Biden Doctrine: Reshaping How We Spend

We were wrong about Biden’s economic doctrine. Our earlier reports criticized President Biden for increasing deficits and expanding government, a common critique he has faced for the past three years. Upon deeper analysis, everyone has been reading it wrong.

In this report, we examined extensive federal, state, and local spending records and consulted with a select group of policy experts. The conclusions are clear:

• Biden’s policies have given the economy time to heal, much like Reagan’s policies did in the early 1980s. Biden’s first term is strikingly similar to Reagan’s, except in one significant respect: under Biden, private spending as a percentage of GDP is now higher than it was under Reagan.
• Even more surprising, the speed at which Biden has established federal primacy while avoiding a discussion about it. This is the most important economic policy story that has not been fully reported, even as many have debated increased deficit spending under Biden.

Don’t have time? Read a Summary version at TLDR; Strategic Insights.

Our conclusion on Biden’s historic presidency: The Biden-Harris administration’s goal isn’t just more spending; it’s more spending at the federal level. This is the most important and underreported story of this election season.

How to Cure a Recession

Back in 2008, Obama stepped into the White House as the Global Financial Crisis was raging. Franklin D. Roosevelt III, grandson of the former president and a professor of economics, gave Obama some bold advice: go all-in on spending, as if there's no tomorrow - because without such action, there might not be. Obama didn't fully buy into this idea. Obama did boost federal spending, but then dialed it back - a move some critics say came too soon.

Biden took the advice.

The results? Better than expected. In 2022 and 2023, the U.S. economy grew about 2% each year, surprising those who predicted a downturn. Unemployment stayed low at 3.7%. The economy handled the pandemic better than many feared, avoiding a repeat of the Great Depression.

Much of the credit has gone to the Federal Reserve and Chairman Powell for its aggressive rate hikes, but we believe fiscal policies of President Biden’s fiscal expansion during the Fed induced monetary contraction deserves credit for creating the environment that has allowed economy to heal. Biden’s policies have drawn heavily from Keynesian principles, emphasizing the need for sustained government intervention during periods of economic uncertainty. Unlike past downturns, when government pressed breaks as soon as economy seemed to be faring better, Biden-Harris have been gradual and strategic with spending reduction., thereby slowly bring people back to work, rather than shock them into it. This approach has meant lower productivity initially, something we criticized Biden for in the past, but as less people are unemployed, we we anticipate productivity to pick up faster as less people need retraining.

Biden’s approach contrasts sharply with that of previous administrations facing an economic contraction. During the Great Depression, a delayed and insufficient response deepened the crisis, while in the Great Recession, stimulus efforts were pulled back too soon, curtailing recovery. Worse still, the benefits of cash infusion were limited in the Great recession by erecting policy walls that had echoes of depression era name-calling. Afterall, if the economy crashed, someone must have caused it! These policy requirements, such as increased capital requirements reduced Banks’ ability to lend, just as the economy needed the cash circulation the most, thereby limiting the benefit of government injection.

Biden, by maintaining higher levels of government spending, and not pushing for retribution on banks has aimed to avoid these pitfalls. He was also lucky that unlike the Depression or the Great Recession, you couldn’t point to banks or other institutions for this recession, limiting the desire or the ability on everyone’s part to exact a revenge (Harris’ recent proposal on price controls notwithstanding).

The State of the Union

The economic recovery from the crisis has brought new problems. One big result of more federal spending and borrowing is a change in power between federal and state governments.

After decades of growth, by 2006’s, state and local spending had reached close to federal spending. Mind you, this at a time when the US was still in 2 wars, with defense representing over 20% of the Federal budget.

Now, things are different. State and local spending has fallen to 37% of total government spending, despite defense having falling to only 11% of the Federal spend. State and local spend is likely to drop even more in 2024 and 2025 as Federal transfers contract and states work to balance their budget. After years, it appears, States have finally ceded control back to the Federal Government.

Many in the GOP see Biden as a Carter like idealogue, looking to increase Federal spending and centralizing the government. Vance and others close to Trump are drawing plans to reverse the declines. They see State funding/ spend from the following perspectives:

Historically, state taxes evolved from property-focused to diverse systems including income and sales taxes, driven by increased public services and federal mandates. In this light, State control and shifting more responsibility has become a key, even if less promoted Republican goal, while Democrats remain firmly towards a weak state to more fully control the agenda. Democrats aim for using increasing category based federal grants to control the outcomes, whereas Republicans support block grants that allow flexibility to control agenda at the state level.

While there’s been a great deal of scrutiny at the Federal level to reduce spending, State spending had been under a secular growth for decades, primarily as social conservatives pushed for more education spending and democrats pushed for more healthcare spending.

These signs of decline appeared in 2008, first with the Global Financial Crisis (GFC) and then again in 2020 as the pandemic severely impacted long-term funding. In both instances, instead of using increased one-time payments for temporary expenses and enhancing states' flexibility, many opted to make long-term commitments. More detrimentally to their long-term relevance, they chose to cut taxes. In fact, eight states cut taxes in 2023, marking a reversal from years of growth.

The lower taxes in states are only increasing their reliance on federal funding, which now constitutes 34% of state revenues, compared to 20-25% since the 60s when state spending took a sharp increase with Lyndon Johnson’s Great Society. Not only are the states spending less in relative terms, they are also collecting a smaller and smaller share of the revenue directly.

This centralization has increasingly concerned many policy experts, especially on the right. One senior analyst who works at a right leaning think tank told us, “As Governments centralize the financial control, they have a tendency to become less democratic. We have seen this in other countries, and although United States remains a vibrant democracy there are signs that politics at state and local level has deteriorated in recent years, becoming more engaged in culture wars than the more important policy issues. We often hear about the Right spurring these culture wars, but often it is the left that picks up on the various themes to mobilize its base to weaken the trust towards the local government.”

We spoke to a senior advisor in the White House, who is also advising Kamala Harris campaign. She dismissed the idea of centralization or that we are in a secular decline, instead suggesting, “it’s normal in a recession or decline for Federal Government to step in. In recent years, we had to act fast and flood the economy. Now those conditions are behind us and we will be partnering with states in building an American future for all. We have taken deliberate steps to not erect a policy posture that limites State powers. In fact, if you look at the Harris plan, we are very clearly outlining how we will partner with states on infrastructure.”

She further dismissed the idea of culture-wars as a distraction: “You can’t tell me abortion rights don’t matter to most women.”

The expert from the think tank disagrees. “I have read the theories that State spending is pro-cyclical and grows and ebbs with the economy. But there is more going on here. Simultaneously, as state and local governments have become weaker, the expansion of federal welfare programs have only grown and there’s no sign this will reverse if Harris wins. She has already announced a series of redistribution programs, and tax increases.”

It has been estimated that the federally controlled programs such as Social Security, Medicare, and Medicaid are all projected to grow faster than the overall economy whereas the state controlled programs such as education and policing will continue to grow at a slower pace than economy. So, to rebalance the Federal vs State balance, Federal Government would need to shift more of its spending to States, while reducing its own spending on these welfare schemes - which neatly ties to the Trump-Vance plan in a sharp contrast with the Harris-Walz plan.

He continues, “What’s remarkable is that this very large shift in Government landscape has been underreported as many journalists focus on deficits at the Federal level alone. It is very clear where media is getting its cues from.”

Right - the democrats control the media.

Find the Hole, Plug the Hole

Ok - so the States are becoming weaker, we get it. Coming back to the core of this Report, though: critics of the Biden administration often argue that government intervention in the economy has reached unprecedented levels. Yet, a detailed look at the numbers tells a different story.

As pandemic struck, we had an economy that had a lot of holes. The job the government had was to plug each hole as fast as it could, and then make sure it gives it enough time to heal.

As we look at the numbers, it’s clear that this is what Biden’s economic team has done. While federal spending has grown, the overall share of government in the economy has actually decreased in recent years. In 2023, government spending made up 30.3% of GDP, down below the 31% in 2019 under Trump. This reduction occurred despite a notable increase in interest expenses, which have risen by 0.7% of GDP due to the higher cost of servicing the national debt amid rising interest rates. These figures suggest that rather than unchecked expansion, the Biden administration has focused on recalibrating spending, directing funds toward specific areas of need rather than broad-based increases.

The private sector has shown signs of robust activity, countering the fear that government spending might crowd out private enterprise. Non-government spending, which includes investments by businesses and households, has risen from 69.3% of GDP in 2019 to 69.7% in 2023 and continues to grow as a share of economy and expected to reach the highs not seen since the late 60’s. Interestingly, what this chart also dispels clearly is that the steepest drops in Private Spending have come under the GOP governments, driven by increasing defense spending and shifts towards states.

“A couple of percent of increased deficit spending has allowed us to avert a recession,” commented a noted economist. “It’s obvious, everyone wants to paint Biden as a communist, but US recovered the fastest and has come out the strongest from the 2020 declines due to Biden stubbornly staying the course with spending. Unlike Reagan, he also didn’t do this with Federal spending on building a war machine, but by investing in domestic programs that directly benefit the people.”

Indeed, Defense spending, another focal point of critique, has also interestingly been lower than during the Trump Presidency and lowest it has been as a ratio of GDP at any time in last 50 years except during the second Clinton presidential term. Under Trump, defense spending was 3.4% of GDP in 2019, whereas under Biden, it has dropped to 3.2% in 2023. While the decline is marginal, it shows why the GOP has not been making Ukraine funding a bigger fight than it is.

When we add it all up, it’s hard to pin this on Joe. Yes, he loves to control the economy, but if you add it all together, he’s not as “spendy” as he’s painted to be. While the Biden administration has indeed played a substantial role in steering the economy, the declining total Government spending shows a policy posture that is much more nuanced than many give this government the credit for.

Looking Ahead: Economic Strategies on the Horizon

In 3 months, we will have an election. In 5 months, we will have a new President. There’s a great urge in this moment to ignore the present and the past and look at the future. Yet, this is exactly the moment we have to stop and look where we are to understand where we want to go.

On that count, as we analyze further and talk to experts, it is becoming clear that Biden has not led a complete economic catastrophe. Economy, which was being given a 70% of falling into a recession in 2022 has continued to grow. Joblessness has remained low, and disaffected workers are rejoining the economy.

There are also causes for concern. Tariffs haven’t resulted in manufacturing growth - some say, not yet. While we haven’t had a recession, we have also not had real wage growth for many Americans. Deficits remain high, even if there are signs they are moderating; interest expense now represents 11% of the US Federal budget. We are still involved in 2 global wars, even if not as directly as we were during the Bush years. So where do we go from here?

Convergence and Divergence in Trade Policy

When it comes to Trade, it’s a matter of degrees. For Trump, everyone is bad, and we need to protect against all external trade enemies. Harris sees trade in a more nuanced terms and is looking to build alliances to counter China.

Broadly, both Trump and Harris are expected to pursue protectionist measures aimed at safeguarding American industries. Under Trump, tariffs on Chinese imports were increased significantly, affecting $370 billion in goods and contributing to a 16% decline in U.S.-China trade volume since 2018. These tariffs, which have been largely maintained under Biden, have resulted in a $50 billion decrease in the U.S. trade deficit with China. Harris, if elected, is expected to continue this protectionist stance, with a focus on revitalizing domestic manufacturing sectors, which has seen increased manufacturing spending but still a declining manufacturing sector in proportion to GDP. The Biden administration's CHIPS Act, which aims to boost U.S. semiconductor production, has already led to $200 billion in new investments in the sector, a trend Harris is likely to expand upon.

"We are witnessing a bipartisan shift toward more interventionist trade policies. The debate is no longer about whether to protect American industries, but how best to do so without triggering broader economic repercussions," commented a noted economist at the Peterson Institute for International Economics.

Domestic Economic Priorities: Housing and Taxation

While there is some convergence on trade, the domestic economic priorities of Trump and Harris diverge significantly. Harris’s platform is expected to build on Biden’s policies, with a particular focus on addressing housing insecurity—a pressing issue for many younger Americans. Harris proposes increasing federal investment in affordable housing by 25%, which could lead to the construction of an additional 3 million housing units over the next four years, addressing the severe shortfall in affordable housing that currently stands at 7 million units nationwide.

In stark contrast, Trump’s economic approach during his presidency included significant deregulation and tax cuts for real estate developers, leading to a 40% increase in luxury housing construction between 2017 and 2020, while affordable housing development lagged behind. Harris also advocates for raising the top marginal tax rate from 37% to 45%, targeting the wealthiest 1% of Americans, which could generate an additional $200 billion in federal revenue over ten years. This is in direct opposition to Trump’s Tax Cuts and Jobs Act of 2017, which reduced corporate tax rates from 35% to 21% and added $1.9 trillion to the federal deficit over a decade. Harris has also proposed increasing corporate tax rates and reverse AJA’s several proposals that reduced tax burden on the wealthiest Americans.

"The difference in tax policies between Harris and Trump could have significant implications for income inequality and federal revenue," observes a leading economist at Urban-Brookings Tax Policy Center. "Harris’s approach might reduce the deficit in the short term, but its long-term political feasibility remains uncertain in a divided Congress."

State and Local Government Reform

Beyond federal policy, we believe the true fight is going to be at the State and Local level. Trump team has been strongly proposing deregulation at Federal level and shifting more power to States. Unsurprisingly, there is limited reporting on this subject given the complexities involved in parsing the numbers.

Many question, what exactly would the contours of these changes look like. If Trump wins, a “jam-the-breaks” tax cut as Reagan tried would only shift power more towards the center, unless it is paired with increased taxes at the state level. Trump and his base remain pro Social Security and Medicare/ Medicaid, two programs that will ensure Federal spending continues to grow at a healthy rate. There are suggestions that Trump will shift more control over these programs to the States, but these plans are premature and we have seen difficulty Trump had in enacting complex changes in his first term.

The increasing reliance on federal funding has eroded the gains in state autonomy made during the late 1990s and early 2000s. A deregulatory platform that will reverse this trend may strengthen the economic and democratic fabric of America, where state powers function to limit centralization. But it can only succeed if the states also build back the financial muscle to control more of the revenue directly. While State Spending increased in 90’s and 2000’s, it did not do so only on the backs of increased Federal funding, States and Local governments actively worked to increase their revenue to fund Education and Healthcare.

This dependency on federal aid limits the sustainability of state finances, and an ability of a reform that strengthens the state and local governments, and in turn the democracy. In coming decade, state spending on education, for example, is expected to contract by 2% annually declining birth rates and a shrinking tax base. Policing has already become a hardsell. States have not taken large infrastructure projects for decades. So, while we think a change is needed that halts the centralization, we believe a change is unlikely in a climate where State and Local politics remain mired in culture wars than the difficult policy questions.

Dr. Lilliana Mason, author of Uncivil Agreement had previously commented, Cultural issues are powerful because they resonate emotionally with voters, but they can divert attention from the more technical and complex economic policies that will ultimately determine the country’s prosperity.

"If states don’t adapt to this new fiscal reality, they risk becoming increasingly irrelevant in shaping economic policy," warns the economist at Urban Institute. "This doom loop of further centralize power at the federal level is just getting started." In other words, we are watching the last of the turd swirl in the toilet.

The Report Card: Incomplete

So - as we come to write the report card on Biden’s three and a half years in the office, we have say on the whole Biden has done alright. The economy is on the mend and Government spending is less than it was under Trump in relative terms.

On the other hand: Biden has also been less than communicative about the move to centralize, which we think is disingenuous. The good news with politics is it’s never over. Now that Kamala Harris is the nominee with wind on her backs, we would like her to own the message and drive home why these welfare programs need to be so tightly controlled at the center. If not, we would love to see her to build a stronger partnership with State and Local governments as these programs are deployed. For example, Harris’ housing plan could only succeed if she partners well with states that control property tax and infrastructure at local level.

As to Trump: In Vance, we had thought Trump has found someone who can drive the message of why less centralization is good. The recent fight with cat ladies, however, has us disappointed. That being said, while Trump may be able to stem the current tide of Fed primacy in Government, we do not believe Trump will be able to shift much financial control back to states.