Can America Wrest Back Its Happy Future?
The Democrats' $3.5-trillion Build Back Better spending plan — actually a $5- to $10-trillion bill, depending on the time horizon — has reportedly been scaled back. Not to zero, as it should have been, but to $2 trillion — or $3.5 to $7 trillion in additional future spending obligations, on top of $6-trillion annual budgets and proposed $1.2 trillion in infrastructure spending. Reportedly, Democrats are on the verge of a deal to pass it.
Adding these figures comes to as much as $14.2 trillion of federal spending authorizations in this year alone. Including $4.36 trillion (2022 estimate) in spending by state and local governments, that amounts to 89% of annual U.S. GDP. The U.S. economy cannot survive when government is spending almost all that we produce.
We will survive in the short term by borrowing, but once the tipping point has been reached where investors lose confidence in the U.S. government, debt obligations will be called in, and they can be met only by printing worthless money. Repaying debt with worthless currency is a de facto default, but this is what Biden has in mind when he says that Build Back Better won't cost U.S. taxpayers a dime — indeed, he says half of all taxpayers will get a tax reduction (the half that don't pay any taxes but would receive larger refundable tax credits).
Only a very cynical person could assert that by monetizing the debt, we will end up paying nothing. The future of countries that have repaid debt by printing worthless money is not a bright one. It makes no difference whether we are speaking of a $3.5-trillion or a $2.0-trillion bill. Both involve spending that can be repaid only by monetization or by a combination of monetization and tax increases. And the tax increases proposed by Democrats amount to confiscation of investments, inheritances, and retirement savings on an enormous scale.
Perhaps the most pernicious element of Biden's tax policy is his determination to raise taxes on corporations. U.S. companies were already leaving America during the Obama era, with its 28% corporate tax rate. Trump's 21% rate began bringing corporations back to America, and his low rates on repatriated earnings would have brought in an estimated $340 billion in government revenues over ten years from 2018 to 2027.
Now those gains are at risk. Sen. Sinema may be able to block corporate tax increases, but if she cannot, the result will be slower economic growth and inflation. Biden's policies are a repeat of the period from 1966 to 1982 when the U.S. economy suffered from the effects of LBJ's wartime and welfare spending and of subsequent Big Government policies under Nixon and Carter. During that period of economic and cultural malaise, the U.S. stock market declined over a 16-year period from early 1966 to mid-1982, a recovery time that rivaled that of the Great Depression from 1929 to 1954.
If Biden has his way, rising annual spending may trigger another period of decline beginning sometime between 2022 and 2024. It's impossible to predict the exact onset of a recession, but it is not difficult to predict the effects of humongous government deficits. The only way to deal with crippling deficits is either to accept low growth, as the Japanese have for decades, or to monetize the debt using inflation, as the U.S. did during the late 1970s — or both.
Is there an alternative that will bring about a happy future?
The Harding/Coolidge response to the sharp recession of 1920 offers a model. Those GOP presidents responded to Woodrow Wilson's policy mistakes by reining in government spending, balancing the budget, and taking a "hands off" approach to business activity. The recession was painful, but within months, the economy recovered, and the Roaring Twenties had begun.
It's unlikely there will be another Roaring Twenties this time around. Recovery from the pandemic may give the impression that economic growth has returned, but Biden's imposition of "the largest tax increases since 1942" may quickly shut it down. The Tax Foundation predicts that Biden's new taxes "would have a negative effect on long-term output" — a reduction of long-term GDP by 1.62%. That may not seem like a lot, but with total GDP growth of only 3%, a reduction of 1.62% would cut economic growth by more than half.
The result: fewer good-paying jobs, lower returns on retirement accounts, and declining living standards for everyone. That is the happy future that Biden promises.
I do have faith in America and in the ordinary people of this country, who, in time, will come to see what Biden's economic policies are bringing about. And I'm not the only one who believes that a happy future — one without the scourge of progressivism — lies ahead.
Matt Ridley, author of The Rational Optimist, is a long-term optimist who provides a convincing roadmap for a happy future. "Human nature will not change," he writes. "So, the human race will continue to expand and enrich its culture, despite setbacks[.] ... The twenty-first century will be a magnificent time to be alive" (359). This is despite all the evidence Ridley presents for the seemingly inevitable fall of empires due to bureaucratic overreach and governmental intrusion.
If Ridley is correct, our greatest enemy is not communist China, but progressives here at home. If allowed to continue to govern, they will destroy the innovation and work incentives that would otherwise raise living standards greatly by the end of the century. Imagine living standards that may be ten times what they were in 2000. The problem won't be making a living — it will be how to spend what we have.
Ridley is indeed an optimist, but there's no reason why America should not remain a prosperous and secure nation as long as we practice fiscal restraint and rein in taxes. But Biden's 2021 spending plan is a recipe for economic collapse. At best, the effect of Biden's tax policies would maintain median household income at $68,703 for decades, just as LBJ's wartime and welfare spending lowered growth over the next 16 years. (From 1968 to 1984, U.S. household income actually fell when adjusted for inflation.)
Matt Ridley's prediction of a happy future may be correct, but only if Biden's spending plans are defeated. Whether it's $3.5 trillion or $2 trillion, on top of other spending, the result will be a long period of stagnation. That doesn't sound like a very happy future.
Jeffrey Folks is the author of many books and articles on American culture and politics.
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