January 20th 2021 marked the end of a humiliating chapter in American history. The nation had endured four long years under the leadership of a nasty, misogynistic, brash Commander-in-Chief. One who proposed a ban on Muslims coming to America and hired a dog breeder to head up a Coronavirus taskforce. Whose first Monday on the job was spent claiming that three to five million illegal ballots cost him the popular vote, and whose final days in office ended in accusations that he had triggered riots at the US Capitol that left five people dead.
Set against Trumpian turbulence, it’s hardly a shock that reviews of Biden’s first 100 days in the Oval Office have been near-unanimously positive. As one former Obama staffer quipped in 2020: “The country just needs to chill out and have a boring president”. Here was a country craving unity, calm, sanity. In the wake of what one commentator termed the “worst 1,462 days in presidential history,” Biden had delivered.
But there’s a plot hole in the pro-Joe narrative. Because how boring is $6 trillion in spending proposals? How reassuring is the news that the executive branch is carrying out the biggest government splurge of all time? How dreary is the fact that we’re no longer worrying that “a billion here and a billion there – and soon you’re talking real money,” because this president has pushed the envelope well into the trillions?
Biden’s Covid relief package alone comes to $1.9 trillion. The Democrats’ American Jobs Plan for infrastructure will cost $2 trillion and the American Family Plan a further $1.8 trillion. It ought to provoke profound unease, but the numbers are sufficiently vast to be giddying, disorientating – dazzling, even.
So it matters not to many that the spending is poorly targeted (Americans in London are receiving $1,400 cheques to stimulate the UK economy). And by talking of “investment” and “infrastructure” the administration is pulling the wool over the public’s eyes, disguising the reality that these plans cover far more than bridges or buildings, incorporating healthcare, daycare and a range of research projects. The public will grow accustomed to the huge number of new entitlements and rolling them back, when the day of reckoning arrives, will be very painful indeed. Small businesses have reported struggling to take on workers – because what incentive is there with government benefits this generous?
Perhaps the figures are simply so eye-watering that not even the leader of the free world can wrap his head around the notion of fiscal retrenchment. The pandemic response has increased national debt by $4.7 trillion, which works out at an extra $14,000 for every man, woman and child in America. The $1.9 trillion that has already been approved is only marginally below Bill Clinton’s deficit for his eight year-long presidency (adjusted for inflation). If Biden’s plans come into fruition in their entirety, almost two thirds of all US debt issued in its 245 year history will have been in the last 13 years.
Granted, this is wartime spending. There was consensus among economists that these drastic measures were likely to be the appropriate response. Unlike recessions of the late 19th and 20th centuries, this was a demand-side slump. Governments had intentionally clamped down on economic activity, and to preserve jobs and businesses, scaffolding had to be erected.
Nor can we solely place blame at the President’s door: Donald Trump unleashed a wave of statism in the Republican Party and was no more troubled by fiscal largesse than Biden. This is as a bi-partisan spending spree, the same way as what we are witnessing on this side of the pond. Here in Britain, UK government borrowing has topped £300bn. It’s less the act than the relaxed response that is troubling. Are we all starting to believe that Modern Monetary Theory can truly deliver economic miracles? Can governments and central banks create as much money as they wish without consequence?
Well, no. The Institute of Economic Affairs published a research paper last week warning that a central bank that systematically monetises the deficit of the government will perpetuate an economy with enlarged government deficits, unsustainable monetary growth and, in the end, higher inflation and macroeconomic instability. We have ample historical evidence and sound economic theory that support the relation between excessive monetary growth and inflation.
Worse, it’s not obvious that the US economy needs all this stimulus. Activity was rebounding before the American Rescue Plan was introduced. Trillions of dollars are being poured onto what could become the world’s strongest economic recovery. And even if the sheer volume of freebies puts the average American on edge, they could still be buying into the increasingly popular idea that the best way to recover is through government-stimulated economic activity. The longer-term plans rely heavily on state intervention, subsidies, and direct employment. Forget the market: let the state pick winners.
But believing we can fly won’t make us grow wings. Make no mistake: there will be a huge bill to pay for all this. Biden is planning large increases in taxes on capital and on corporations, the burden of which will inevitably be passed on in the form of reduced investment, lower wages, and higher prices. In short: it won’t end well.