President Joe Biden is in serious trouble.
In political terms, he has failed across the board: on foreign policy, he has surrendered Afghanistan to a ragtag gang of 8th-century tribal barbarians, incentivized a Russian invasion of Ukraine, and provided an opening for a Chinese invasion of Taiwan, all while making unrequited overtures to the terrorism-sponsoring Iranian regime; on domestic policy, he has pressed irrational COVID-19 restrictions on children, polarized Americans with foolish and illegal vaccine mandates, labeled his political opponents Jim Crow racists, and pursued radical social change on everything from gender ideology to anti-religious regulation.
But it is on the economic front that Biden has truly failed most dramatically.
Most of the consternation about Biden’s economy has been focused on the unprecedented inflation Americans are currently experiencing. Not for four decades has inflation seen these levels: according to The Wall Street Journal, “A relentless surge in US inflation reached another four-decade high last month, accelerating to a 7.5% annual rate as strong consumer demand collided with pandemic-related supply disruptions.” For his part, Biden chalks inflation up to supply chain issues connected with the COVID-19 pandemic – but as Santul Nerkar of FiveThirtyEight points out, Europe “has faced similar supply chain issues and an even worse oil shock…And yet, European countries have experienced lower inflation, perhaps due in part to their smaller government response.” Nerkar adds that Biden’s American Rescue Plan – absurdly credited by Rep. Hakeem Jeffries (D-NY) as a key factor in America defeating COVID – contributed to inflationary pressures.
But conservatives are making a large-scale political and economic mistake if they believe that the chief threat to the American economy in the mid- to long-term is inflation. It isn’t. It’s thus worthwhile discussing the future of the American economy, with an eye toward precisely the question of timeline: what are America’s short, mid-range, and long-term threats economically? As we will see, the policy we pursue right now creates significant short-term danger – but the mid-range and long-term danger dwarf whatever pain we’re experiencing right now.
Short-Term Problems: Inflation And Unemployment
There is no question that inflation is a serious problem. That is due, in part, to supply chain issues – since February 2020, used cars and trucks have seen a 22.9 percent increase in price, compared to just 3.5 percent for core CPI; since February 2020, energy has risen 9.5 percent, compared to 3.0 percent for shelter. That’s because of oil and gas shortages on the energy side, and chip shortages on the auto side. Over time, some of this should be alleviated.
It is also true that the Federal Reserve is likely to ratchet up interest rates in their next meeting; in fact, the markets are pricing in the significant possibility of an interest rate increase of 50 basis points. According to CNN, Bank of America – admittedly an outlier – is calling for no less than seven rate hikes this year. In any case, the Federal Reserve understands that its mandate is to rein in inflation, and we should probably foresee that it will do so quickly.
Biden’s overheated economy – his overspending, his promotion of loose monetary policy – could have serious short-term consequences. Consumer sentiment has tanked to its worst state since October 2011. A huge part of that is inflation concern: consumers say they expect an annual inflation rate of 5 percent in 2022.
In the early 1980s, Fed Chair Paul Volcker famously increased interest rates, and unemployment jumped to 10 percent. It’s unlikely that increasing interest rates to the extent discussed right now will have similar effects – Volcker increased interest rates to 20 percent, not from zero percent to one percent. But it would not be surprising to see some turn in the employment market thanks to Federal Reserve policy changes.
Mid-Term and Long-Term Problems: Debt And Stagnation
Inflation is a problem.
But the far more serious danger to the economy is stagnation.
In the 1980s, Japan was seen as a serious economic contender on the world stage. From “Die Hard” to Michael Crichton’s “Rising Sun,” the going theory was that Japan would soon compete for dominance with the United States. Then, the Japanese economy cratered – and it still hasn’t recovered. What happened? At the end of the 1980s, the Japanese real estate bubble burst, and the Japanese government immediately engaged in Biden-style economic “stimulus.” In 2001, the Bank of Japan attempted to spur the economy through inflationary monetary policy. According to the Heritage Foundation’s James Roberts and Danielle Lacalle, “[b]etween 1991 and late 2008, Japan spent $6.3 trillion on ‘construction-related public investment,’ which significantly contributed to the country’s stagnation, high debt, and weaker productivity growth.” Japan now holds an extraordinary level of public debt, which amounts to more than 250 percent of GDP. Fully one-quarter of the budget goes to interest payments on the debt. Japan also has large shortfalls in terms of pensions, despite the fact that Japan has cut its pensions multiple times. Since 1991, Japan’s GDP growth has exceeded 3 percent precisely twice, in 1996 and 2010.
If this sounds familiar, it should.
The United States’ debt-to-GDP ratio has exploded since the advent of the Obama presidency – and then it went exponential during COVID-19. According to the Federal Reserve Bank of St. Louis the U.S. debt-to-GDP ratio expanded from 64.1 percent in the first quarter of 2008 to 82 percent by the third quarter of 2009; it expanded again to 105 percent of GDP by the time Barack Obama left office; it was only 108 percent before COVID, but now has jumped to 122 percent of GDP. We already spend $300 billion per year on net interest payments. As we increase interest rates, we also increase our interest payments on the debt we take out. The Congressional Budget Office says that net interest costs are likely to amount to 8.6 percent of total GDP in 2051 – about $60 trillion in total interest payments over the next thirty years. The Committee for a Responsible Federal Budget suggests that should interest rates rise, we will be paying $948 billion per year in interest on the debt by 2031 – almost a quarter of our current budget amount.
It isn’t just a pure spending problem, of course. Biden is also pursuing economic policies that breed stagnation: redistribution of income away from investment and innovation and toward cronyistic labor unions; regulations via the Securities and Exchange Commission that crack down on how private equity and venture capital operate; crackdowns on particular businesses that tend to rub Biden the wrong way (see Musk, Elon) or that simply seem like fat targets (see Amazon and Facebook); useless, massive investments in fighting “climate change”; wasteful and ugly governmental discrimination via “diversity, equity, and inclusion” plans.
Stagnation isn’t merely predictable – Biden has already predicted it. In pushing the failed Build Back Better plan, the White House projected economic growth of 2 percent or less every year for “most of the next decade, after factoring in inflation,” according to Politico. That, too, is no surprise – it’s in line with CBO predictions, which suggest 1.6 percent growth after the COVID-19 recovery.
If our economy doesn’t increase dramatically, our burdensome debt is going to loom larger and larger faster and faster. After all, we need to suck money out of the private markets to pay for our extensive, burdensome, and counterproductive public sector. And that problem will be exacerbated by Biden’s love for taxation, which he adores on principle – if America had a quarter for every time Biden characterized higher taxes as “patriotic,” we could actually relieve the national debt. But such taxation reduces innovation and investment, precisely the vehicles Americans require for economic growth. That is particularly true of Biden’s desired increases in corporate and capital gains taxes. Even without active Democratic rollbacks of the Trump tax rates, Trump’s tax cuts expire for most individuals at the end of 2025.
Nothing grows the economy like actual economic growth. Yet for years, America’s economic policymakers have delegated more and more power to the Federal Reserve – and in doing so, have made economic policy dependent on fiscal policy. That’s been a large-scale mistake. It’s been a far larger mistake for the federal government to accelerate its suicidal economic plans during COVID-19 – at the beginning of the pandemic, perhaps such measures could have been justified. But by now, it’s clear that the federal government’s economic policy has done unparalleled damage to America’s mid-term and long-term economic health. And if Joe Biden succeeds in his plans, that damage will only grow worse.
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