issue of deficit spending versus fiscal austerity – the consensus on that issue has already left the station. What I will address is the impact of the spending itself on the US economy. 

Looking at this spending, there is a risk that a significant portion of both the spending under President Biden’s American Rescue Plan, currently before Congress, as well as the administrations expected plans for a large-scale, infrastructure revitalization plan, may slip through the fingers of the US economy in terms of longer term economic impact. 

The possibility that the increased spending could lead to less growth than the Biden administration hopes (or, as I will discuss tomorrow, accelerating inflation) comes down to where that fiscal stimulus is actually spent. 

The growing “leakage” of fiscal stimulus

Conventional economic thinking would hold that increased government transfers to households – that is stimulus from the federal government like the recent checks – or spending on infrastructure and other public goods would result in increased demand for, in this case, American goods and services. That would generally be expected to boost economic growth and put upward pressure on prices, productive capacity (demand for capital) and, eventually, workers’ wages.  

But what if, as has been the case for the last quarter century to an increasing degree, those goods – and even some services – are procured from abroad? Simply put, the intended beneficial impacts on the economy resulting from such government spending would be muted.

The reason is that many of the positive results expected from higher levels of government spending (assuming no increase in rates of taxation) – or, in the case of the present pandemic crisis, replacement of lost income to households – comes in the form of the fiscal multiplier that such spending or replacement is expected to produce. 

Fiscal multipliers result when the demand from the recipients of the federal cash produces demand for more plants and equipment to increase supply – together with expansion in support industries servicing new production capacity, which then produces more jobs, yielding higher aggregate domestic incomes, and yet more consumer demand, and so forth.

For instance, if the federal government gives out a contract to build a new bridge, the construction firm then goes out and buys steel to build the bridge, and both the contractor and steel producer hire more workers, who receive paychecks that they go out and spend at restaurants who then hire more cooks and waiters, who then go out and spend… and so on. This, in theory, grows domestic demand and eventually boosts the US economy.   

The converse is easier to think about from the standpoint of fiscal spending to replace lost household incomes as a result of the pandemic. If, say, a stimulus check is used by a family to purchase a Peloton bike made in Taiwan, as opposed to buying a membership to work with a trainer at the pandemic-closed local gym, there is almost no multiplier effect as most of the benefits of that purchase flow abroad. 

Let’s call this phenomenon of household relief or stimulus money heading out of the US “leakage.” Over the past 20 years such leakage has tripled while the size of the US economy has barely doubled. This is what it looks like (note that while falling during the pandemic lockdowns, we are back to record levels with regard to goods imports):

And if one were to remove petroleum imports from the above,, the impact on all other goods is even more extreme.

Moving from the household to the sphere of government and business, let’s say that over the next five years the US government – directly and through private contractors – increases spending on infrastructure by $1 trillion per year. Studies have long shown that such spending can literally pay for itself via economic growth, but only when that spending stays in the US economy.. 

There can also be “leakage” here as contractors turn to imported goods – whether that’s raw materials or construction equipment – to build that infrastructure. Then the economic growth that should result from these infrastructure projects is also muted.

Furthermore, preventing this “leakage” could aid the revitalization of the US manufacturing economy. American manufacturers on the receiving end of fiscal spending on infrastructure would build larger and more advanced facilities to fulfill order demand. That scaled up investment would give US manufacturers the ability to be more price competitive, and reduce domestic demand for foreign imports as well as fueling export demand. 

There are enormous benefits to intelligently executed fiscal spending, but the same is not true for fiscal deficits in general, as we saw clearly during the Trump years. Cutting business taxes and taxes on the wealthy certainly produced large deficits in 2018 and 2019, but they did not result in the increased levels of domestic capital investment or any other multiplier effects.

Whatever spending occurred by the private sector was generally to upgrade communications and IT equipment, to buy intangibles (patents, copyrights, etc.) and to fund share buybacks. The reason? The tax cuts did not actually increase household or business demand for domestic goods or services, so there was no corresponding investment in job creating goods production..

Tariffs to protect domestic industries were equally ineffective given (a) pushback from US multinationals and the major domestic distribution channels (see Amazon, Walmart, etc.); and (b) problems experienced by downstream manufacturers that experienced price increases in, for example, steel and aluminum, resulting in their end production being non-competitive.

Therefore, intelligent fiscal (deficit) spending must go hand in hand with aggressive and viable actions to stop “leakage” abroad, including:

• An even more loophole-proofed Buy American plan than the good first step put forth by the Biden administration last month. We need to elevate domestic content requirements, that is the percentage of a good that must be made in America in order for contractors receiving stimulus to buy it. We also need to close loopholes, including those permitting imports on the basis of their “supporting” American jobs by virtue of their lower prices enabling consumers to spend more on US services.
• We need to withdraw from, or heavily pare back our commitments under, the Agreement on Government Procurement which bars the US from showing preferences to domestic manufacturers and contractors in many non-defense infrastructure sectors.
• A strong dollar makes US manufactured goods less competitive. The US must reconsider its relatively hands-off policy on foreign currency exchange intervention by other nations and, when necessary, develop robust intervention initiatives to insure that the dollar does not again strengthen from present levels.
• Finally, the Biden administration’s infrastructure program should be large enough, and of a duration not less than 10 years, to ensure US manufacturers continue to receive orders for years to come , giving them the certainty they need to invest in new factories or facilities in the US.

Multinational companies (here and abroad) and the distribution and retail companies in the US that benefit from the status quo will squawk, as will some of America’s trading partners. But if you listen to them, Mr. President, much of your good work in using government spending to Build Back Better will go down the drain.