Up, Up And Away: Spending, Taxes, Deficits, Shares, Prices

It’s not easy to follow the trillions trail. Here is a road map. Six relief bills have pumped $5.3 newly created fiat money into the economy, equal to about 25% of GDP. The early tranches of this spending reflected a bipartisan view that something had to be done to relieve the distress caused by the Covid-19 pandemic, and quickly, even if it was difficult to separate the needy from the unneedy when cutting cheques. The last, $1.9 trillion tranche, ended the era of political comity.

President Biden then introduced his $2.5 trillion infrastructure plan, to be followed by a $2-$3 trillion social infrastructure programme to expand the welfare state. Further expansion of government is planned when the President submits his first budget to congress. Covering  the fiscal year beginning October 1, it will call for a 16%  increase in health, education and other social spending, along with a mere 1.7% increase in “national defense programs”, the latter a cut when inflation is taken into account.

Republicans aren’t having any of it, and Biden is not backing down. This partisan warfare is not simply a case of politicians behaving badly. It is a result of politicians’ attempt to reconcile what they believe to be the national interest, the interest of their constituents, and their own interest in keeping their jobs. Broadly put,

  • Democrats believe that government is a force for good, and that more is better than less. Republicans believe that government, especially untethered from financial constraints, is inefficient and can be malign force in national life; less is better than more.
  • Democrats believe that expansion of the entitlement state and the battle against climate change should take precedence over military spending, a recent version of George McGovern’s 1972 call to “Come Home America” after years in which, he said, danger from abroad “permitted our own house to fall into disarray. Republicans generally fear that larger entitlements sap individual initiative, believe that climate change can be managed without massive expenditure, and that military strength and preparedness should have a high claim on the nation’s resources. Ronald Reagan’s “The nine most terrifying words in the English language are ‘I’m from the government, and I’m here to help’” captured that belief.
  • Democrats have no fear of large deficits, especially if needed to assure super-full employment and enlargement of the welfare state, and are behaving as advocates of Modern Monetary Theory believe they should. Out-of-power Republicans have recovered their belief in fiscal prudence, and again abhor deficits, especially now that the economy is already headed towards a boom that should take growth this year to around 8 per cent.

Democrats have won the latest battle in the partisan war. The result is a new roster of economic winners and losers.

  • The private sector is a loser. Eager to participate in infrastructure investment, it finds itself frozen out and, to add to the pain, its taxes are due to go up. Steven Ratner, who led President Obama’s effort to save the U.S. auto industry during the great recession and is now a Wall Street banker, writes in the New York Times, “Hundreds of billions of dollars will be invested by government agencies, whose record of success with direct investment in the commercial world is, at best, mixed…. The normal government process [is] where the combination of influence peddling and inexperience can be devastating.”
  • Women and people of color are winners, benefiting from targeted programs ($5 billion for Black farmers; billions for care givers, “disproportionately women of color and immigrants” says Biden).
  • The better-off are losers, the poorer are winners, as taxes on the former and benefits for the latter both head up.
  • Workers who prefer not to join trade unions will be losers and trade unions winners as regulations favoring unions in representation elections take effect.
  • Fossil fuels lose, renewables win. Tax provisions that benefit fossil fuels to the tune of $3.2 billion annually (not including the absence of a carbon tax) will go down, while the $9.8 billion benefits to renewables industries will rise.
  • Immigrants, legal and illegal, are winners as entry is eased and benefits made available (in New York, $15,600 to any illegal who lost a job during the pandemic). Losers are the communities bearing the cost of the immigration surge, low-wage workers facing increased competition, and taxpayers, including those in New York footing the $2 billion cost of the state-government hand-outs.

The unanswered question is how the redistribution of economic costs and benefits that constitute the Biden revolution will affect the national interest, as opposed to the interests of specific groups.

One indicator will be whether the redistribution of income and advantage reduces criticism of America’s system of market capitalism. There is a widespread belief that inequality has increased to unacceptable levels: 47 per cent of Americans say they would vote for an otherwise well-qualified socialist candidate for President.  Reports that median compensation of CEOs rose 15 per cent while many companies were laying off workers have been grist for the mill of the critics. Biden’s version of reformed capitalism might reduce support for the socialist alternative, surely a goal worth pursuing.

Another indicator will be whether Biden’s spending programs produce disturbing inflation. A White House team headed by Biden economic advisers Jared Bernstein and Ernie Tedeschi characterizes the recent jump in the price of almost everything as “moderate” and “transitory”, aping the position taken by Fed chairman Jay Powell. Larry Summers, Bill Clinton’s treasury secretary, hardly a small-government advocate, says “going big” as treasury secretary Janet Yellen puts it, “… could manifest itself … in rising inflation and ratcheting-up of inflation expectations … [it] doesn’t seem prudent.”

The Biden team is counting on a booming economy – retail sales in March soared by 9.8% as states reopened their economies and Americans reaped the benefit of the risks Trump took with their tax dollars by backing vaccine manufacturers – to win voter endorsement of the end of “the end of the era of big government”, and enable them to retain control of both houses of congress. But Trump will not be on the ballot, and in 2020 voters preferred most Republicans lower down on the ballot even as they abandoned Trump. And losers, especially white men who refuse to cooperate with pollsters, might turn their resentment into ballots.

But why cavil? For now it is up, up and away, while we hope the beautiful balloon that lifts the economy continues to sail along, immune to policy errors.