Happy Memorial Day or should we say Covid Liberation Day. President
is celebrating with the $6 trillion budget he released Friday that, in its willful magnitude, is unprecedented in American peacetime history. Democrats with their narrow majorities in Congress have no mandate for this, but they plan to jam most of it through anyway.
As the pandemic finally eases due to vaccines, the emergency spending of the last two fiscal years should recede. The booming economy doesn’t need it. Consumers are flush with Covid relief payments and demand is soaring. Yet Mr. Biden wants to keep using the cover of Covid to sneak through an expansion of government that would be historic and permanent.
The nearby chart on spending and taxes as a share of GDP tells the larger fiscal story. World War II was the only comparable period with so much spending and new debt as the last two years. But once the war ended, military spending fell. Economic growth slowly reduced government debt as a share of GDP.
Not this time. If Mr. Biden gets his way, spending in fiscal 2022 will still be $6 trillion, which is some $2 trillion more than before the pandemic in 2019. Then spending will keep rising and remain a little under 25% of GDP for the rest of the decade. That level has never been reached in a single year since World War II, and the postwar pre-Covid average was 19.4%.
Even this level of spending is surely understated since much of it will finance Mr. Biden’s new cradle-to-grave federal entitlements for child care, paid family leave, community college and more. These are mandatory programs that don’t require an annual Congressional appropriation.
Spending on new entitlements always starts small and then becomes a huge budget wedge, squeezing out core federal government responsibilities including defense. Transfer payments rose to 70% of federal spending in 2019 from 27.7% in 1964 when LBJ launched his Great Society, while defense’s share has shrunk to 15.4% from 46.2%. Mr. Biden will accelerate this unsustainable trend.
The President’s discretionary priorities also deserve a word. Most executive agencies would get huge budget increases, including Health and Human Services (23.1%), Commerce (27.7%), and the Environmental Protection Agency (21.3%). Apparently, the administrative state will need more money for the vast regulatory buildup the President has ordered.
On the other hand, Defense (1.6%) and Homeland Security (0.2%) budgets would decline after inflation. China is a generational challenge. Iran is arming its proxies across the Middle East. Migrants are flooding the Southern border. Yet Mr. Biden believes the military and border security need to go on a diet.
Mr. Biden proposes to finance all this with some $3 trillion in tax increases, the largest tax hike as a share of the economy since 1968, according to Strategas Research Partners. Mr. Biden is pitching his tax-and-spend plans as boosting “inclusive” growth.
But his tax increases would reverse the 2017 tax reform that increased business investment and lifted wages across the income spectrum, especially lower earners. The taxes would also whack the supply side of the economy just when we need more investment to meet the post-pandemic explosion of demand on everything from warehouses to semiconductors.
The budget forecasts that revenue as a share of GDP will average 19.3% between 2022 and 2031. Revenue has averaged 17.3% since 1970 and has only exceeded 19% of GDP in five years since World War II.
The tax increase won’t kill an economy that should boom this year as Americans emerge from their homes and spend again. But the new taxes and burdens of government will erode growth over time as money is diverted to social welfare payments and political projects rather than to increasing economic growth and productivity.
That burden will also include an unprecedented level of new and rising debt. Only two years ago, in 2019, federal debt held by the public as a share of GDP was 79.2%. In 2021 it will rise to an estimated 109.7%, and under Mr. Biden’s budget it would climb to 117% by 2031. As entitlements grow, so will the debt.
Even Mr. Biden’s budget assumes that interest payments on the debt will more then double to 11.2% of spending by the end of the decade. But that assumes the Federal Reserve won’t raise interest rates all that much, and that America’s creditors won’t demand a higher premium to guard against inflation and financial risk. Mr. Biden is counting on the Fed to monetize all of this debt, but no one knows how long this modern monetary theory can last.
Far more certain is that if Mr. Biden’s budget passes, one way or another Americans now in their cradles will be paying for it long after today’s politicians are in the grave.
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Appeared in the May 29, 2021, print edition.