By Dr. Harold A. Black
The president unveiled his $6 trillion budget – although using the word “budget” next to $6 trillion seems ludicrous. I will leave it to others to critique the contents of the proposal. There is one surprisingly honest facet to the budget proposal. It is that the economy is projected to grow at an anemic 1.9 percent per annum. This should be a warning shot fired across the bow of the nation. Recall that during the Obama years, 1.9 percent was referred to as a “growthless recovery.” Our economy should grow at a 3 percent annual rate in its sleep and the reason that it does not is because of the government. It is a wonder that we grow at all given the piles of regulations that weigh on business, the tax policies that change from administration to administration, the changes in the leadership of the federal agencies and the ever increasing burdens of government having to fund its spending.
If the Biden economic team projects a growth rate of 1.9 percent, then it is almost certain that that number is optimistic. First, the surge in economic growth during the Trump administration is largely credited to regulatory reform – which is generally overlooked – rather than just the tax cut. Biden will do the opposite and increase the regulatory burden and increase taxes, in particular the corporate income tax. Second, budget projections often are made with total disregard for human nature. Many budgets assume that corporate and individual behaviors will remain unchanged in the face of the new regulations and taxes. We know that this is not the case. Most budget projections fail for this reason.
Ironically, the administration says that its budget is a “fiscally responsible path” and will be balanced in 2030. I doubt if any rational person believes that will occur. The only ways the budget can be balanced is either by decreasing spending or increasing taxes. The federal government, regardless of which party is in power, has demonstrated an inability to cut spending leaving only ever increasing taxes as a budget balancing tool. Since at some point, ever raising taxes becomes politically infeasible, the government will increase funding through borrowing by issuing Treasury bonds. This means that the Fed must enable the spending by providing a market for the Treasurys. As a consequence, the Fed is pressured to keep the cost of repaying the debt lower by keeping interest rates low. Consider that if the 10 year Treasury is 3.2 percent, interest costs on the debt will exceed the defense budget by 2023. Continually issuing Treasurys will result in significant rises in the price level. At some point, inflation becomes untenable and although increased inflation will lower real payments on the debt, the Fed will be forced to try to fight inflation while keeping government financing going. This will be akin to driving with one foot flooring the accelerator while the other foot is flooring the brake. The result will not be pretty.
I think that most politicians know the consequences of their profligate spending but few have the stomach to alter spending in a meaningful manner. Each budget is larger than its predecessor mainly due to entitlement spending which grows unchecked. Yet if a party or politician proposed to rein in medicare and social security spending, they would be voted out of office. The opposing party would label them as heartless fiends trying to “balance the budget on the backs of the poor and elderly”. Lastly, the projection of Biden’s balanced budget in 2030 is impossible for another reason. By that time or close to it, the population aged 65 and older will outnumber those 18 and younger. That single fact will cause our current entitlement system to collapse. Medicare costs would become untenable. Social Security being a ponzi scheme that relies on those who are working to pay the benefits of those who are retired will go bankrupt. If a private business were to sell a similar retirement plan, its principals would be put in jail. Medicare and Social Security are stark indicators of how socialist solutions to the nation’s problems yield dire consequences. Washington will soon have to figure out how to rein in spending on medicare and on social security. I am not optimistic.