President Biden has released a framework for his Build Back Better plan, which he hopes will gain the support of Democrats in the House and Senate. The plan includes spending increases of $1.85 trillion over 10 years, but that figure relies on gimmicky accounting and the actual cost would be higher.
The plan includes new and expanded subsidies for housing, preschool, renewable energy, health care, elderly care, electric cars, child care, school meals, higher education, farming, refundable tax credits, and other activities. The aim is to pass the plan as a reconciliation bill, which requires 51 votes in the Senate.
The spending would be funded by a $2 trillion tax increase, thus likely damaging investment, hiring, and growth. A rule of thumb is that each dollar of an income tax increase causes about 50 cents of deadweight losses or economic damage. Thus, a $2 trillion tax increase would damage the private sector by about $3 trillion.
But the spending itself would be harmful even without a tax increase. Let’s look at 10 downsides to the Democratic spending plan.
States Can Do It. Much of the proposed spending is for activities that states can fund themselves. Expanding subsidy programs is a bad idea, but such programs are even more inefficient when imposed top-down by Washington. If West Virginia or Arizona want to subsidize housing, preschool, or renewable energy, they can do so with their own state revenues. There is no need for aid from the federal government, especially when it is running large budget deficits while West Virginia, Arizona, and other states have large surpluses. State and local tax revenues are currently up 11 percent over pre‐pandemic levels.
Private Sector Can Do It. Some proposed spending is for activities that the private sector is already doing, so there is no need for new subsidies. The plan would increase subsidies for electric vehicles even though EV sales are already booming. In other cases, the plan would subsidize activities that the private sector would address by itself if governments got out of the way. The plan, for example, includes $150 billion in housing subsidies, but governments are causing the affordable housing problem by restricting supply with excessively tight zoning and building regulations.
Fix Existing Policies. The plan includes $555 billion in subsidies to address climate change, but the government itself imposes policies that exacerbate the harms from climate-related disasters such as hurricanes, droughts, and fires. Furthermore, the green way to fund infrastructure is through user charges that restrain resource use, but the Democrats plan to subsidize infrastructure, which is not green or efficient. Rather than creating new subsidies to address climate change, the government should fix its current anti-green policies.
Federal Overload. Policymakers do a poor job of managing and overseeing the vast array of current federal programs, and new programs would further overload them. The federal budget at $6.8 trillion is 150 times larger than the average state government budget of $45 billion. Most federal politicians have probably never even heard of hundreds of the government’s 2,300 or so programs, let alone actively oversee them.
Democracy. The spending plan would reduce democratic control of government. When the federal government funds state and local activities, decisionmaking moves from elected state and local officials to unelected and unknown officials in far‐away Washington. The Democratic plan would move control over activities such as preschool and child care to federal bureaucrats. In an April speech, President Biden lauded “democracy” 16 times, but his spending plan would result in more top-down mandates on state and local activities.
Diversity. Residents of each state have varying preferences for spending programs and taxes. State governments can maximize value by tailoring policies to those preferences. But the Democratic proposals would undermine such beneficial diversity by imposing one‐size‐fits‐all rules for energy, preschool, child care, and other activities. Biden promised that he would bring the nation together, but trying to force conformity on Americans with top‐down programs would increase anger and division.
Corporate Welfare. Democratic leaders often rail against corporate subsidies, yet their spending plan includes subsidies for industries such as housing, automobiles, and energy. The subsidies would increase the feeding frenzy of corporate lobbying in Washington.
Costly Regulations. Federal subsidies come tied to regulations that raise costs for the states, cities, businesses, and organizations that receive funding. Federal infrastructure subsidies, for example, come tied to labor and environmental rules that raise costs and delay projects. The Democratic spending plan would probably lead to costly new rules imposed on education, energy, housing, preschool, child care, and other activities.
Fraud and Waste. Federal subsidy programs suffer from waste and fraud because state and local administrators have little incentive to restrain costs when the funds come “free” from Washington. Programs such as Medicaid and school lunches have long had high fraud rates, and we have seen massive fraud in recent pandemic aid to the states. Meanwhile, federally funded projects, such as light‐rail systems, often suffer from large cost overruns. The new hand‐out programs would likely suffer these same problems.
Programs With Poor Records. The Biden administration promised that it would follow “evidence-based policymaking,” but Biden’s plan would expand programs that have poor track records. For example, the plan would expand workforce training subsidies, but such efforts have never worked very well. And the plan would expand the earned income tax credit, but the program has an error and fraud rate of about 20 percent and it creates work disincentives as income rises and the credit is phased out.
