by Michael Busler
If his proposal is implemented, it may take years to fix.
Aside from the blunders President Biden has made concerning the border crisis, energy policy, and foreign policy, his biggest blunders are on economic policy. Based on his latest budget proposal, he is trying to commit his biggest blunder.
Biden’s proposed budget vastly increases government spending and government taxation, while creating trillion-dollar annual budget deficits well into the future.
Let’s factually take a look at the current situation. The economy right now is growing at the fastest pace in nearly four decades. It is likely that growth this year will hit 8%. Last quarter we grew at 6.4%, up from 4.2% the prior quarter. The economy is growing very well, and we are near the level that we were prior to the virus. There is no problem with growth.
But inflation is a problem. Despite the administration’s position, inflation is right now a serious problem that will get worse the longer we wait to react to it. Biden’s budget proposal will make the inflation problem much worse.
The inflation data is presented in a number of ways to consumers. Sometimes a monthly price index is given, which compares consumer prices to the prior month. Sometimes the index is compared to the same month last year.
The critical and most valuable information tells us what is happening now. From January to April of this year, the monthly Consumer Price Index went from .3% to .4% to .6% to .8%. That means since January inflation is running at about a 6% annual rate and it is increasing.
To stop this from getting worse, the federal government must change both Monetary and Fiscal Policy, immediately.
With Monetary Policy, the Federal Reserve must quickly and gradually, reverse its policy of buying $120 billion of government debt monthly. This reversal will slow the growth of the already oversized money supply. The Fed must also begin to immediately and gradually raise interest rates. These actions will take some excess demand out of the economy.
After having run up $6.5 trillion in deficits in 2020 and 2021, the government needs to reduce its spending and reduce the deficit. The reduced spending will similarly take excess demand out of the economy, which puts downward pressure on price. The reduced deficits will take pressure off capital markets.
Considering where we are and where the trends are leading, President Biden’s budget proposal is the exact opposite of the proper Fiscal Policy. His proposed massive increase in government spending will flood the market with excess demand. Biden says that will lead to growth. But really it will lead to more inflation in the short term and possibly stagflation in the longer term.
This Biden Blunder may be the worst of all. It could have long term, very negative effects on price stability, growth, and employment. If his proposal is implemented, it may take years to fix.
To be fair, his economic advisors would disagree. They would say that this view is based on an inflation fear. They would argue that the current inflation is primarily a result of supply chain disruptions brought about by COVID, bad weather, and suppliers’ failure to anticipate the high growth the economy has seen since last May.
They note that the economy is now almost fully re-opened. In the next few months supply will catch up to demand and inflation will subside. Once that happens there will be no need for the Federal Reserve to immediately change its policy. It also means that the President can put forth a bold plan for government spending without any inflation fear.
Unfortunately, the current and future inflation problem is not mostly caused by supply chain disruptions. This inflation is caused by rapidly rising energy prices which will continue as the Biden Administration restricts supply while worldwide demand increases.
Also, the Money Supply has grown more than 25% in the last two years. Once our economy reaches full capacity, which will be in the next month or so, this money supply growth is highly inflationary, especially in an economy that is growing at an 8% rate.
Those huge budget deficits are also highly inflationary. A total of $6.5 trillion of excess demand from the federal government deficits in the last two years is inflationary to an economy that generates about $21 trillion annually in GDP.
Inflation will continue to be a problem after the economy fully re-opens. Consumers are flush with cash mostly from the free money the federal government gave out. That too will add to inflation.
President Biden’s budget proposal is his biggest Biden blunder yet.
To comment, you can find the MeWe post for this article here.
Michael Busler, Ph.D.
is a public policy analyst and a Professor of Finance
at Stockton University where he teaches undergraduate and graduate
courses in Finance and Economics.
Source: https://www.americanthinker.com/articles/2021/05/bidens_budget_is_one_more_biden_blunder.html
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