Give President Biden credit - he’s going big. After $1.9 trillion spent to get the economy rolling again, he is lining up a series of multi-trillion dollar investment bills to tackle everything from climate to education. And, all this spending sits on top of the already ballooning annual budget deficit well in excess of $1 trillion per year.
While the Republicans have no grounds for claiming fiscal discipline, these numbers are truly extraordinary. Trump’s tax cut (which I was against) will end up costing about $1.9 trillion, the same as Biden’s first package. But keep in mind this cost was over 10 years, not 6 months.
While Stephanie Kelton can assure us deficits don’t matter, I tend to side with the now maligned Milton Friedman and his assessment that “there is no such thing as a free lunch.”
Much of the debate on big spending and debt has focused on the potential for consumer inflation. There are real concerns and risks on prices and economic heavyweights have argued both sides extensively. I will leave that debate for another day. But, it is not the only tradeoff to explore. In fact, this level of spending is sure to have many impacts. A short term boom is surely one of them. But, there will also be costs, and I think big ones. Here are a few on my mind:
Asset inflation. Seen the stock market lately? Or housing prices? Or bitcoin? When interest rates go to zero and we print money, hard assets increase in value. Assets are collateral and when they can be borrowed against for nothing, they are worth more (think about your mortgage payment).
More inequality. Who owns assets? The rich. Who needs cash flow to use these assets (like renting a house)...the poor and middle class. And it’s not just low interest rates that help the rich. Our consumption first fiscal ($1400 checks) and monetary policy (why save if you only get 1% yield) means lower income households will increase spending that ends up with the best businesses - not in savings accounts to build resilience in the next downturn. Expect Jeff Bezos to keep accumulating dollars.
Market distortions. Fed induced zero interest rates are a massive market distortion on their own. But, as the money supply expands, the government will need to respond to smooth things out. Price controls, subsidies, universal basic income, debt forgiveness, loan backstops, new taxes...we will need to start tuning the dials to limit the ever growing inequality...and new problems will ensue. Sadly, new rules and regulations tend to help the big boys even more as they have the scale and lawyers to work around things. The vicious cycle continues.
More leverage and market fragility. When you can borrow for nothing, many will do it. Gamestop, Archegos,the fall of the Turkish lira...these are examples of excessive debt. It’s everywhere and growing - all issued based on the promise of ever increasing asset prices. But, with any hiccup, expect trouble. Market volatility will massively grow as the system reaches its limits. It could take years to really hit its peak, but we seem to be on a runaway train.
Even more politics. When the government makes the rules and gives out the money, politics will get even more important. Influence peddling, lobbying, heated rhetoric, vocal political signaling - it will all grow. Truth is we need less politics right now, not more. But, we are just getting going on our cycles of partisanship, backlash and anger. Voter happiness is a handout away. But the trade off is being hidden.
But, the worst outcome of unlimited money? We simply kick the can on solving our real problems. Housing too expensive? Subsidize it. Education out of reach to most? Give it away. One of the most cited statistics on the latest stimulus is a 50% reduction in child poverty (because of child credits). That is great news and likely true - for this year. What about next? And the next? How do we FIX the problem not just hide it for a while? On and on it goes...but pouring money into a system that is not working will simply make it worse. This is true in any realm - business, non-profit, family. Constraints force us to deal with trade offs and seek new creative solutions. When the money is flowing for free...postponing is too easy.
While I think the left has more fully succumbed to “debt doesn’t matter”, the tendency to throw money at any problem is a long term and truly a bi-partisan habit. I have no doubt Trump in victory would have gotten big checks out too. And added more tax cuts along with it. But, the cliff is coming. Whether we get close or go over it, a reckoning is inevitable. Perhaps then we can get to the real work of solving problems.
Cows get all the bad press, but our crops are wreaking havoc on our environment and ecosystems. “Plant based” does not mean climate friendly.
Yuval Levin makes the case for a toned down framing of all issues. Not everything can be the coming apocalypse. And saying so just undermines our much needed institutions even more.
Yes, China plays for keeps and they use “private” companies to do it. The case against Huawei.
Must read essay “Why is Everything so Liberal?” The left flat out cares more about politics. But that matters in culture a lot more than elections.