Buckle Up…

Eakinomics: Buckle Up… Yesterday the policy gods smiled on Eakinomics. First, The New York Times published a “leaked” outline of the next step in the administration’s spending plan. Entitled “Biden Team Preparing Up to $3 Trillion in New Spending for the Economy,” it is the first insight into the nuts and bolts of the infrastructure, climate, and other initiatives in 2021: “President Biden’s economic advisers are preparing to recommend spending as much as $3 trillion on a sweeping set of efforts aimed at boosting the economy, reducing carbon emissions and narrowing economic inequality, beginning with a giant infrastructure plan that may be financed in part through tax increases on corporations and the rich.” The article spends a bit of time on the legislative strategy of splitting the initiative into two or more pieces of legislation, but that is not our focus today. Instead, those keeping score at home will notice that then-candidate Biden proposed a bit over $3 trillion in new taxes during the campaign. If, and I mean if, all of these were to pass Congress, then this is a break-even proposition at best. Notice, however, that the administration is admitting up front that “That figure does not include the cost of extending new temporary tax cuts meant to fight poverty….” Correct. The expanded child credit costs $100 billion this year alone; extending it (and others like the premium tax credits to subsidize insurance, the earned income tax credit for non-custodial parents, and more) will raise the bill to several trillion dollars. Simply put, the administration inherited a federal budget with a dangerous structural deficit as far as the eye can see and decided to move from budgetary felony to fiscal homicide. It’s nice of them to let us know. The icing on the cake, however, was the simultaneous arrival of a Congressional Budget Office working paper entitled “The Economic Effects of Financing a Large and Permanent Increase in Government Spending” (as if anyone would ever do that!). The authors state, “In this working paper, we analyze the long-term economic effects of financing a large and permanent increase in government expenditures of 5 percent to 10 percent of gross domestic product (GDP) annually.” For anyone who has not been drinking progressive pseudo-economics, the results are unsurprising: “After 10 years, the level of GDP by 2030 is between 3 percent and 10 percent lower than it would be without the increase in expenditures and revenues. In those scenarios, younger households experience greater loss in lifetime consumption and hours worked than older households. Additionally, the fall in lifetime consumption and hours worked is largest for higher-income households and smallest for lower-income households when a progressive income tax is used. A progressive income tax generates the largest decline in total output. It also generates the smallest decline in consumption among the bottom two-thirds of the income distribution.” So, a large and permanent increase in redistributive spending shrinks the economy, making everyone worse off (but the poorest the least affected). In this scenario, 10 years down the line there would be handwringing about the middle class and claims that the poor are getting worse off. The proposed solution will be a large, permanent increase in redistributive government spending. Fiscal mismanagement, economic futility, rinse and repeat. Fiscal mismanagement, economic futility, rinse and repeat. Fiscal mismanagement, economic futility, rinse and repeat….