President Biden has proposed a budget for fiscal 2024 that increases government spending by 10% while raising $5 trillion in new taxes over the next decade. He says he will not raise taxes on any household earning less than $400,000 per year. This budget will lead to stagflation, likely worse than the country has ever experienced.
At a time when record government budget deficits have pushed the total public debt to more than $31.5 trillion, a prudent spending proposal would attempt to hold the line on discretionary spending. That includes all spending except the entitlement programs (Social Security, Medicare etc.) and interest on the public debt.
Instead, Biden is proposing to spend more money that the government simply does not have. Instead, one alternative suggestion would be to keep discretionary spending constant at the level before the pandemic.
According to the IRS, only 1.8% of US households earn $400,000 or more in annual income. That means, according to Biden, these roughly 2.5 million capital creating households will pay an additional $5 trillion in taxes.
If Biden did pass this budget, the economy would experience extremely slow growth and very high inflation. It is really easy to see why.
The large increase in government spending will create more demand in an economy already experiencing inflation causing excess demand. Biden hopes the increased demand will be met with increased supply. If that happens there would be little inflation and lots of growth. The reality, however, is exactly the opposite will happen.
In order for business to increase output (supply) they need two basic inputs. The first is labor. With the labor force participation rate declining, fewer workers are entering the workforce. That has already created a labor shortage. That means finding new labor for future expansion will be nearly impossible.
Often, business can replace labor with the second input, Capital. This is done through automation, artificial intelligence and robotics. This requires large amounts of new capital.
Some of the new capital is created from business’ retained earnings, which is earned income after paying taxes and after paying their stockholders a dividend, which represents the return on the stockholders’ investment.
Biden wants to raise the corporate tax rate from 21% to 28% meaning corporations’ tax bill will increase by 33%. After paying their stockholders the necessary dividend, retained earnings would fall and there would be far less capital created.
Most of the new capital comes from households who earn more than $400,000. With Biden raising taxes by $5 trillion on those households, there will be nearly $5 trillion less capital created. That means $5 trillion less capital available to business and other capital requiring endeavors.
Without new capital and without more labor business can simply not expand. That means the economy can’t grow and thus stagnates.
Since business can’t increase output, the only way to respond when demand exceeds the current supply is to raise prices, leading to more inflation. The result of Biden’s proposed budget is a stagnant economy with more inflation which is stagflation.
The 2024 government budget comes at a very critical time and could set the path for much of the next decade. A responsible government that truly puts the needs of the majority of Americans as the top priority would confront the economic problems sensibly. That means holding real or perceived social injustice solutions and climate change issues as a secondary priority.
The public debt has reached its ceiling. This issue must be addressed immediately. Regardless of all of the blah blah that the Biden Administration puts forth, his budget will lead to trillion-dollar annual deficits for at least the next ten years.
At the same time, the entitlement issue must be addressed before both Social Security and Medicare are bankrupt. Since there are no good solutions to this problem, the least bad solution is to gradually raise the retirement age to at least 70 and probably 72.
It is also a good time to have the government stop giving away free money. Decades of data show these programs have little to no impact on the quality of life for the people they are intended to help.
The 2024 budget needs to put economic growth as the top priority. That simply means households have the opportunity to earn at least somewhat more than the inflation rate and that they are encouraged to do so because the free money is stopping. Business needs an adequate, well-trained, educated and motivated labor force.
And, most importantly, business needs as much new capital as possible. Biden’s proposed budget will make our economic problems worse.
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