economics
Bidenomics: the most irresponsible economy policy in 40 years?
University of Chicago
City University of New York
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Genesis
Response
Penultimate
Finale
June 12th, 2021
I am glad to see that there is common ground: the debate on these various spending plans should focus on whether the benefits outweigh the costs.
There is perhaps an even more important principle. The resources which the government spends are not created by the government: they are ultimately obtained by taking them away from citizens who produce them. The many layers of borrowing and central banking may obscure but do not invalidate this simple truth. A government, therefore, needs to be a responsible and frugal custodian of the resources it appropriates. Since I wrote my last piece, the Biden administration has proposed additional spending plans of unprecedented size, reaching a total of 6 trillion dollars. That does not strike me as the frugal custodianship we need: it strikes me as excessive.
Some items are appealing. There are bridges that need fixing. I like the idea of funding preschool in the interest of advancing education early for all, particularly for the least privileged families. As my colleague Jim Heckman has shown in a long line of research, investment in education is particularly valuable during the early childhood years; see Invest in Early Childhood Development: Reduce Deficits, Strengthen the Economy - The Heckman Equation. But what is needed is a careful debate, item by item.
Moreover, market solutions are side-stepped to the detriment of achieving the proposed aim. Take the aim of reducing CO-2 emissions to address climate change. Economists have long argued to create and trade CO-2 emission permits to allow the market to solve that problem. One does not need to pursue expensive government spending plans and detailed interference with private choices instead.
There are some outright dangerous ideas floating about. No, the central bank cannot magically conjure up resources by setting the interest rate at a level desirable for the government: it sets that interest rate to keep inflation low and stable and the output gap near zero, respecting forces of supply and demand. Inflationary pressures are rising already, and it is only a matter of time until the Fed will have to raise rates. In countries where central banks have financed government largesse through the money printing press or where excessive debt burdens have resulted in sovereign default fears, it has not ended well. It is dangerous for the United States even to entertain the thought of walking down this path. And, no: taxing the rich won’t be nearly enough to finance these massive plans either.
Excessive labor market regulation in Germany a few decades ago resulted in high unemployment and futile attempts to address the slack with government spending. The necessary but painful labor market reforms should be a warning sign to anyone advocating going down that path. Most people want to earn their income and respect in the community not by having the government tell companies who they should hire and at what wage, but rather by what they bring to the table. We should give them that chance and let markets work.
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