Biden's $3.5 Trillion Spending Plan Will Leave Americans Poorer in the Long Run

A new analysis projects that private capital, wages, and America's GDP will fall over the next three decades if Congress passes the $3.5 trillion reconciliation package. But at least government debt will grow!

As Congress wrangles over the details of a massive spending bill that's central to President Joe Biden's "Build Back Better" plan, a new analysis shows the proposal will leave America poorer in the long run.

Biden's plan to hike federal spending by about $3.5 trillion over the next 10 years—paid for with a combination of huge tax increases and up to $1.75 trillion in new borrowing—will decrease future economic growth and reduce private wealth, according to a new analysis from the Penn Wharton Budget Model (PWBM), a macroeconomic forecasting project based at the University of Pennsylvania.

The report projects that the reconciliation package would cause GDP would fall by about 4 percent by 2050 relative to where it would be if the proposal did not pass. That decline is driven by an estimated 6.1 percent reduction in private capital, which the group defines as "computers, equipment, factories, buildings, and other productive assets that are used to produce goods and services" and an 8.9 percent increase in government debt.

Higher levels of spending and higher amounts of government debt "crowds out investment in productive private capital. Less private capital leads to lower wages as workers become less well-equipped to do their jobs effectively," the PWBM analysis warns.

That higher levels of taxation, spending, and borrowing are an albatross on future economic growth is not exactly a revolutionary conclusion—unless you work in government, that is. Congress pressed ahead with the reconciliation package this week, as the House Ways and Means Committee stuffed a long list of tax increases into the bill. They plan to hike the corporate income tax, capital gains tax rate, and personal income tax for the top income bracket. Other taxes will target tobacco products and e-cigarettes, cryptocurrencies, and more.

As those parts of the budget plan are finalized in the coming weeks, we'll get more specific analyses from agencies like the Congressional Budget Office and the Joint Committee on Taxation. The PWBM report is based on a framework of the reconciliation bill that was released last month, so it does not take into account the specifics that are beginning to emerge, but the big picture remains the same: No matter whether the bill relies more heavily on revenue raised from taxation or by borrowing, the negatives outweigh the positives.

"Higher revenues decrease government debt, which offsets some of the negative effects on wages and GDP," the report says. "On the other hand, higher tax rates on wages discourage households from working." Other aspects of the plan, like greater levels of spending on public housing and increased Medicare benefits—at a time when some parts of the Medicare program are in danger of hitting insolvency—will further "reduce households' incentives to work, which accelerates the decline in GDP."

Workers might benefit from the massive surge in government spending in the short term, but they will lose out in the long run. The PWBM analysis says wages will rise by 0.7 percent between now and 2030 due to a reduction in the labor supply that will make workers more valuable. "However, as the decline in private capital grows over time, labor productivity continues to decline, which lowers the wage," the report says. By 2050, hourly wages will be 2.1 percent lower than they otherwise would be.

In all, the PWBM report suggests that Biden's massive spending package would hurt taxpayers, investors, workers, and future generations already facing the prospect of lowered standards of living caused by America's impossibly huge pile of debt.

Build Back Better? Hardly.