Biden Is All Wrong On Government Spending
/My previous posts on the subject of Biden have mostly dealt with issues of corruption, energy and ”climate,” and to some degree foreign policy. But let’s get to the biggest of all domestic policy issues, which is the overall level of spending and taxation.
As with essentially every issue of public policy, when it comes to overall spending and taxes Biden is just all wrong. There is no nicer way to put it. Biden has called for massive increases in domestic spending, and also massive increases in taxes. The tax increases he seeks are not remotely sufficient to pay for the increased spending, but would be more than enough to crush the hopes of millions of Americans ever to get a little ahead in life.
Biden emerged briefly from his usual hiding in Wilmington yesterday to announce his new economic team, and in his short remarks, said this (from the Wall Street Journal report on the event):
The president-elect called on Congress to pass a robust coronavirus relief bill but said a larger stimulus effort would be necessary during his administration to address the long-term impact of the pandemic. “Any package passed in lame-duck session is, at best, just a start,” he said.
So is it “relief” or “stimulus”? Is there a difference? Does it even matter? The underlying idea is that government spending is the source of all well-being, and therefore more spending is always needed and always better. The gigantic relief/”stimulus” passed by the House back in May never went through, and nevertheless the economy grew at an annual rate of 33% in the third quarter, and is on track to grow at a further 11% rate in the fourth quarter according to the GDPNow site of the Federal Reserve Bank of Atlanta. Is there even any slack left in the economy, other than the intentionally-imposed idleness of various “lockdowns” ordered by some governors, mostly in blue states? You would think that that would be a relevant question to answer before just taking on another $3 trillion of debt and passing out the money to anyone with their hand out. Instead, our presumptive new President hungers to get his hands on absolutely as much borrowed money as he can to waste as fast as possible.
To me, the most important lesson in American history as to the value of government spending for relief/stimulus occurred in the period of 1945-48. Harry Truman was the President. The Keynesian economists, led by Paul Samuelson, had predicted dire consequences for the economy if the government failed to promptly engage in massive “stimulus” to assure continued employment for the millions of workers and troops (close to 20 million in total) being demobilized from the war effort. But instead, the opposite occurred. Over the period 1945-48, federal government spending dropped some 61%; and as a percent of GDP, federal spending dropped from 44% to 9%. As I wrote in a post just last week:
[T]he government went ahead and de-mobilized the troops, cut the spending, never engaged in the “stimulus” that Keynesian economists were demanding — and the economy promptly boomed like it had never boomed before.
So how do historians deal with the unavoidable fact that the greatest boom we have ever known followed this dramatic reduction in government spending? The answer is, by confining the whole thing to the memory hole.
A friend recently gave me a copy of David McCollough’s 1992 biography of President Harry Truman. McCollough is a thorough and diligent researcher. Although he has taught for short terms at several universities, he has never been a permanent professor at any of them. He also claims to be independent politically, although he has publicly criticized President Trump.
McCollough’s Truman biography is very comprehensive, almost 1000 pages long (996 to be exact, not counting the footnotes); and the years 1945-48 cover over 150 pages in the heart of the book. Granted, a lot of important stuff was going on at the time — the Potsdam conference; the decision to drop the atomic bomb; the formation of the UN; the election of Republican majorities in both houses of Congress in the 1946 election; the creation of Israel and the decision of the U.S. to recognize it; the emergence of the Cold War with the Soviet Union; and plenty more. But the astounding fact is that McCollough somehow never finds space to make even a single mention of the huge drop in government spending that launched the ensuing economic boom.
Even the status of the economy is relegated to a handful of almost off-hand and brief descriptions. Here are the key ones:
In September 1945, the War having just ended, predictions of economic doom and gloom were everywhere. Truman sent a lengthy (16,000 word) written message to Congress presenting “a 21-point domestic program” that would essentially be a renewal of the New Deal, with vast new government programs to take up the economic slack, including “increased unemployment compensation, an immediate increase in the minimum wage, a permanent Fair Employment Practices Committee, tax reform, crop insurance for farmers” and more. “It was an all-out, comprehensive statement of progressive philosophy and a sweeping liberal program of action . . . .” (Page 468). However, in Congress, a coalition of Republicans with conservative Southern Democrats (they still had those then) combined to block almost all of it.
Several months later, Congress having “balked at his requests,” Truman “just asked for more. . . . He asked for national compulsory health insurance to be funded by payroll deductions.” (Page 473). Again, the proposal went nowhere.
From page 520, relating to October 1946 (just before the mid-term elections): “The depression that everyone had so feared had not come. Employment, even with all the strikes, was high. Money was plentiful. Business was booming.”
In the 1946 elections, the Republican swept both houses of Congress. From page 548, relating to March 1947: “The United States was the richest, strongest country in the world and prospering as few could have ever imagined. Production was up. Incomes were up.”
From page 564, relating to the summer of 1947: “The Republicans were determined to cut taxes and expenditures. . . .” Well, did they or didn’t they? McCollough never says!
Truman did not give up on demanding new programs and spending. In January 1948 he made an address of about an hour in length to Congress. From page 586: “Truman called again for a national health insurance program, a massive housing program, increased support for education, increased support for farmers, the conservation of natural resources, and a raise in the minimum wage. . . .” Although McCollough never explicitly says so, essentially none of this went anywhere.
In the summer of 1948, now in the run-up to the next presidential election, McCollough describes the state of the economy as follows (page 621): “Unemployment was below 4 percent. Nearly everyone who wanted a job had one, and though inflation continued, people were earning more actual buying power than ever before, and all this following the record year past, 1947, which, reported Fortune magazine, had been ‘the greatest productive record in the peacetime history of this or any other nation.’”
How is it even possible to write a history of this period without mentioning even once the dramatic drop in government spending and the clear refutation of the Keynesian hypothesis that massive government spending is the key to full employment and wealth creation? I can’t answer that question.
Anyway, Biden is proposing the exact opposite of the economic program that brought on the great post-World War II economic boom. Instead of our own prior successful economic model, he proposes a model more akin to that of a Greece or an Italy. Once again, we will be relying on Congress to balk at the program of vast government expansion put forward by an economically illiterate President.