Biden-Harris policies and their consequences were no surprise to those paying attention

Milton Friedman used to advise researchers to focus on large policy changes rather than attempting to separate a small change’s signal from the noise. In this sense, the “ambitious” policy agenda of the Biden-Harris administration was expected to be a gift to the research community.

Accepting this gift, since 2020 I have been making forecasts of some of the consequences of those policies. Now is a good time to assess the accuracy of those forecasts, which relate to aggregate labor markets, insurance price controls, and drug price controls.

As promised, Biden and Harris redistribute income with health insurance expansions and student-loan forgiveness, although not necessarily in the Robin Hood direction. They give union bosses more tools for reducing competition in the labor market. They try to regulate the internet as a public utility. They distort healthcare markets in many ways, including a new ban on short-term health insurance plans, and granting selected companies a monopoly on a generic drug. They go significantly further than the Obama administration in terms of requiring the private sector to change behavior in ways the bureaucrats expect to reduce carbon emissions. At great human-capital expense, they enabled teacher unions and blue-state governments to maintain “social distancing” far longer than warranted.

The exhaustive list would have more than 1,000 entries.  Overall, even the federal agencies’ own low-ball estimates of the costs of the regulations finalized 2021-24 are almost $2 trillion.

1. Macro Performance

Four years ago, I released a study with Kevin Hassett, Tim Fitzgerald, and Cody Kallen of the economic effects of candidate Biden’s agenda compared to President Trump’s. Knowing that campaign promises do not necessarily turn into policy, we analyzed several policy scenarios. The scenario closest to the portfolio of policy changes over the past four years we called “capital taxation constant” (CTC). Biden-Harris climate regulations proved to be somewhat more aggressive than represented by the CTC scenario including, for example, a requirement that manufacturers of medical inhalers (sic) either cease production or convince the Environmental Protection Agency that they are earnestly seeking lower-emission technologies. On the other hand, as nonlawyers we did not account for such a high failure rate of Biden-Harris rules in federal courts.

Under the CTC scenario, labor and capital would be 5.0 percent below the Trump baseline in the long run. In tomorrow's Wall Street Journal, we show that a single trend fits the data well from 2017-Q1 through 2021-Q4, except for the first full pandemic quarter. Then inflation hit and employee compensation—and national income more broadly, which isn’t shown in the chart—fell 5 percent behind. To be more precise, the latest data (2024-Q2) show inflation-adjusted employee compensation per adult to be 4.6 percent below the trend.

Arguably, human capital would have fallen somewhat below its trajectory after 2020 due to pandemic behaviors unrelated to Biden-Harris policies. By itself, this would have pulled labor income somewhat below its prior trend for several years. On the other hand, with some of the regulations not taking effect until 2025 and beyond, we have not yet seen the full effect of the Biden-Harris policies. Large language models and other “AI” technologies have been a positive growth effect that was unanticipated in 2020 when we made the forecasts.

We used a closed-economy model (tariffs were modeled like other excise taxes) that imposes a constant labor’s share, a constant depreciation rate, no statistical discrepancy, and equality between GNP and GDP. In reality, labor’s share of national income has been pretty constant, but the national income’s share of GNP has fallen a bit. More significant has been a fall in the ratio of GNP to GDP. Conversely, a real GDP per capita chart would look “better” than our compensation chart, which of course is no consolation for workers.

Contents of the "Inflation Reduction Act"

Please let me know how this so-called "Inflation Reduction Act" reduces inflation.  Here's what's actually in it:

Major items

• Alternative minimum tax for corporations Sec 10101
• This raises the level of business taxation, which reduces real wages.
• IF it reduced the dispersion of business taxation, that would be a force toward increasing real wages to help offset the level effect.  BUT see below on the dozens of IRA provisions that increase the dispersion of business taxation.
• Gives the Treasury Secretary the authority to determine an individual corporation's tax liability!  Sec 10101 (a)(2)(C), (a)(13)
• [I changed my mind: I want to be Treasury Secretary!]
• Close the "carried interest loophole" Sec 10201
• $80B for IRS Sec 10301


• 3 types of drug price controls
• Prices set by HHS for selected Medicare drugs Sec 1191 [I think the Senate typist meant Sec 11091]
• Inflation rate cap for Part B drugs (obtained at hospitals and clinics rather than pharmacies) Sec 11101
• Inflation rate cap for Part D drugs (obtained at pharmacies) Sec 11102
• Medicare Part D (i.e., drug plans for seniors) insurance-benefit floors and reduced subsidy rates Secs 11201-11202, 11401
• Both benefit floors and subsidy-rate cuts will increase Medicare Part D premiums.  The net result could be more subsidy $ and more drug-plan expenses for most seniors.
• One insurance-benefit floor (Sec 11201) requires that enrollees have 100% of their pharmacy bill covered after they have spent $2k for the year.  Another (Sec 11202) does the same on a monthly basis (roughly $150 per month).
• A third insurance-benefit floor is for vaccines Sec 11401
• Zero is a dangerous number for a price!
• The 80% Medicare subsidy associated with these transactions is cut sharply.  This by itself would reduce distortions in the program.
• Remember that Part D premiums are already about 75% subsidized.  At that rate (which will increase -- see below), the government expense for Part D could well increase.  
• Increases in subsidies for Medicare Part D premiums Sec 11404
• Specifically, expanding eligibility for "low-income" premium subsidies
• Budget gimmick courtesy of Alex Azar: repeal rebate rule Sec 11301
• This rule would have prevented drug manufacturers from competing for Medicare Part D business by offering rebates, thereby sharply increasing Medicare Part D premiums and the government's Part D expenses.
• On paper, repealing this rule would reduce the federal deficit.  However, many expect that the rule would be struck down in court (regardless of whether the IRA repeals it), especially now that agencies have less latitude in reinterpreting statutes.  Hence this savings is a budget gimmick.
• I explain in Chapter 10 of yourehiredtrump.com how HHS Secretary Azar concocted this rule.  We warned him and Trump that Democrats would, via a budget gimmick like this, use the rule to "fund" their big-government programs.
• Extend the "temporary" Obamacare expansions that were put in place during the pandemic Sec 12001


• Clean energy tax credits Secs 13101-13802
• 291 pages of the Green Dream!
• Interestingly, Sec 13105 increases credit for nuclear power plants, but just those already built.  Intended to slow down nuke-plant closures?
• Otherwise "clean" refers to the various technologies that are in vogue, including bio fuels and battery manufacturing
• Get a tax credit for purchasing a used Electric Vehicle Sec 13402
• $4K or %30 of sale price
• But only for households with AGI less than $150K and EVs selling for less than $25K
• Must go through a car dealer
• Limit of one credit per vehicle lifetime
• Limit of one credit per taxpayer per 3 years
• As a result, the federal government will be granted EV credits when:
• EVs are produced,
• EVs are sold new, and
• EVs are sold used
• $20B for agricultural conservation programs Secs 21001 and 21002
• Appropriations for clean energy programs ($80-85B total)
• Another 100+ pages of the Green Dream, not to be confused with clean energy tax credits (291pp).
• $2B subsidies for "Electric loans for renewable energy" Sec 22001
• Biofuel subsidies Sec 22003
• $10B for rural electric cooperatives Secs 22004 and 22005
• $15B for Greenhouse Gas Reduction Fund Sec 60103
• $1B for HUD clean energy projects Sec 30002
• $3B for NOAA climate resilience projects Secs 40001-40007
• $10B to subsidize switching from natural gas appliances to electric Secs 50111-50123
• $1B to subsidize zero building energy code adoption Sec 50131
• $14B for DOE loans and grants Secs 50141-50145
• $3B for electricity transmission subsidies Secs 50151-50153
• $6B for the Office of Clean Energy Demonstrations Sec 50161
• $2B various other DOE Secs 50171-50173
• $1B for clean heavy-duty vehicles Sec 60101
• $3B for clean energy programs for ports Sec 60102
• $6B for various pollution-reduction programs Secs 60113-60116
• $3B for Environmental and Climate Justice Grants Sec 60201
• $5.5B for various other clean energy/environment Secs 60502-60506
• $3B for USPS clean fleet Sec 70002
• Taxing fossil fuels
• Increase royalty rate on offshore oil and gas by about 4 percentage points Sec 50261
• Increase royalty rate on onshore oil and gas by about 4 percentage points Sec 50262
• Both royalty rates are expanded to flared gas Sec 50263
• Methane Emissions Charge Sec 60113
• Permanent extension of tax on coal Sec 13901
• Roughly $1 per ton.  For context, coal prices were sometimes below $50/ton before the pandemic

Smaller items

• Eliminating cost sharing for vaccines in Medicaid and CHIP Sec 11405
• Changes to Medicare payments for biosimilars (Secs 11402 and 11403)
• Reinstate superfund Sec 13601
• Research credit for small businesses Sec 13902
• $5B for forestry subsidies Secs 23001-23005
• $0.5B to further carry out the 1950 Defense Production Act Sec 30001
• $1B for National Park Service and Bureau of Land Management Secs 50221-50223
• $0.6B various water Secs 50231-50241
• Regulation of offshore wind leasing Sec 50251
• Some kind of extension of offshore leasing program Sec 50264
• Limit encroachment of offshore windmills onto areas under lease for offshore drilling Sec 50265
• Various other DOE and DOI Secs 50271-50303
• Various other EPA programs (less than $1B) Secs 60104-60112
• Small amounts for Council on Environmental Quality Secs 60401-60402
• $4B for Endangered species programs Secs 60301-60302
• $2B for Neighborhood Access and Equity Grant Program Sec 60501
• Various other Sec 70001, 70003-80004

How Incumbents Capture Price Controls: Example from the U.S. Senate

U.S. Senators are proposing to put both retail and business-to-business price controls on insulin.  The (intended?) result will that be that consumers will pay more, diabetes complications will get worse, and incumbent manufacturers will make more money.

Drugs generally follow a life cycle.  Unique new drugs often command a high price that soon falls sharply as the incumbent faces competition from alternative therapies and/or generics.  Insulin has the same kind of life cycle.  Two biosimilars (essentially a generic version of a biologic, which is a more complicated type of drug) were quickly approved under one of the new approval pathways created by the Trump Administration that helped bring prices down (explained further in my forthcoming Journal of Law and Economics paper).  Seven more biosimilars are in the approval pipeline and will soon be competing with the incumbents.

The incumbents would like to freeze time before those competitors arrive, and Senators Shaheen and Collins are obliging.  While they advertise freezing the retail price at $35 plus inflation, they will also impose price controls on the business-to-business transactions that new entrants use to break into the market (read more about them in Chapter 10 of http://yourehiredtrump.com, or in Chapter 13 of my favorite textbook, or in the analysis by OACT and CBO).  By hindering the entry and diffusion of the new biosimilars, the price of insulin will not fall as it would have, and usually does over the drug life cycle.

Suppressing competition is exactly what I'd expect Big PhRMA to order up on the Congressional menu (again, see Chapter 10 of http://yourehiredtrump.com).  I am less surprised than anyone to again see PhRMA deploy Karl Marx's rhetorical device (he always decried the "middlemen" of capitalism), "This legislation rightly recognizes the role of insurers and middlemen" as they see a PhRMA-protection bill come together.

Consumers will have less choice and pay more as a result of this bill.  Adherence to diabetes treatments will be worse than it would have been if this bill were not getting in the way of competition.  Low adherence is not just a health problem, but a financial problem too as private and public health plans are saddled with additional hospitalization expenses for treating diabetes complications.

Cowen and Cochrane are confused about price controls

Tyler Cowen and John Cochrane think that the minimum wage traces out a labor demand curve.  It does not.  There are many ways that a competitive labor market can comply with the minimum wage, and cutting employment is only one of them.  E.g., change the composition of compensation, change the work schedule, change the location of employment, etc.

So labor demand could be wage-elastic but a socially costly minimum wage have no effect (or even a positive effect) on employment in a competitive labor market.

For a more detailed analysis, see also The Upside Down Economics of Regulated and Otherwise Rigid Prices.

Economic Theory in the White House: The Rebate Rule

The "rebate rule" was proposed by the Dept. of Health and Human Services (HHS) in February 2019.  It would have prohibited rebates in the Medicare Part D prescription drug market.  Chicago Price Theory was intensively used in the White House to project the effects of the rule on market outcomes and the distribution of surplus between senior citizens, taxpayers, and firms at various positions in the supply chain.

HHS described rebates as follows "Prescription drug manufacturers prospectively set the list price ... of the drugs they sell to wholesalers and other large purchasers. Manufacturers also retrospectively pay PBMs or other entities in the drug supply chain, under rebate arrangements, that meet certain volume-based or market-share criteria." (84 FR 2340)  The Part D rebates alone exceed $30 billion per year and this rule by itself was projected to increase the Federal deficit by about $20 billion per year, which is historic as a single regulation.

This proposal to eliminate rebates was obviously controversial, as reported in the news and evidenced by the facts that the rule was proposed, received almost 26,000 comments from the public, and then this Thursday was withdrawn by HHS.  The proposed rule was complicated because it was a vertical (business-to-business) price control in a market that already has nonlinear pricing, nonlinear and interdependent government subsidies, and longstanding price regulations of various kinds.  The President himself described the rule as requiring a 193 IQ in order to understand its effects:

But prescription drugs, look, it's a rigged system, OK, if I told you how crazy it is, the Web, it's the Web, you need 193 I.Q. to even understand.  This web of geniuses, they put this thing to lower drug prices. It has 19 effects here and 27, so we got it down and we're getting it down further. We have the smartest people, the best people in that world working on it.... (President Donald Trump April 27, 2019, Green Bay WI)

[other of the regulations discussed in that speech were analyzed with Chicago Price Theory too.  Several dozen parts of other CEA reports draw closely on specific pages of Chicago Price Theory].

I agree that it would be essentially impossible to understand the economic effects of this rule in a timely manner without the extensive assistance of Chicago Price Theory and Automated Economic Reasoning. An important tool for analyzing nonlinear pricing is affectionately known as "the Murphy football" among Chicago economics students (and I associate with this Klein and Murphy article about competition with nonlinear pricing; see Chapter 5 and Chapter 13 of the text).

The football picture shows, among other things, the distinction between list price and net price (i.e., list minus rebate), but in order to prevent revealing too much of the answer to one of the new book's homework problems, I show it in more abstract form below.

For the same reason, among others, I will not say what was CEA's projected impact of the rule.  But take Chicago Price Theory and perhaps you can join the "web of geniuses."

There is no other textbook that teaches the "Murphy football."

There is no other textbook that brings its students so immediately to rigorous and timely policy applications of economic theory.