Many Democrats look at the last four years and assume that President Joe Biden can spend and borrow unlimited government money, keep interest rates near zero while stifling international trade with tariffs and not lose a minute of sleep worrying about inflation. These Democrats argue that President Barack Obama left Donald Trump with an extremely strong and growing economy and the socialist Trump increased federal government spending by an unbelievable 65 percent in his four years in office while increasing the deficit by an unfathomable $6 trillion. (These figures do not include the $1.9 trillion rescue package Biden passed in his first month in office to try and right the economic catastrophe caused by the disastrous mismanagement of the COVID-19 pandemic by Donald Trump.) So, if Trump can borrow and spend money like a drunken sailor with a pocket full of credit cards and not budge inflation, why can’t Biden? To understand this, we need to look back at what we learned from the Trump fiasco.
Before going further, it is important to remember that Biden’s plans are just that. Like any president, Biden’s first year in office is essentially an extension of his predecessor’s policies. The tax and spending policies in effect today are those that were passed during the Trump term. All that Biden has accomplished economically so far is the passage of the aforementioned $1.9 trillion rescue package with most of the money going for vaccinations and bailing out state and local governments. When we look at the Biden economic packages, I am writing about hypotheticals since we really don’t know what will be passed.
We are definitely seeing inflation today. These price increases are caused by supply disruptions caused by the COVID-19 pandemic. For example, the lumber industry shut down last Spring. The last thing homeowners wanted was non-family members in their homes when COVID was raging; consequently home remodeling came to a standstill. This year, you have two years of pent-up demand for home remodeling in a scaled back industry of suppliers. It takes roughly a year of drying time for every inch thick of green lumber before it can be used for building. Consequently, lumber prices are astronomical. The only way to blame Joe Biden for this is because he pulled us out of the COVID nightmare and brought us back to some sense of normalcy.
What did we learn from the liberal Trump?
In 2017, I predicted Donald Trump’s presidency would be an absolute disaster and those who survived would consider themselves lucky. I certainly nailed that prediction! However, I also predicted Trump’s runaway spending and borrowing would trigger high inflation and the highest trade deficits in history. I was wrong big-time on the inflation call. While Trump’s trade deficits were consistently the second biggest of any president, they were still $190 billion less than Republican President George W. Bush’s.
What happened and why I screwed up helps us understand the risks President Biden’s plans present. First, why didn’t inflation explode with all of Trump’s deficit spending? At the end of Obama’s term in 2016, the federal “Net lending or borrowing” balance was -$717 billion. At the end of 2019 (pre-pandemic), Trump’s net lending or borrowing balance was -$1.137 trillion. During this period, Trump grew the deficit by $420 billion.
What is really unprecedented is that over the same period, “Net private savings” increased $389 billion. Trump and the Republicans tax cuts were geared to benefit the rich and corporations. Obviously, these individuals and corporations didn’t have anything better to do with this money than to put it into savings. So, almost 93 percent of Trump’s increased deficit didn’t get spent. It went into what I call “Dead money”. It is pretty near impossible for money that is sitting in savings to cause any kind of inflation.
So, while Trump was breaking every non-recession deficit spending record in history, corporations used their windfall to puff-up their balance sheets and rich people invested their tax cuts in stocks and bonds and other savings instruments. This didn’t do anything to help the economy but it also didn’t trigger any inflation.
The second question, why didn’t our trade deficit explode because of Trump’s borrowing and spending? A country’s trade balance equals the country’s total exports minus total imports. The trade balance also equals private savings plus government savings. (Fairness of trade agreements have no impact whatsoever.) I assumed that Trump’s massive increase in debt on the government side of the equation would send our trade balance to unheard of negatives.
What happened was that Trump’s government savings deficits were almost balanced off with a 93 percent increase in private savings on the other side of the equation. Trump’ trade deficits were always larger than Obama’s (or any other president), but never approached George W. Bush’s.
So what about 2020?
While the above narrative explains why inflation stayed under control in 2018 and 2019, what explains the low inflation in 2020 when Trump’s borrowing and spending moved from liberal to socialist levels?
In 2020, Trump broke every spending increase and deficit record in our history. Trump increased federal spending just in 2020 by an unbelievable 43 percent. He added $3.3 trillion to our national debt in one year. Trump’s out of control borrowing pushed the US’s total debt to a value larger than our annual GDP. This use to be considered as a trigger point where an economy would crash into some type of Venezuela style chaos with out of control inflation that finally ended in an economic collapse.
The reason all of Trump’s 2020 spending didn’t lead to runaway inflation was that all this federal spending went into the economic black hole caused my Trump’s mismanagement of the COVID-19 pandemic. While hundreds of thousands of US citizens were dying from a silent killer and the response of the person occupying the White House was calling the disease a hoax and denying science, the economy went into a tailspin. Trump’s spending was like a Band-Aid trying to stop the bleeding from an economic artery being cut. What Trump called stimulus programs were actually rescue programs that kept the economy from collapsing. With the economy in this bad of shape, even a 43 percent spending increase and $3.3 trillion of new debt couldn’t spur inflation. At the end of Trump’s term, he was the only president since Herbert Hoover to have negative job and GDP growth during his time in office.
Monetary policy
One of the other keys to keeping inflation at bay is maintaining consistent monetary policy. In an ideal scenario, this means the Federal Reserve sits back and lets the market set interest rates. The Fed broke this rule in late 2018 when Trump’s borrow and spend bubble economy was falling apart and the Fed started lowering interest rates. In 2020, when markets realized Trump was incapable of dealing with the pandemic and started collapsing, the Fed aggressively lowered interest rates to zero. Because the Fed was lowering interest rates while the jobs market and the economy was collapsing, this didn’t contribute to inflation.
What this should mean to Biden
Hopefully, the preceding gives some more depth to the Trump fiasco and we can understand the dangers of thinking that inflation is dead. In his first months in office, Biden has worked to restore our nation’s physical health. His success is reflected in our country’s economic resurgence. This is important.
Biden proposes cutting out the huge tax cut handouts to corporations and some modest cutbacks to the welfare to the rich we have had in the US over the past forty years. Biden’s spending includes things like a subsidy to parents with children. You can bet your last dollar that 93 percent of this money is not going into private savings or become dead money. If Biden were to simply keep Trump’s 2020 spending and borrowing, the impact on inflation would be much more volatile just because the people that are winners in Biden’s budget proposals will spend the money they get.
Trump spent his presidency ignoring the advice of real experts. In contrast, Biden’s spending proposals are classic, textbook economics. Spending government money on infrastructure, education, health care and basic research are proven ways to increase a nation’s productivity. Productivity increases typically transfer to wage increases. Notice the word “typically”.
Over the past forty years in the US, most wage gains from productivity gains have gone disproportionately to high wage earners. We’ll cover fixing this momentarily; however the important thing about Biden’s spending is that the money is going middle and lower income people who will spend it. This presents more risk of inflation.
International trade
What is also important is getting rid of Trump’s ridiculous tariffs on selected imports and getting rid of the reciprocal tariffs other countries slapped on our exports.
Inflation happens when too many dollars are chasing too few goods. Open international trade acts like a pressure valve release to an overheated economy. During the Bill Clinton Administration, he actually had federal budget surpluses in his last three years in office. However, the US still had negative trade balances each of those years with the 2000 trade balance at -$398.9 billion. The too many dollars in the US economy were spent on foreign goods and inflation stayed at very low levels. Without the trade agreements Clinton signed, we would most likely have had runaway inflation by the end of his term.
China
Trump foolishly thought he could cause serious economic damage to China with his ridiculous trade war. This didn’t work very well. In the 2020 election, Trump took the worst beating by an incumbent president since Herbert Hoover and Xi Jinping is still the undisputed leader of China.
In contrast, Biden looks to regain the US’s competitive edge with China by making ourselves more productive with his targeted spending.
Inflation?
No matter how wonderful Biden’s spending proposals are, if Biden keeps spending at Trump’s level, there is a high risk of inflation because the people earning this money will spend it. All things being equal, also expect our trade deficit to reach new heights.
Make no mistake; inflation is a very bad thing. It does not impact everyone at the same rate. Typically, wages rise much slower than the things we buy during inflationary periods. Worse, inflation leads to higher interest rates. With the level of debt the US government has, if we had to start paying six percent interest rates on federal debt, that would be catastrophic.
How to fix this? End the 40-year welfare for the rich and corporations and reorient our spending priorities. In other words, balance spending with tax increases and balance the federal budget.
Tax increases, solve two problems at once!
In 1945 the US’s highest tax rate was 94 percent on income over $200,000. After WWII, the US ruled the world. Income over $200,000 was taxed at 91 percent. In 1965, the highest tax rate was lowered to 70 percent on income over $200,000. The high tax rate stayed at this level until 1982 when Reagan lowered the rate to 50 percent (on income over $86,500).
By 1988, Reagan flattened the tax curve and all income over $29,750 was taxed at 28 percent. Since then, the top tax rate has floated in the 30-39.5 percent range. https://files.taxfoundation.org/legacy/docs/fed_individual_rate_history_nominal.pdf Biden’s tax plan would raise the highest tax rate from 37 to 39.6 percent. He is actually just fast-tracking a change already planned to take place in 2025. This is a pathetically small tax increase.
According to The Pew Research Center, “The wealthiest families are also the only ones to have experienced gains in wealth in the years after the start of the Great Recession in 2007. From 2007 to 2016, the median net worth of the richest 20% increased 13%, to $1.2 million. For the top 5%, it increased by 4%, to $4.8 million. In contrast, the net worth of families in lower tiers of wealth decreased by at least 20% from 2007 to 2016. The greatest loss – 39% – was experienced by the families in the second quintile of wealth, whose wealth fell from $32,100 in 2007 to $19,500 in 2016.”
“As a result, the wealth gap between America’s richest and poorer families more than doubled from 1989 to 2016. In 1989, the richest 5% of families had 114 times as much wealth as families in the second quintile, $2.3 million compared with $20,300. By 2016, this ratio had increased to 248, a much sharper rise than the widening gap in income.” https://www.pewresearch.org/social-trends/2020/01/09/trends-in-income-and-wealth-inequality/
The point here is simple, the US used to be an egalitarian or classless country. No more. The way to fix this is to go back to a tax system like we had when the US was the world’s most powerful country and the US middle class grew because of high marginal tax rates and aggressive estate taxes. By raising US taxes back to traditional levels, we can raise enough money to pay for desperately needed infrastructure, education, health care and basic research.
Corporate/business tax rates
One of the fantasies Republicans try and sell is that if governments just give corporations and rich people tax cuts, they will in turn create jobs. Donald Trump proved just how silly this is.
As noted above, Trump gave rich people and corporations $multi-trillion tax cuts and they used the money to pad their balance sheets and invest in the stock and bond markets. This was good for stock markets, not so good for those wanting jobs. The reality is that more jobs were created in the last three years of the Obama Administration than during the first three of the Trump Administration. The low pre-pandemic unemployment levels Republicans brag about didn’t happen because of Donald Trump, they happened in spite of him.
In the real world, job creators expand their businesses and hire more people when they think they can make money doing it. This is going to happen if the tax rate is 10 percent or 60 percent. The only things tax cuts for corporations and rich people accomplish is to make rich people richer.
Summing this up…
When we look at our history over the past 40 years, fiscal conservatism has meant prosperity. Republican President Ronald Reagan came into office with the first federal government-spending deficit greater than $100 billion. He doubled that by his last year in office to -$212 billion. While raising government spending by 82 percent during the Reagan term, we had a number of recessions.
Republican President George H.W. Bush took over the borrow and spend mantle from Reagan. He maintained Reagan’s rate of annual spending increases and almost doubled the budget deficit to -$359 billion in his last year in office. A nasty recession spelled the end of the Bush I presidency.
Democratic President Bill Clinton put the brakes on the out-of-control Republican spending and only increased total federal government spending by 27 percent over his two terms. He left office with a $153 billion budget surplus while bringing the US arguably the strongest peacetime economic boom in our history.
President George W. Bush returned a frenzy of Republican borrowing and spending. Over his two terms, he raised federal government spending by 86 percent and left office with a -$774 government spending deficit. He also left the US with the worst economic crash since the Great Depression.
Democratic President Barack Obama had the misfortune of taking office while the economy was unraveling from the Bush II disaster. Tax receipts plunged 26 percent in his first weeks and Obama had to deal with the US’s first $trillion deficit (-$1.5 trillion). Federal government spending rose only 24 percent during the conservative Obama’s two terms in office. He managed to whittle the annual spending deficit down to -$717 billion by his last year in office. During the Obama term, he launched one of the longest economic recoveries in history.
The Socialist Republican Donald Trump took over the strong Obama economy and showed the US a level of borrowing and spending never before imagined. His 42 percent one year spending increase of $2.1 trillion is bigger than the entire federal budget was up until 2002. Electing Trump cost us almost $6 trillion in additional debt. What did all this borrowing and spending get us? Donald Trump left office with the lowest Annual G.D.P. Growth Rate of any president since these records were first kept in 1937. Trump is the only president to have a negative Annual Growth rate of Non-Farm Jobs during his term since the Great Depression.
Over the past forty years, Democrats brought us conservatism, frugality and prosperity. Republicans have brought us liberalism, socialism, massive debt, progressively worse economic disasters and excuses.
It doesn’t take much for Frugal Ron to look back at this and be alarmed by the size of Joe Biden’s spending plans and the possibility of more deficits. Yet, at the same time, Biden is spending money on the things that can bring us long-term prosperity. He also addresses essential spending to try and mitigate future climate changes. In addition, he is addressing the needs of long marginalized people of color.
There are a number of things to take away from all this:
- The Biden spending plans (if passed) have the potential to create wealth for a wide range of the population for years to come. They also have the potential to improve the lives of a wide range of the population.
- The most effective way to make sure inflation does not return if the above spending happens is to balance the federal budget with tax increases on those most able to pay. This requires returning to the type of tax structure the US had during its glory days.
- The second most important anti-inflationary step for Biden to take is to end Trump’s trying to pick winners and losers in the marketplace with his selective trade tariffs. Get the government out of the markets and remove Trump’s tariffs.
So, what is going to happen if Biden gets his spending plans enacted into law? If taxes are raised to balance the budget and trade is opened back up, we could have one of the longest, broad based and prosperous periods in US history. If a Republican style plan with lots of spending, no tax increases and keeping trade restrictions in place is passed, we are probably looking at another Republican style economic debacle, made worse by high inflation.
