Biden’s budget predicts the Roaring Twenties will end in 2022. Uh oh.

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Can Joe Biden have a transformational presidency if the result is a same-old, same-old economy? It’s a question worth asking after looking at his administration’s first proposed budget.

Sure, the document claims the Biden policy agenda — such as new infrastructure investment and universal pre-school — would “yield significant economic returns [including] boosting productivity and economic growth” to the benefit of all Americans. But it’s hard to find those impacts in its economic projections. While Biden’s economists forecast a big burst of growth over the next two years, the following years are predicted to be a lot slower. (Wall Street is predicting much the same.) Specifically, they see the nation’s gross domestic product, adjusted for inflation, expanding at a red-hot 5.2 percent pace this year and 4.3 percent in 2022. Then comes the downshift, with GDP growing at just under 2 percent annually, on average, through 2031. That’s more like the pace we saw in the long recovery after the global financial crisis, but worse. 

We should all hope the post-pandemic economy performs a lot better than that. Faster overall growth and a more productive workforce should mean faster wage growth. Had increases in worker productivity maintained the rapid pace seen from 1996 through 2005, U.S. per capita income would be $12,610 higher today, notes a group of Oxford University economists in a working paper published in early May. Even accounting for inequality, wages would be higher. Recall that the famously fast wage growth seen in the 1990s was accompanied by rapid productivity growth.

But there’s a big non-economic reason to hope for growth faster than the pace predicted in the Biden budget. The historically slow recovery out of the Great Recession coincided with a rise of nativist populism, both here and in other rich countries. When economic growth falters, bad things often happen. In the study “Going to extremes: Politics after financial crises, 1870 – 2014,” researchers found after a severe financial crisis, “voters seem to be particularly attracted to the political rhetoric of the extreme right, which often attributes blame to minorities or foreigners.” This reaction equates to a 30 percent increase, on average, in the vote share going to far-right parties. A similar cause-and-effect is suggested in “Populist psychology: economics, culture, and emotions,” which finds that economic crises “cause emotional reactions that activate cultural discontent. This, in turn, activates populist attitudes.”

The easy, partisan conclusion to draw is that Biden lacks confidence in his ideas and policies. That probably isn’t the case. Because of how federal budgets are put together, it may well be that the economic forecasts were done before various Biden proposals were finalized. And, of course, we still don’t know how much of his agenda will be passed or exactly what form it will take. Those growth estimates might be updated and nudged higher at some point.

But don’t expect anything as dramatic as the growth projections seen in the uber-bullish Trump administration forecasts after the 2017 tax cuts. Generating fast economic growth is a lot harder than it used to be thanks to a slower rate of workforce growth. If the labor force were still growing at the pace it was during the immediate post-war decades — especially as the baby boomers started working — then the economy’s growth potential would be close to 4 percent. But with the working-age population growing a lot slower than back then, hitting even 3 percent annual GDP growth means boosting productivity to levels not seen consistently in a half-century.

Certainly, the Biden White House thinks policy can make a big difference in growth, whether through more science research, better education, or more immigration — although many of these levers take time to work. And not everything depends on government action. Far from it. A big part of the Roaring Twenties thesis is that a suite of long-gestating technologies, especially AI, will finally start to have a big economic impact. Nor should we forget how bad policy can undermine growth. Let’s hope that the tsunami of federal spending doesn’t spark higher inflation and that a rush to raise taxes doesn’t impede private investment. If that were to happen, those weak forecasts might become a self-fulfilling prophecy.



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