Monday, Sep 20, 2021

Bidenomics: Higher Taxes, Bigger Deficits and the Return of Inflation

After President Joe Biden released his blueprint for the 2022 federal budget last week, a bemused Wall Street Journal editorial dubbed him the “$6 Trillion Man.” Conservatives accuse Biden and the Democrats of trying to mandate an unprecedented level of federal spending next year and the years to come, supported in part by ruinous tax increases on the business sector and wealthy investors, and huge amounts of additional deficit spending. Republicans argue that Biden lacks a sufficient mandate to support such radical changes from the voters who elected a 50-50 split Senate in November, and reduced the Democrat majority in the House to just a handful of votes.

The Wall Street Journal editorial argued that, “As the pandemic finally eases due to vaccines, the emergency spending of the last two fiscal years should recede. The booming economy doesn’t need it. Consumers are flush with Covid relief payments and demand is soaring. Yet Mr. Biden wants to keep using the cover of Covid to sneak through an expansion of government that would be historic and permanent.”

Biden’s spending plan was released to the public on the Friday before the three-day Memorial Day holiday weekend, in an apparent effort to minimize its exposure to criticism in the media. The plan calls for a rise in federal spending to 25% of GDP for the rest of this decade — an unprecedented level except in times of war — to finance a further increase in the level of federal cradle-to-grave entitlement spending.

Biden would increase the current level of spending on the federal bureaucracy by more than 20% for the Departments of Health and Human Services (21%) and Commerce (27%) as well as the Environmental Protection Agency (21.3%). The money is needed to finance Biden’s plan for a vast expansion of federal regulations on virtually all aspects of American life, as called for by the items on the progressive agenda including the Green New Deal.

The punitive tax increases on businesses and the wealthy that Biden has called for to pay for part of this federal spending frenzy would impose a huge drag on new job creation and continued growth in the American economy. Over time, Biden’s measures would make American-made products and services far less competitive in the global marketplace, and start a new flight of American investment capital to lower-taxed and more business-friendly foreign countries.

On the other hand, after accounting for inflation, Biden’s proposed budget would reduce funding for the Pentagon and the Department of Homeland Security. The funding cuts would come at a time when America faces a growing threat to its Pacific Rim allies from an increasingly aggressive China, a menacing Russian military buildup along its borders with Eastern European NATO allies, an immigration crisis on our southern border with Mexico, and increased support for international terrorism and a looming nuclear missile threat from an emboldened Iran.

ELIMINATING THE TRUMP TAX CUTS

The drastic tax and regulatory increases which Biden proposes would eliminate the most successful elements of President Trump’s economic policies, whose corporate tax cuts and reductions in federal regulations stimulated domestic business investment and new job creation.

Trump’s policies increased demand, resulting in wage increases for American workers across the income spectrum. The largest raises went to black, Hispanic and less-educated workers who had suffered the most from the steady losses of good-paying American industrial jobs over the past 30 years, and reduced the national levels of unemployment for those workers to all-time low levels.

Those were also the workers who were the first to be fired due to the Covid-forced shutdown of hundreds of thousands of small American businesses. The tax increases and new regulatory measures Biden now wants to impose on businesses and investors would mean that many of those now-closed business and the jobs they provided will never return.

The impact of those regulatory and tax increases won’t slow down the economy right away, because tens of millions of American consumers are still awash in the cash payments authorized by Biden’s $1.9 trillion Covid relief measure, and have embarked on a historic spending spree to celebrate the end of the pandemic lockdowns and travel restrictions.

But the post-Covid spike in consumer demand, coupled with key bottlenecks in industrial supply chains and a shortage of available workers as businesses seek to fully reopen, has created long backlogs in orders for products ranging from new cars to kitchen appliances to lumber for the construction of new housing. The shortages have further exacerbated an explosive increase in prices for consumer staple items such as gasoline at the pump, as well as all kinds of food at the supermarket.

SHARP PRICE INCREASES HURTING THE POOR

The sharp price increases for these essentials have the greatest impact on the budgets of the same lower-income families that were hardest hit by the massive job losses in the hotel and restaurant industries and other small business forced to close due to the pandemic.

When necessities get more expensive, consumers with less disposable income — who already spend a bigger share of their money on essentials — feel it first. According to a 2016 study by the Brookings Institution, low-income households spend a significantly higher percentage of their budgets on basic needs — such as housing, food, transportation, utilities, health care and clothing — than they did three decades ago.

When costs for these essentials rise, low-income households are forced to make painful trade-offs.

“Low-income families live paycheck to paycheck, so something has to give,” said Mark Wolfe, executive director of the National Energy Assistance Directors’ Association. “Based on our surveys, when families face unaffordable bills, they cut back on other essential purchases including food, medicine and clothing.”

THE END OF THE COVID-RELIEF SURGE

The most recent after-tax consumer income figures indicate that the surge in the purchase of consumer goods fueled by generous government Covid-relief benefits has now run its course. In April, after-tax income slid 15.1 percent from the record level it hit in March, when tens of millions of Americans received hundreds of billions of dollars in stimulus payments.

Over time, as Biden’s new taxes come into effect and his increases in regulation make American businesses less efficient, the current high growth rate that has been sustained by federal deficit spending at unsustainable levels is projected by Biden’s own economists to fall to less than 2% per year by the end of this decade. As taxpayer funds are increasingly diverted by Biden’s policies from productive investments to wasteful social welfare and wealth transfer payments, the overall rate of economic growth will inevitably slow and new job creation will falter.

As Biden’s deficit spending continues, it will further erode the confidence of international investors in the underlying strength of the American dollar. That will lead to inevitable rises in market interest rates, currently being held down to near-zero percent by a massive Covid-induced emergency intervention by the Federal Reserve. That emergency is now over, and pressure is building on the Federal Reserve to allow interest rates to return to levels set by normal market forces, if only to counteract the troubling signs of hyper-inflation now appearing across important sectors of the economy.

THE DANGER FROM BIGGER DEFICITS AND HIGHER INTEREST RATES

The rising interest rates will further slow the rate of investment in the American economy, make mortgage, auto finance and credit card payments much more expensive for consumers, and have a ruinous impact on Biden’s federal budget projections.

As recently as two years ago, in 2019, the accumulated federal deficit held by the public was roughly 80% of America’s GDP. By the end of this year, largely as the result of a $3.7 trillion budget deficit in fiscal year 2020 (due mostly to emergency Covid relief spending) and an additional $2.1 trillion in debt projected by the Congressional Budget Office for this year, the national debt would rise to roughly 110% of America’s GDP.

That would exceed the debt-to-GDP ratio of Greece in 2010, when it needed an emergency international bailout to save it from bankruptcy. After this year, Biden’s budget projects the annual federal budget deficit to fall to “only” the $1.8 trillion level in fiscal 2022, and then remain flat at the $1.3 trillion level each year for the next decade.

These huge chronic deficits will continue to accumulate despite Biden’s proposal to pile on an additional $3 trillion in new taxes to partially pay for his increased spending proposals over the next decade. According to Biden, these new taxes will be imposed entirely on businesses and the wealthy, whose well-paid accountants and lawyers have a long track record of success in finding new ways to evade previous federal tax increases. They include an increase by a third in the tax rate on corporate profits (from 21% to 28%), a near doubling of the tax rate on capital gains (from the current 23.8% to 43.4%), and a new way of figuring federal estate taxes, which would make it much more difficult for families to pass on much of their accumulated wealth to their descendants upon their deaths.

Biden’s claim that middle- and lower-income taxpayers will not be impacted by his budget proposal also ignores that fact it would allow the lowered tax rates for individuals across the board included in Trump’s 2017 tax cut bill to expire by 2025.

WHO CARES ABOUT DEFICITS?

Essentially, the Biden budget is a clear statement that his administration, and the Democrats who are united in its support, no longer care about the size of budget deficits and have abandoned the goal, last accomplished in 2001, of even trying to balance the federal budget.

Furthermore, the Biden budget blithely predicts that the chronic budget deficits it forecasts will have no longer-term negative effects; that inflation rates despite the continued drastic increases in the money supply will never increase beyond the 2.3% threshold, which would force the Federal Reserve to raise interest rates; that international investors will continue to see US Treasury notes as the most secure economic safe haven for their money; and that, despite huge increases in federal taxes and regulations, the private sector of the US economy will continue laying enough golden eggs to finance a Democrat-run, increasingly European-style social welfare state.

One of the rationales which the Biden administration has used to justify the extraordinary levels of federal spending that it is proposing is that interest rates on US Treasury-backed securities are near-zero, meaning that current interest payments on the national debt are a very small portion of the current federal budget. But even Biden’s budget projections, which are based on the assumption that current near-zero interest rate levels will continue indefinitely, predict that federal payments to finance the national debt will more than double to account for 11.2% of all federal spending by the end of this decade.

RISING DEBT SERVICE COSTS A POTENTIAL BUDGET PROBLEM

Furthermore, the federal trust funds which theoretically pay for the generous entitlement benefits of Social Security and Medicare are fast approaching bankruptcy, which means that in the near future, those costs mandated by law will also be added to the federal budget, gradually crowding out discretionary spending by all other departments of the federal government.

If the Fed does allow interest rates to rise to actual market levels once again, the pressure on the federal budget from the much higher debt service payments will increase dramatically. It will scramble the Biden administration’s current budget projections and force it to confront difficult choices in the near future between drastic cuts in entitlement benefit and large increases in payroll withholding deductions, or most likely, some of each. The cost of maintaining the current level of benefits is increasing rapidly as the youngest cohort of the so-called “baby boom” generation reaches retirement age, and their health care costs covered under the Medicare program continue to increase rapidly, with fewer younger workers available to pay for them through their designated Social Security and Medicare payroll deductions.

WILL TAXPAYERS GET THEIR MONEY’S WORTH?

Biden’s proposal for the federal government to spend $6 trillion in the next fiscal year is so large that it is hard for most people to put into a proper perspective. One way of looking at it is to do the math, which shows that federal spending next year would exceed $45,000 for every American household. That raises an obvious question: “Will taxpayers and their grandchildren who will be forced to begin paying all that newly borrowed money back be getting sufficient value from all that deficit spending?”

To help answer that question, let’s take a closer look at the details of Biden’s proposed 2022 federal budget. The bulk of the new spending is covered by two new bills the Democrats have introduced in the House over the past two months, which propose to spend a total of $4.5 trillion in new money to pay for what are very loosely described as “infrastructure” investments, as well as massive increases in spending on new federal welfare and entitlement programs to pay for items such as free universal pre-K and community college education, paid medical leave, federal subsidies for child care, increases in salaries for unionized public school teachers, and a general increase in the federal minimum wage to $15 an hour.

Biden’s budget proposal is deceptive, because the spending levels for many of the new programs it is introducing are relatively low during fiscal 2022, but are scheduled to increase rapidly in subsequent years.

As usual, Biden and the Democrats have stuffed their two major spending bills with a long list of unrelated items from the liberal policy wish list. They range from drastic curbs on the use of fossil fuels, to massive investments in still unreliable renewable energy sources, to continued subsidies for a massive forced switch by consumers to electric cars. The Democrats are also trying to manipulate the federal tax code to create a massive, socialist-style forced transfer of wealth away from successful entrepreneurs and investors to the less successful, in the name of economic “equity.”

THE END OF THE AMERICAN DREAM?

The socialist-inspired measures introduced by President Biden and his progressive supporters, such as Senate Finance Committee chairman Bernie Sanders, seek to undermine the incentives of the free market economy, and would effectively eliminating the equal opportunity of individuals from all backgrounds to achieve the classic “American dream” by dint of their own abilities, hard work and ingenuity.

Democrat Senator Elizabeth Warren would have the Biden administration go even further by beginning to confiscate 2% of the total financial resources of the wealthiest 1% of Americans each year. That proposal is not included in Biden’s current budget plan, but nobody in Washington would be surprised if it were to be included to help pay for additional federal spending proposals in the next round of liberal initiatives Biden is now preparing to introduce.

The new proposals would include such items as the addition of a so-called public option to the Obamacare health insurance marketplaces to compete with private insurance plans, additional subsidies and forced reductions in prescription drug costs, bailouts for Social Security and other nearly bankrupt federal trust funds, more climate change initiatives and additional federal education spending.

A WARNING FROM LIBERAL ECONOMIST LARRY SUMMERS

Their total cost, in addition to the spending programs that Biden has already announced, is difficult to calculate at this point, but it is large enough for veteran Democrat economist Larry Summers, who served as President Bill Clinton’s Secretary of the Treasury, to sound an alarm in an op-ed piece published by the Washington Post, titled: “The Inflation Risk Is Real.”

Summers starts off on a positive note, congratulating the leadership of the federal government for bringing the Covid-induced recession to a rapid close, and using “strong fiscal and monetary policies” that has enabled the US economy to “outperform those of other industrial countries.”

But then Summers turns to the bad news: “New conditions require new approaches. Now, the primary risk to the US economy is overheating — and inflation.

“Even six months ago, it was reasonable to regard slow growth, high unemployment and deflationary pressures as the predominant risk to the economy. Today, while continuing relief efforts are essential, the focus of our macroeconomic policy needs to change.”

Summers is concerned that the Covid relief measures passed by Congress and the aggressive policies adopted by the Federal Reserve are already showing signs of overheating the economic recovery. “This is not just conjecture,” Summers warns. “The consumer price index rose at a 7.5 percent annual rate in the first quarter, and inflation expectations jumped at the fastest rate since inflation indexed bonds were introduced a generation ago. Already, consumer prices have risen almost as much as the Fed predicted for the whole year.”

Summers acknowledges that some of the recently seen large price increases in consumer goods and basic commodities are likely to be temporary, and will probably subside as the impact of Covid-generated labor shortages and bottlenecks in supply chains fades. But he also fears “a variety of factors [that] suggest that inflation may yet accelerate — including further price pressures as demand growth outstrips supply growth; rising materials costs and diminished inventories; higher home prices. . . and the impact of inflation expectations on purchasing behavior.”

THE POLITICAL CONSEQUENCES OF RECKLESS ECONOMIC POLICIES

In a direct warning to progressive Democrats, Summers notes that “increases in inflation disproportionately hurt the poor and are associated with reductions in trust in government,” likely playing a role in the victories of Republicans Richard Nixon in the 1968 presidential election and Ronald Reagan in 1980.

Summers’ recommendations for heading off inflation begin with a quick about-face in current Federal Reserve policies holding down interest rates while pumping up the money supply. At the same time, Summers is asking the Biden administration “to continue to respect the independence of the Fed as it changes course.”

Second, Summers has endorsed a proposal already adopted by 23 Republican-governed states by ending emergency Covid-inspired unemployment benefits that are now exacerbating a nationwide labor shortage. “Unemployment benefits enabling workers to earn more by not working than working should surely be allowed to run out in September; in some parts of the country they should end sooner. Re-employment bonuses should be considered, and a major focus should be on promoting mobility and training workers for occupations where labor is short,” Summers wrote.

The former director of President Obama’s National Economic Council gently criticizes the Biden administration for its habit of claiming to pay for current spending through proposed future tax increases which may or may not materialize. He endorses administration plans for increased infrastructure spending as necessary “not because of the immediate jobs they create, but because of the long-term increases they generate in productive potential.” However, Summers writes that he would much prefer to see these projects paid for using still unspent Covid-relief funds that Congress has already approved, rather than more deficit spending which “might further stimulate an already overheated economy.”

In summation, Summers warns that “to avoid squandering the [current] opportunity, policymakers need to accept economic reality. The moment has come to move past emergency policies and fight for our country’s long-term future.”

THE IMPACT OF RISING PRICES AT THE PUMP

Meanwhile, as the flow of extra Covid relief money to American families has ended, many are now facing painful increases in gasoline prices at the pump, due in part to the lingering effects of a computer attack by Russian-based hackers on the Colonial gasoline pipeline, creating shortages and long lines at gas stations in many Southern and Atlantic Coast states. Even though the pipeline reopened two weeks ago after its owners paid the ransom demanded by the hackers, supplies at local stations have been slow to return to normal because of a pre-existing shortage of drivers for gasoline truck deliveries.

They, in turn, are part of a larger shortage of all truck drivers across the nation, driving up the cost of shipping for all kinds of consumer goods — including food and paper products — from ports and factories to retail stores and customer homes.

Finally, the nation’s oil refineries, many of which were shut down completely due to the lack of demand during the pandemic, have been slow in trying to keep up in the sharply rising demand for gasoline since the Covid restrictions started loosening up in April.

High gas prices have always been a sensitive political issue for the party in power, especially at the beginning of the summer driving season, when tens of millions of American families increase the nationwide demand for gasoline for long-anticipated vacation trips.

A 30% INCREASE OVER LAST YEAR

When the average price of regular gas at the pump surpassed $3 per gallon for the first time since 2014, the Biden White House knew it had to come up with a reason that would satisfy the impacted voters.

Ignoring the fact that Biden’s long-term “green-energy” policies aim to eliminate the purchase and use gasoline-powered cars entirely, Press Secretary Jan Psaki told the White House press corps last week, “The president knows that gas prices are a pain point for Americans. President Biden is opposed to any proposals to raise the gas tax. And it’s why we will continue to monitor prices, and are glad that Americans can get on the road again.”

Psaki did her best to minimize the impact of sharply higher prices for gasoline on lower income American families eager to get back into their cars and on the road to their favorite vacation spots after more than a year of shifting Covid travel restrictions.

“As Americans are hitting the road, they are paying less in real terms for gas than they have on average over the last 15 years,” she said. “They’re paying about the same as they did in May 2018 and May 2019.” That may be true, but it does not change the painful realization by car owners that filling up their tank today costs roughly 30% more — about a dollar a gallon — than it did last year at this time.

But despite its attempts to sidestep the issue, the Biden administration and other Democrat government policies in states like California have already sharply increased the cost of energy to American car owners and households, with even greater price increases clearly visible on the political horizon.

INFLATION QUICKLY TAKING HOLD

The same storyline is being repeated today in industry after industry. Short term costs are rising, and many American businesses are taking advantage of the situation to raise their prices for consumer goods significantly for the first time in more than a decade.

For example, the Costco big box discount club chain reported last week that it has seen accelerating price increases across a wide variety of the products it sells, ranging from aluminum foil to breakfast cereal to raw meat — which has seen a 20% spike in price over the past month alone — and it has passed most of them along to its customers.

There is a bidding war now on for the few available houses for sale in real estate markets across the country. People seeking to buy new cars or household appliances have to wait for months for their orders to be delivered. There are still spot shortages in supermarkets and limited varieties available on common items ranging from paper towels and toilet paper to canned vegetables and even ice cream.

Frustrated consumers emerging from the long pandemic shutdowns seem more willing than ever to pay more to get the things they want. That inflationary psychology has quickly taken hold, with potentially ominous consequences for the future of the American economy.

President Biden’s free-wheeling progressive government spending policies are just making the situation worse. His administration has been studiously ignoring the warnings, even from sympathetic longtime liberal friends such as Larry Summers. We are now looking forward to a long, hot summer for the American economy, and so far, the end is nowhere in sight.

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