Vote Joe, get Bernie? That’s not what the voters signed up to. Certainly not those swing voters who wanted rid of The Donald, but didn’t expect to find themselves washed up on the wilder shores of Democratic Party policy with Bernie Sanders – not that Vermont has a shore, but you know what I mean. The new President spent a lot of time recently talking to the senator for Vermont – who, it might be useful to remind ourselves here, is an Independent, not a registered Democrat – and seems to have been taking lessons from him in left-wing economics. Left-field economics, even.
Now the results of those chats are becoming apparent, at an astonishing speed. Mr B’s new spending commitments are now up to US$6 trillion, and there’s more to come, though where the money will come from is not so clear. This rate of spend and the vagueness as regards funding make the Johnson Administration (Boris, not Lyndon Baines) look positively prudent. The figures are so enormous that they have become, in the literal sense, fantastic. The USA is of course a large and very wealthy country, and with a population of 330 million any per-head figures soon start to add up to a very big total. For instance, the estimated $14,000 in Covid costs for each US citizen works out at $4.5 trillion. However, the President’s spending commitments are bigger than that; they hark back to the Kennedy/Johnson spending splurge of the 1960s when there was money for everything – war, space, infrastructure (highways and airports), social programmes. You name it, the government would spend on it. That bill soon came home in the form of low economic growth, high taxation, and out-of-control inflation. Richard Nixon began to grapple with it, but it was Ronald Reagan who finally got a grip on it, forcing government back to basics and reducing taxes so that enterprise could flourish and start creating wealth. So, you might ask, where is the Ronald Reagan of the mid 2020s? Some governor, congressperson or senator is going to have to sort this out and, given the speed at which Joe has been writing cheques, the problem is coming down the track a lot faster than last time.
This is not to say that there aren’t things in the USA which need sorting out, at a cost. Some highways, bridges, and airports are becoming decrepit – they do after all date from the 1960s – and whilst government is very good at big spending on big projects, it tends to be very bad at the little things, like repairs and updating. But any decent accountant can work out whether it’s worth building a new bridge, widening a road, or building a new airport terminal and produce a cost-benefit analysis to justify the spend. A trickier issue is that America’s social system is failing the very people it ought most to be helping and it’s very expensive to run. This also needs reviewing, and almost certainly warrants more money – providing it gets to the people who actually need it. Which means not sending two thousand dollar Covid payments to those who don’t need them, as both Donald and Joe have done. The new President is however proposing a $1.8 trillion American Families Plan, to provide more free childcare (free to the parents, that is), paid parental leave from work, and a lot more subsidised education. Here again we could ask our cost-benefit accountant to run his analysis programme to see how many dollars of wealth might be created by, for example, allowing new parents more time off work. Life is, of course, not just about cost-benefit analyses. It’s a lovely idea that Ma and Pa should spend more time with the new junior during those precious early months. However, it would be interesting from an academic standpoint to find out whether that actually creates any return on the dollar spent – because it’s not really going to be free, it’s going to be paid for by the old, the sick, the rich, the childless, the big earners, and the part-timers with big families.
So, let’s turn to the side of the accountant’s balance sheet that shows ‘Sources of Funds’. Joe has thought about that – or somebody has; maybe Bernie. We’re talking about millionaires, billionaires, and corporations. They can afford it, can’t they? Corporation tax will rise from 21% on the dollar to 28%, the top rate of income tax (on those earning roughly $400,000 and upwards) from 37% to 39.6%, and capital gains tax for those making gains of more than $1million a year to 43.4%, double the current rate. So that’s all right. Those are the folks that can afford it. Problem solved. Except of course that this will not even begin to fund the programme, even assuming that all these rich folks and corporates carry on just as they are, without adjusting their behaviours in order to reduce their tax bills. If this assumption proves true, it will be the first time in recorded history that this has happened.
The Biden Administration has not yet produced its figures but we can be sure that that this will be just the first bite at the golden apple. As revenue falls and expenditure climbs there will be two possible effects, which may well both come about simultaneously. First, all sorts of extra taxes will be levied to try to make up the governmental revenue shortfall, the trick being – at least initially – to come up with obscure taxes and charges that nobody notices until they find themselves overdrawn at the end of the year (Gordon Brown must already be thumbing his dog-eared copy of ‘Funding the Blair Years’ and booking a ticket to Cape Cod, his favourite destination). Second, inflation will start to grow as the government prints more and more money to make up the revenue gap. That, of course, hits everybody, but especially the poor, the old, the unemployed – those who find their outgoings rising faster than their income. It especially hits those who rent their homes rather than buy, as house prices tend to inflate, whilst mortgage debt doesn’t. But interest rates do inflate, again hitting those who can least afford it. At this point Joe may need to have another word with Bernie and ask him what to do next. The odd thing is: Bernie won’t know. But it will be about 2024 by then, so hopefully (as Mr Biden said last week) “We the People [will] not flinch” and they will back a new Ronnie to get them out of the mess.
We should not underestimate the troubles ahead. Government is going to become bigger and bigger – and mostly less efficient, government payrolls will grow and grow, productivity will fall, wealth will diminish. The rich will leave, or else take lower earnings, hoping that better times will come. Mr Biden says that we now live in an age of new economic realities. No, Joe, we don’t. You can have new social realities and society does evolve all the time, often for the better. But some realities remain the same. You cannot make water run uphill, you cannot make the sun shine at night, you cannot take a cat for a country walk. Similarly, economic realities abide throughout the ages. You can have socialism but not at the same time as economic freedom. You can be left-wing but that won’t create wealth unless you’re sitting on a lot of oil, gold or diamonds, and not even necessarily then, as any Venezuelan can attest. And most of all, you cannot run unbalanced budgets for long.
Mr Sanders may have convinced Joe that you can, and Joe may want to be the great reforming Democrat President who redistributed wealth and built a fairer society. However, he can’t achieve that by disobeying the basic rules of economics. It’s not just the Republicans who believe this; a number of Democrats have already started muttering about the cost and the extravagance of what is being proposed. There are still a lot of politicians around who remember the mess the last time this was tried; and the pain of clearing it up. Mr Biden has, let’s not forget, a Senate that is only Democrat-controlled because Vice President Harris has a casting vote, and a House where his majority is now – following a number of Democrat resignations – just six. That means it will be a major battle to get any of this through, and things will get worse for the President at the end of next year when some additional Democrat seats are likely to turn Republican during the 2022 mid-term elections.
The odd thing is, it’s just possible that Mr Biden, or his reputation, may be somewhat salvaged by any inability to deliver his programme. Joe is a wily old politician, so maybe that’s his plan – to win kudos from the left for trying, while reaping the relief from the centre that he failed… and that he’s not Donald Trump. Could old Joe be that subtle?