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Do you remember the supply side economy? This is the doctrine that says that lowering taxes (especially for the rich) would spurt growth and bring in more new income than they lost.
It was not true, as research showed the Reagan and Bush tax cuts guided by William G. Gale and Andrew A. Samwick for the Brookings Institution. Early returns on Trump’s tax cuts show that they did little to fuel growth. However, certain supply-side measures could really be relied on to increase overall supply and increase production. Some of them were even tax cuts. There was good reason to believe that, for example, a more generous depreciation of business equipment and machinery depreciation – part of the 2017 Tax Act – would boost investment and increase share capital. In fact, the results look disappointing. The share of investments increased, but only slightly.
However, many of the most promising supply-side measures relate to government spending, including investing in physical infrastructure such as roads, bridges, ports and airports.
The argument for more public investment is essentially the same as the argument for more private investment: if the returns are high enough, the future benefits outweigh the upfront costs and leave some “profit” to the investor. All of these arguments are strengthened by today’s extremely low interest rates, which lower the cost of capital. Now is the time to invest in the future – in both the private and public sectors.
However, choosing the right projects is crucial. This means we don’t limit ourselves to physical investments like factories and roads, as investing in human capital offers many of the highest returns. Fortunately, much of President Biden’s American employment and family plans goes in this direction.
Take two key examples: pre-K training and paid vacation. We have known for decades that high quality training for 3 and 4 year olds pays off. A comprehensive review of existing studies by the Council of Economic Advisers in 2015 found the company can win up to $ 8.60 for every dollar invested.
But you have to be patient. These huge profits will take a generation or more to harvest because so many of them come in the form of higher adult incomes. Mr Biden’s proposal for a national partnership with states to offer free, high quality preschool to all 3 and 4 year olds is likely to pay off long after he leaves.
Paid family vacations and medical vacations receive less attention, but are important parts of the Biden agenda. These are clearly supply-side measures as they would increase labor participation, especially of women. The pandemic has shed bright light on the need for paid vacation because so many people, especially women, have been forced to drop out of work or care for loved ones when they are sick.
But the need was long before the pandemic. The United States is the only developed nation that does not guarantee its employees paid vacation at the federal level. Paid vacation is an insurance against adversity faced by millions of American families each year. A breadwinner gets sick. A child or other family member, perhaps an elderly parent, needs care at home. A new baby arrives. A mother or a father are used for military service.
These are normal parts of life. Some can be tackled with better childcare availability – another part of Mr Biden’s agenda. But many require someone to stay home from work, maybe for weeks or months.
The good news is that the pandemic has roused Congress to the need for paid vacation. In 2020, emergency leave measures were adopted in two different Covid aid packages. The bad news is that what’s left (tax credits from the US bailout plan that was passed this March) will expire at the end of September. America needs something permanent.
The Biden team suggests implementing a 10-year plan that provides at least two-thirds of the average weekly wage for up to 12 weeks of family or sick leave, up to a maximum of $ 4,000 per month. There will be arguments about whether these numbers should be bigger or smaller, but this plan is better than the one we have now – which is nothing.
The greatest benefit to society comes from providing high quality pre-K and paid vacation to disadvantaged families. Wealthy families already make these investments themselves. It is the poor and near-poor who cannot afford to have a good time in front of K or to live without a paycheck for a while.
Opponents of such programs often denigrate it as “socialism”. I like to praise them as a real supply-side economy.
Mr. Blinder, Professor of Economics and Public Affairs at Princeton, served as Vice Chairman of the Federal Reserve from 1994-96.
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Published in the print edition on May 26, 2021.