Say It Ain’t So, Joe: The Downsides Of Bidenomics

>> Tom Church: This is the Libertarian Podcast from the Hoover Institution. I'm your host, Tom Church, and I'm joined by the libertarian professor, Richard Epstein. Richard is the Peter and Kirsten Bedford senior fellow here at the Hoover Institution. He's the Lawrence A Tisch professor of law at NYU and is a senior lecturer at the University of Chicago.

Now, Richard, last week at the first GOP debate, the first question asked to the candidates was about so-called Bidenomics. Coincidentally, you had just written a column about Biden's economic record, and I'd like to discuss it with you, starting with this question. Is there anything actually distinctive about Biden's economic policy?

Or are we just putting his name on the classic economics word that everyone likes to combine?

>> Richard Epstein: No, I think there's something which is distinctive. He's using the term to contrast himself with the notion of neoclassical economics is practiced by people like myself. Who start to believe that supply and demand and market forces are in general the dominant way in which you ought to organize a society.

He doesn't believe that. If you recall, when he first came into office, he said, Milton Friedman doesn't walk with the streets of the White House anymore. I'm in charge of this place. The odd thing about it was that he kind of implied that second rate minds like Milton Friedman can't take over this sort of stuff when first rate minds like me and my various support staff are really in the running.

So I think he really meant to do this. I also think, by the way, it's fair to say that he has taken whatever it is that Barack Obama had done and ravaged it up another notch beyond what everything else had happened before. Obama was certainly a progressive, but I don't think he would have done the kinds of things that Biden turned out to do.

So we're talking about bionomics. What we do is we first have to put aside, I think, the foreign affairs piece of this situation as a general matter. I don't think that Bidenomics explains either pro or con, the abrupt withdrawal from Afghanistan, which I'm highly critical. But on the other hand, it does explain a bunch of other things in terms of his funding priorities that start to take place and his regulatory priorities that start to take place.

So let's start on this sort of on the economic side. The first thing you're gonna start to look at is some mix between taxation on the one hand and regulation on the other. And there's no question that under Biden, what we do is we have a serious way to look at what's going to happen to make the overall tax system more steeply progressive than it is.

That could include getting people out from under the tax if they're of low income, and it can include imposing higher rates of tax on people if it turns out that they are simply rich they wanna get the progressive tax. Biden, of course, is toying with something much further.

It's a kind of an open secret that even though Bernie Sanders and Elizabeth Warren didn't win the election or the presidency. One of the reasons why they would never think of running against him is that their policies have been faithfully imputated by him, and they're very happy of it.

So on the tax stuff right now, there's a case on which I'm working. It's before the Supreme Court, it's called Moore. And what the Moore case sort of raises in the background is, can the United States constitutionally impose a wealth tax? That is, the more money that it turns out that you stole ought to have, we can tax you on that particular amount of wealth.

It doesn't matter whether you had a gain or a loss. We find some high threshold before we tax. You say $20 million, and then a super high one say $100 million and so forth for a higher rate. And if you lost money on the income tax, too bad, you still pay the wealth tax.

Elizabeth Warren was very pliable. At one point, she said, well, I'll need 3% from the rich guys. And then she said, not enough, better go to six. And so people are gonna say, well, if you could go to six, why not to ten? And they're willing to entertain that.

And if they don't do that, there's a notion called the taxation of unrealized income. This sounds like a real jawbreaker, but it actually, it's one of the fundamental mainstays of the American tax system. What happens is today, if you own a share of stock, the rule for taxation runs as follows.

You figure out what the cost of the stock was and any variations in the cost by adding or subtracting. And you take that adjusted basis and reduce it from the amount received, typically in cash, and you tax people on the gain if and only when they start to sell the share of stock.

And so if you, Tom Church, are a very fine rich millionaire. And you've got 100 stocks in a given year and you decide to sell one of them, it's a relatively simple calculation to figure out the tax that you're going to pay. There'll be some deferment on that particular tax if you don't get the money in cash or in marketable security.

It turns out the Democrats are now toying with the notion of taxing unrealized appreciation. And this seems like a small detail, but it's an enormous change. So the first point that we do is you don't have to sell the shares, you just have to own them. And if there's some kind of an appreciation, what we can do is to figure out what these shares are worth and then tax you on the amount of gain that you've gotten from your cost, raise your basis.

But instead of doing this for one share, you have to do it for the entire portfolio. And sometimes you'll own all sorts of assets that are not easily valued, and you're gonna have to put a value on them after a dispute. And then you gonna have to force people to sell or to mortgage the particular shares in question in order to be able to pay the tax.

And it's not clear that the market will survive this, but the Democrats are quite keen about putting this forward. And in fact, there's some loose language and some judicial opinions would say realization is not a constitutional requirement. It's not thought out in any systematic fashion. It will be surely limited when it gets to judicial discussion.

But the point is, if that tax was put into place, it would be the kind of a revolution that has never taken place before in the entire annals of taxation. So the tax stuff, I think, is, in fact, one element of it. Then there's the regulatory side, and I think one has to think very soft about the way in which this thing starts to work.

And here, you could pick your poison. Start, I think, with the energy and with climate change, and you'll see what the difference is. When you had the Trump administration in position, essentially, drill, baby, drill, may not have been the full statement of what happened. But the basic assumption was that we could certainly produce large amounts of fossil fuels, sell them domestically, sell them overseas, get large amounts of revenues.

And then take steps to sort of limit the emissions of adverse kinds of substances, of pollutants into the atmosphere in order to control against global warming. But there was no interdiction of fossil fuels, and there was no movement to make everything depend upon, not fossil fuels, but solar and wind energy to keep things going, the nuclear stuff being kept capable to one side.

Biden is clearly pushing in this opposite direction. He wants to make these things primary. I regard this as one of the most audacious and dangerous moves ever made in the history of Western civilization. These technologies of wind and solar are not stable enough to be the base on which things are going to work.

And so when you start to see, for example, the recent fires that took place in Maui, the first thing you look to is not the change in global temperatures. We don't know whether it was hot or cold on that particular day, it doesn't matter. What really matters is when the company said, we have to make sure that our power lines are properly insulated, we have to cut away various kinds of vegetation from around them and so forth.

They were told, invest more in renewable technologies, leave this stuff to one side. The same thing happened in California in the way in which things were run. And so what happens is in an effort to try to make these technologies primary, you create an enormous risk of fire and massive kinds of destructions in both places.

I think this is surely on Mr. Biden's watch. I think it's the most dangerous development that we start to take place. It's not as though I'm going to try to ban wind to solar energy, I don't want to ban anything. But they have to be taken into account the same way that fossil fuels are.

What are their externalities? How costly it is to build them, how difficult it is to maintain them. What do you do with noise pollution with respect to one, or sun pollution with respect to the other? What about dismantling the apparatus and getting rid of the parts? You have to have an end to end study, and he just does not want to do it.

So then you get the climate change and so forth. There's also Biden now. What happens is I look at these particular numbers and I say they kind of go up and down. If you take the most common graph of this is the University of Alabama at Huntington puts out monthly figures, and you start reading them and you see they go up and they go down.

The most conspicuous two figures of this are 1998 and 2016, and both of them are real spikes with respect to temperature. But if you look at the year before and the year after, in both cases they're very sharp decline. So what this starts to indicate is that these high levels of variation take place in a very short period of time.

The increase in the level of carbon dioxide over this period is steady and it's small. And I don't think it explained the spurt on the upside, and it can't explain what's going on on the downside. So at this point, what you'd start to do is to look to other kinds of situations.

Is it going to be a volcano that you have to worry about? Is it going to be a sunspot? Is it gonna be El Nino? Is there gonna be some kind of difficulty that took place in the flora and fauna in any given location to figure out whether or not you have global warming?

But Biden does not wish to do that. Biden economics says, full scale ahead, and then he does something in terms of his politics, which I again, regard as utterly indefensible. I do not think that executive orders ever should be used by any president in order to sort of bind the way in which the economy will start to look after the president leaves office.

That's a function for legislation. So the president can start saying how he's supposed to fill out forms, may even be able to say that this is my priority when I'm in office. But to say, this is the priority that the next president is gonna be bound for is wrong.

The next president can disregard that. I think it's pretty clear at which point you have the danger that people are gearing up under one president and then the next president comes in. Either you're gonna have to double down on the same strategy, or you're gonna have to go and reverse.

It's just the wrong way to do government. So Biden economics essentially has this very strong component of administrative discretion in either the president on the one hand, or his chief administrative officers on the other. And then I'll just mention two other things and then take any questions you want.

If you start looking at the antitrust laws, the basic situation that you see is that traditional account, in one or two sentences, quite simply says. Every time you want to propose a merger or some other kind of transaction, a cartel, or some cooperative venture. You have to figure out what the efficiencies of this thing are and whether or not it tends to create various kinds of restrictions.

And the usual view is that market divisions of territory and that price fixing per se bad, that is very strong presumption against allowing them. But vertical arrangements are generally pretty good because they get rid of kinks in the production cycle. Biden does not do that. And you read what Lena Khan says and so forth, it turns out that they seem to think that every merger has antitrust implications.

None of them have efficiency benefits. And so what they do is they go overboard in trying to block kinds of transactions that take place. The most famous illustration is a case called Grail against Illumina, on which I've written a bunch of amicus briefs and so forth, and letters.

In which what they try to do is to separate two companies that are in the complementary parts of the cancer business. And the great danger that you have is if you get rid of an alliance, it turns out the immediate production of goods won't take place. And you hope to offset that down the road when some other guy comes in and can join in the technology.

The parties understand that they have contractual arrangements designed to keep the market open because it's in the interest of both to do it. But you can't get that through Lena Khan. And I regard these sort of basic attacks on technological cooperation as being extremely dangerous. And then, of course, we have the securities market.

And we have all of these situations where you have to make disclosures about not only the amount of carbon dioxide that you're gonna generate, but the amount that's gonna be generated by your trading partners. Those who supply you, and maybe even those who get it from you. My own view is none of this information about individual firms has the slightest thing to do with global warming.

Their miniscule outputs compared to the changes of what happens in China. And if you're an investor trying to figure out what technology you want to use, you're gonna figure out, let's see what China does, and then we'll know something about the dangers of global warming. Their changes are going to be orders of magnitude larger than individual firms.

And for whatever it's worth, the american firms have been extremely energetic in trying to improve their supply chains, you know, that leave well enough alone. So I regard these as kind of colossal blunders. And it turns out, on this particular part of the thing, Biden economics essentially is, do not trust market institutions.

Assume that you have almost infallible knowledge of the way in which large schemes of production work. And then on the basis of that knowledge, coerce everybody else to behave your particular way, and the result is what we see now. There's a slow decline in popular confidence in the United States government, a slow awareness that the standard of living for most ordinary people is undergoing some kind of a short decline.

A pretty confident awareness that the stock market is going nowhere fast. It may not go down radically, but it's certainly not going to go improve in the way which it did in the Trump years and so forth. So that you get kind of a general popular malaise. And it's even in places like New York.

I mean, I wrote a column about one New York statute wants to retrofit all these standard homes so as to make them more globally efficient on energy levels. Cost of fortune supplies a negligible benefit, and what do the local citizens say? They say, well, we think global warming is a real danger, much greater than I would rate it, but somebody else ought to bear the cost.

It ought not to be us. And it turns out if everybody says that, it's a modern version of the NIMBY argument, not in my backyard, don't regulate me. And it turns out, I think if you looked at the latest situations, even in places like Illinois and New York, Biden is losing some degree of popularity.

Because essentially, when all of these changes start to hit home, people perceive a steady, inexorable, modest, but inexorable decline in overall standard of living. This is not the bottom falling out, but it's the property, it's everything going in the wrong direction. And people fear that it could speed up as well as slow down, which is why you have this public apprehension about the system.

>> Tom Church: The other thing slowing down, Richard, is inflation. And I mentioned that because we're just past, I think, the one year anniversary of the Inflation Reduction Act, which President Biden is very proud of. So tell me, what percent of credit would you give the IRA versus actions by, say, the Federal Reserve or others in bringing inflation down?

>> Richard Epstein: Well, I mean, if you look at most of the people who supported the Inflation Reduction act, they do not treat it as an inflation act. They said that was the way to get this thing started. But if you start looking at the expenditures on it, virtually all of them were dedicated in order to make shifts in the composition of the supply for energy.

And so if you're going to ask that question, I would basically put it in a very different fashion. I think there are a couple of things that are more important. One, I do think that you raise interest rates to the point now where long term mortgages at 7%.

Generally speaking, that's going to sort of reduce the demand for various kinds of money and goods and services, and that will slow things down. I think there's also something, not as much, but something to be said that we've managed to unscramble a lot of the supply chain issues that seem to exist at the end of COVID.

And as these goods flow, things are going to start to get better. The problem that you're trying to do on this is, I think, measured in the following way. People like Paul Krugman and David Brooks writing in the New York Times, what they do is they refer to something known as the misery index.

Which is the sum of the level of unemployment low in the United States, on the one hand, and the sum of inflation, also low. And basically, for our good friend Biden, these numbers are under eight, which is a very impressive number. It means you have under 4% inflation, under 4% unemployment, and so forth.

So the question is, what's right or what's wrong about that? What's right about that is it sort of measures the static index and gives you pretty good news. The question, though, is how you get that. And if it turns out that what you do is you manage to lower the inflation rates because of the high interest rates.

And what you do is you lower unemployment by subsidizing all sorts of jobs in industries that you really don't want to develop things in, much of the energy control stuff is. You then have to ask the following question. What's the implication with respect to long term capital development in the United States?

I mean, my old friend Sherwin Rosen, a very fine economist, died many years ago. He used to talk about how you could create jobs, and he meant this with a kind of a malicious grin in his eyes. He says, you wanna drill for oil? No problem, just get a bunch of teaspoons and start digging, and you'll create more jobs than you could possibly imagine.

And you may even find some oil where you have 10,000 people doughing with spoon. He said, the problem about that is you spend a huge amount of resources and you get something very little. If you had done other technique, you have many fewer jobs, but they'd be efficiently done.

All of those jobs would not be there. Because of subsidies, they would be there because the capital production that you produce or the consumption benefits that you produce exceeded the cost of those jobs. So when somebody says we're creating jobs in a market economy, what they're saying is we're producing through labor benefits for both sides of the equation.

When in fact it's subsidies that are doing this by way of transfer payments. The only person who benefits is the recipient of the wage, there's no capital asset. Which means in the long term, what's happening is you're going to reduce the stock of wealth in the United States.

And as you reduce that stock, it means that future investment will decline, future wages will decline because they're all tied together. So the reason why people are really upset is if they start looking at the long term trends associated with the Biden people. They see that we're investing in the wrong things and we're investing in them in the wrong way.

So there's no particular kind of confidence for what's going on. And I think that by and large, if you could hear a more spirited answer to those questions and explain why these things have some genuine value, people would start to see this, but they don't. Okay, I'll give you one more area.

Labor unions, right? America always has a kind of a love hate with labor union. And Joe Biden says I'm the most pro union worker or boss in the history of the country. And he probably is that. The difficulty you have when you start to create labor unions and so forth is that what monopoly power does is it reduces the output of the firm.

Reduces the benefit to consumer, reduces the investments in long term capital, and gives a transfer haven to one class of workers. There is no way you can give an account of union which shows that it sort of increases the overall size of the pie relative to a system in which you have competition for labor.

In which firms will bid it up but they won't be able to cooperate. Workers will bid against each other, but they won't be able to cooperate in this sort of monopoly kind of way. And so what you do is you see this, you say, it's nice for me in small bucks to get this union.

They may shut it down. But what it is you're not asking the right question is, can I build a new plan if I'm going to be saddled by union restrictions on the way in which I decide to devote my capital to this? It is very instructive. No matter who you talk to on the management side, Democrats or Republicans, and so forth.

The numbers of firms that do not welcome union in their particular ranks, even if they're quite liberal on other ground. It's 97% to 98% of the firms in question and those who go in the other way. It's often a very complicated game in which this all except a union, because you could put a bigger and stronger union against my primary rival, which is not what we want to see in this case.

So what happens is there is no real case for seeing a road to growth coming out of these situations, which is why it is that the american mood on the economy is this pessimistic. And as I said in the column I wrote for Hoover, most of the songs that we start seeing now, not in my town, right?

Can't get away with this kind of stuff. There's songs written by people who sense that they've been left out. And what's happened is if you can displace, what is her name, Taylor Swift or Beyonce by two unknown singers whose names I promptly forget after I hear them, then you know that there is a popular undercurrent.

How it will play out in an election if you have only Trump and Biden in the picture, nobody knows. But if you could remove them from the stage, I think you would see a general orientation in the United States trying to pull back from Biden, not to go back to pure laissez faire capitalism and so forth.

But to say that in the mix, he's gone much further than anybody else, and that's too far. Indeed he's quite a bit to the left of Barack Obama and much to the left of the erratic Donald Trump, and certainly far to the left of any previous Republican, and far to the left of Bill Clinton.

Not the Bill Clinton of today, but the man who is president between 1993 and 2001.

>> Tom Church: You've been listening to the Libertarian Podcast with Richard Epstein. As always, you can learn more if you read Richard's column, the Libertarian, which we publish at definingideas@hoover.org. If you found our conversation thought provoking, please share it with your friends and rate the show on Apple Podcasts, Spotify, or wherever you're tuning in.

For Richard Epstein, I'm Tom Church. We'll talk to you next time.

>> Presenter: This podcast is a production of the Hoover institution, where we generate and promote ideas advancing freedom. For more information about our work. To hear more of our podcasts or view our video content, please visit hoover.org