Fueling Inflation Fire
President’s plan to tax and spend as interest rates rise is a toxic mix
If Oprah Winfrey had a car for everyone, then President Joe Biden’s $6.9 trillion tax-and-spend budget has a program for everyone.
Once again, the president’s budget for the 2024 fiscal year avoids hard choices, dangerously minimizes the impact of government spending sprees on the overall economy and again is based on the tired theme that higher taxes can solve any problem. The president’s persistent belief is that trillions of dollars in tax increases on high earners and corporations can pay for new spending and also reduce both the federal budget deficit and the $31.4 trillion national debt.
This is a fantasy and a dangerous circular argument. There are legitimate discussions to be held about the tax code and whether high earners pay their fair share. However, the Biden budget mixes the potentially toxic brew of hefty government spending and tax hikes at a time when the Federal Reserve is raising interest rates to slow inflation. This is the economic equivalent of pouring gasoline on the inflation fire that the Federal Reserve is trying to extinguish.
All of this represents the collision of monetary and fiscal mistakes over time. Right now, consumers are paying what amounts to an inflation tax. The Fed’s easy money policies and the extraordinary rescue of the global financial system in 2008 launched a historical bull market in stocks and jumpstarted economic growth. But all medicine has side effects. Prolonged easy money policies, tax cuts and hefty spending by the federal government sparked the reckoning with inflation and economic uncertainty.
The few modest spending cuts in the president’s budget amount to less than 1% of the overall budget and are countered by four times as much in spending increases, according to the Committee for a Responsible Federal Budget, a fiscally conservative research group. Moreover, the committee warns that the budget is built around “somewhat optimistic economic assumptions” about long-term growth, lower unemployment and lower long-term interest rates and includes many “costly proposals without first putting the nation’s fiscal house in order.”
In the short term, the budget deficit would slightly increase in 2024 due to the impact of rising interest rates from servicing the national debt and spending that won’t be fully offset by the proposed tax increases. Longer term, the committee notes that the president might be able to reach the administration’s $3 trillion, 10-year deficit reduction target. Meaningful deficit reduction will ultimately need to be nearly three times larger, they also conclude.
A partisan fight over the president’s budget is likely to drag out for months, and most likely the short-term patches will continue to punt the long-term debt dangers to a future generation. The nation also will have a looming deadline on the debt ceiling that could be a political if not an economy-rattling fiasco. The nation has operated under the pretense that debt isn’t oppressive and money can be printed at will without consequences. Now we’re enduring the repercussions of not facing our economic challenges head on.