Dan O’Donnell on why President Biden’s budget proposal would exacerbate the inflation crisis.
Mar. 30, 2022
Perspective by Dan O’Donnell
If the well-established definition of insanity is doing the same thing but expecting different results, then President Biden is insane as well as fiscally illiterate. A little more than a year after sparking record-high inflation with unprecedented government spending, he is poised to do it again.
The President on Monday unveiled his 2023 budget proposal, a $5.8 trillion behemoth that would instantly produce a $1.3 trillion deficit and add an estimated $14 trillion to the national debt over the next decade. In the short term, it would also exacerbate the inflation crisis by dumping trillions more dollars into an already overheated economy.
If the well-established definition of inflation is too many dollars chasing too few goods, then dumping trillions of new dollars in government spending while raising corporate tax rates to 28%—thereby making it far more costly to produce things—is a singularly bad idea.
Making matters worse, the proposal has such unrealistic expectations for short-term inflation that it borders on useless. The economic forecasts built into the budget rely on the expectation that inflation would drop all the way to 4.7% this year. It has instead hit a 40-year-high of 7.9% and will likely push even higher. If all of the Biden budget’s assumptions about inflation are off so dramatically, then how can it possibly provide safeguards against it?
It’s not just that government spending in this budget would be up 30% from just four years ago, it’s that it comes hot on the heels of the $1.9 trillion American Rescue Plan. Passed in early 2021 as the economy was starting to recover from the COVID-19 recession, it was the primary catalyst for the dramatic spike in inflation over the past year.
Economist Milton Friedman famously likened this sort of stimulus to a helicopter dropping money from the sky. If people collect the cash on the ground and then spend it, prices will go up. Almost immediately after stimulus checks went out in the mail last April, inflation increased to 4.2%—the largest year-over-year increase since the Great Recession—and then promptly rose to 5.0% in May. It hasn’t been below 6% in six months.
The sudden cash drop didn’t just flood the economy with unnecessary capital, it also hampered production by keeping people from returning to the workforce as quickly as they otherwise would have. With stimulus checks and expanded unemployment, a labor shortage exacerbated an already worsening supply chain crunch. Supply fell drastically short of demand for pretty much everything.
For the past year, companies both large and small have been forced to pay much higher salaries than were in many instances economically feasible, and because they too have been paying higher prices for the materials needed to produce the goods and services they provided customers, they have been forced to increase the cost of said goods and services just to stay afloat.
The rotors of Biden’s cash helicopter have spun a vicious cycle of high costs that long ago swirled out of control, and now he is proposing another devastating drop. His budget’s massive government spending combined with the largest tax hike in history would raise the cost of doing business even further, flying the US into an even darker inflationary storm.