The Commerce Department just released their estimate for economic growth in the first quarter of this year. GDP increased by an annual rate of 6.4%. That means since May 1, 2020, the economy has rapidly recovered from the deep, but short-lived recession. With even higher growth numbers in the coming months and with inflation increasing, it is evident that no more stimulus is needed and may indeed be counterproductive.
The overstimulation has already caused an increase in inflation. The Federal Reserve (Fed) target for inflation is 2% or less. In the first quarter, inflation reached almost 4%. The Fed says this increase in the inflation rate is temporary and will fall once the economy fully reopens. An objective look at the data indicates that is probably an inaccurate conclusion.
The Fed says the inflation is caused by disruptions in the supply chain due to Covid related closures. That may be partially true, but there are other reasons for the spike in inflation that will still be with us, even as the economy re-opens.
The current inflation is really caused by 1) rising energy prices 2) a too-rapid increase in the money supply 3) huge government budget deficits and 4) a potential capital shortage.
Energy prices will continue to rise as worldwide demand increases and the Biden administration moves to reduce the supply of fossil fuels.
The Fed is continuing to purchase between $80 billion and $120 billion worth of government bonds monthly. They do that by just printing more money which rapidly increases the money supply. The Fed has said that will continue.
The federal government budget deficit was $3 trillion last year and will be about $3.5 trillion this year, assuming no further increases in government spending. President Biden recently said he wants to spend at least $4 trillion more. Deficit spending will continue.
Biden’s deficit spending will be mostly financed by selling bonds to the public which reduces capital available to business. Biden also wants to raise the capital gains tax, raise the corporate tax rate, and raise the highest personal income tax rate. Those three actions will dramatically reduce capital formation and contribute to a capital shortage.
With the rising energy prices, too rapid growth in the money supply, huge government budget deficits and a potential capital shortage, the Fed’s conclusion that increases in the supply chain will reduce inflationary pressure looks to be inaccurate.
Shortly, the Fed will increase their estimate of GDP growth for 2021 from their current estimate of 6.4% up to at least 8% and perhaps as high as 10%. That’s because growth in the second, third, and fourth quarters will be a least 10%.
While Biden’s economists and the Fed itself will disagree with that assessment, the one point where we all should agree, is the notion that any more stimulus will overheat the economy and cause a severe inflation problem.
In his first speech to a joint session of Congress, Biden laid out an aggressive government spending package that totals another $4 trillion. Increasing government spending which dramatically increases the deficit will be purely inflationary. Those programs do not represent an investment that will lead to more jobs, but rather excess spending that will raise prices. And the selling of bonds will tend to stagnate growth.
The other problem with Biden’s spending is that it reduces individual freedom and individual responsibility. Instead, it promotes social responsibility where the government will take care of Americans from early childhood all the way well into adulthood. This is simply not the American way and will reduce American exceptionalism.
For instance, Biden wants to make college tuition-free. That means a student will not pay the college. Rather taxpayers will pay the tuition for each student. While young people think this is a great idea, they don’t realize that they are trading four years of college for 50 years of higher taxes from the income they earn during their working years.
While 12 years of education is freely provided to children under 18 years old, once a person becomes an adult, at 18, they must learn individual responsibility, so they have to be responsible for their own college education.,
History indicates that the U.S. went from the birth of a nation, to the number one, largest and most prosperous economy in the world in about 150 years. Other countries were hundred or even thousands of years older. I believe this was because our economy encouraged individual freedom and individual responsibility, with low rates of taxation and a minimum role for government.
Biden’s current and proposed policies are counter to each of those principles. Instead, his plans will lead to less individual freedom, less individual responsibility, higher rates of taxation and a large role for government. That leads to inflation and eventually stagnation.
Please President Biden, follow the principles that made America great.