Biden’s budget proposal is ‘the most reckless fiscal policy in the last half-century’: Fmr. CEA Chairman

Tyler Goodspeed, Kleinheinz Fellow at the Hoover Institution at Stanford University and Former Chairman of the Council of Economic Advisers, joins Yahoo Finance’s Alexis Christoforous and Kristin Myers to discuss Biden’s $1.5 trillion budget proposal for domestic spending.

Video Transcript

KRISTIN MYERS: Welcome back. Let's talk now about the skinny budget. That means that it's the first look of the details, because the size of the spending is anything but skinny. Roughly 1.52 trillion has been proposed in federal spending, as the Biden administration plans to focus on education and poverty reduction. So let's chat about it now. We're joined by Tyler Goodspeed, Kleinhoff-- Kleinheinz, excuse me-- fellow at the Hoover Institution at Stanford University, and formerly chairman of the Council of Economic Advisors under President Trump.

Tyler, you know, we were chatting about this in the last hour with [? Austan ?] [? Goolsbee, ?] so I want to start with the same question that I asked him. 1.5 trillion in federal spending is a part of this budget proposal that we have so far, on top of about $2 trillion in infrastructure spending. That's quite a bit of money that is being proposed here that the federal government plans on shelling out. Is it prudent for us to be spending that much money? What are some of your first thoughts and reactions to this budget proposal?

TYLER GOODSPEED: Well, it's good to be with you. And let me be frank. In my academic life, I'm an economic historian. And I think we are looking right now at the most reckless fiscal policy in at least the last half century. So with this so-called skinny-- skinny proposal, we're seeing a proposed increase in non-defense discretionary spending of 16%. That would bring non-defense discretionary spending to its highest level as a share of the economy since 1975, so matching the-- its highest share of the economy actually in the post-war period. And as you said, this follows not only a $2.2, $2.3 trillion infrastructure bill, but also a $2 trillion additional COVID relief bill, not all of which was COVID-related. And we just learned this past week that Democratic leadership in Congress has been cleared to pass another reconciliation bill this year. So I think that we are in unprecedented territory when it comes to fiscal policy.

ALEXIS CHRISTOFOROUS: We know, Tyler, that President Biden has said time and time again he's going to have to pay for all of this, including infrastructure and the $1.9 trillion COVID relief package, by raising taxes. He wants to roll back President Trump's Tax Cuts and Job Act of 2017. Do you think Biden will have better luck doing that than President Trump had in trying to repeal and replace the Affordable Care Act?

TYLER GOODSPEED: Well, he does have the advantage of Democratic majorities in both the House and Senate. I will say, how-- I would caution effort-- them on efforts to repeal aspects of the 2017 Tax Cuts and Jobs Act because, look, one of the priorities of the current administration is addressing issues of inequality. What we saw in the aftermath of 27-- of the 2017 tax law, substantial declines in wage, income, and wealth inequality because the 2017 tax law delivered a high-pressure labor market with increased investment in new plant and equipment per worker.

And so unlike the recovery through the end of 2016, when we saw rising inequality and we saw 1.9 million prime age workers leave the labor force, after the landmark tax reform of 2017, we actually saw 2.3 million prime age workers re-enter the labor force. So I think if their objective is addressing longer-run trends in income inequality, I would be very hesitant to start peeling back some of the provisions of the 2017 tax law that delivered a high-pressure labor market that was delivering gains across the income, wage, and wealth distributions.

KRISTIN MYERS: Tyler, what should the priorities then be coming out of the pandemic? As you see it, if you were part of writing this budget proposal, where would you be focusing some of the government spending efforts?

TYLER GOODSPEED: So first and foremost, I would be focused on jobs. There is not going to be a recovery in the US economy until there's a recovery in the US labor market. So making sure that the incentives are in place for employers to continue hiring and to make sure that we are not imposing unduly high implicit marginal tax rates on the return to work. And the second priority would be to provide some long-run certainty for both workers and firms by making sure that certain provisions of the 2017 tax law that are currently scheduled to sunset, to make sure that those are permanent so that we're providing businesses and workers with the certainty they need to invest in new plant and equipment and new human capital training.

ALEXIS CHRISTOFOROUS: Now, I know in this budget proposal-- and it's just that right now, it's a proposal, it's a wish list, if you will, from the Biden camp, but they're requesting that spending for the Pentagon, the military basically remain flat. It would be a decrease from Trump-era spending on military. I just would love to get your thoughts on that.

TYLER GOODSPEED: So the needs and requirements of the Department of Defense are sort of outside of my area of expertise, but I will say that, over the past three decades, really one of the big phenomena in-- in international affairs has been the rise of the People's Republic of China. The People's Republic of China has become a global superpower, with-- with capacities for surveillance and technological disruption that their Soviet predecessors would have marveled at. And so I think in the context of that-- that security threat, we ought to be thinking very, very carefully about-- about whether or not the Department of Defense is adequately funded.

ALEXIS CHRISTOFOROUS: And you bring up China. What's your take so far, early still on in the Biden administration, but at least the initial dealings with China is they're not looking to lift those tariffs imposed by the Trump administration anytime soon. What would your advice be to this administration when it comes to those tariffs and China?

TYLER GOODSPEED: Well, I think that China is a tough nut to crack because, at the end of the day, we are talking about a $14 trillion non-market economy. And just a couple of years ago, when we were working on the section 301 tariffs, we had experts in from the OECD to discuss issues of the global trade and pirate and counterfeit goods, and which totaled almost $600 billion in 2016. And that was almost exclusively the People's Republic of China. We asked them who was number two, they said there is no number two, it's China. So I think I would certainly advise the Biden administration, and in particular the US Trade Representative, to continue to take a tough line on China, as-- as the pre-- as Ambassador [? Lighthizer ?] did in his tough negotiations for a phase one agreement, which include snapback provisions if-- if the People's Republic of China do not honor their obligations under that agreement.

KRISTIN MYERS: All right, Tyler Goodspeed, formerly the chairman of the Council of Economic Advisors under President Trump, thanks so much for joining us today.