Joe Biden released his budget. You assume that there is a lot of negotiation and wiggle room on federal budgets, but there is not. Before a Congressperson gets inaugurated, roughly 70% of the federal budget is mandated spending on all kinds of things they have oversight over, but not a say in the amount or how it is spent.
For example, my friend Jeff Minch wrote about the International Monetary Fund (IMF). The US money that goes to that fund is automatic. There is almost an infinite list of things where the money is automatic.
Entitlement spending makes up the largest percentage of the federal budget. That’s why things like Illegal Immigration are important because those people use up resources meant for citizens. Not only that, in the Trump administration we spent a lot of resources to try and keep them out. Think of it this way, every illegal that crosses the border causes your taxes to go up.
If you are for open immigration, you ought to also be for cancelling the entire social safety net.
Defense spending makes up about 16% of the budget. Most people think it makes up a gigantic portion because cutting-edge equipment headline numbers cost so much. If you want to cut the defense budget, maybe check out Ukraine. You can’t have a free society without a strong army. The initial Congress realized that and made it a priority early in the life of our country.
During Covid, our governments all over the country spent like drunken sailors on a three-day bender. There was no discipline. Today, we are seeing a lot of evidence of fraud when it comes to things like PPP loans. Turns out, when the government decides to pass out a bunch of free money, bad things happen.
It’s worth remembering what Milton Friedman said. I realize Joe Biden doesn’t think much of Friedman, but the scoreboard on inflation is showing how stupid Biden is.
There is only one place where inflation is made: that's in Washington...in response to pressures from the people at large...The voting public...ask their congressmen to enact goodies in the form of spending, but they are unhappy about having taxes raised to pay for those goodies.
That brings me to my headline point. Governments can’t ever “invest”. The government doesn’t create jobs. Government can only spend taxpayer dollars. When a politician touts how many jobs they created, they are automatically lying. Businesses create jobs. Innovation creates jobs.
Remember, we made a huge mistake and shut down our entire economy for Covid. When you compare 2020 and 2021 numbers to 2022 numbers, it’s a false comparison because the underlying conditions are not close to similar.
Where does the government get its money? Taxes. How do the US Treasury and Federal Reserve create dollars? It prints and borrows. That borrowing is purely a pledge on the future tax revenues of US citizens.
The multiplier effect of government spending on the GDP of the American economy is close to 0.
Joe Biden’s recent budget proposes an extra $2.5 trillion in new taxes. These huge tax increases fly in the face of reality when inflation caused by the government is draining the American pocketbook.
You might think it’s okay to tax billionaires and corporations because it doesn’t affect you. But, it does.
Corporations don’t really pay taxes, they aggregate them. They raise prices to pay them. When governments force minimum wages higher, corporations just raise them, hire less, and then charge you more. Interestingly, Milton Friedman said that because the “government take” of taxes is so small relative to the total amount of American tax revenue, the most efficient tax rate for corporations would be 0%.
A 0% tax rate would increase competition, decrease prices, increase the wages paid to workers, and increase employment. Notice, when a large corporate finally climbs the mountain and dominates its industry, it’s all for regulations and higher taxes. That’s because the government will help them eliminate competitors.
Capital gains taxes going up are really a tax on investment by the private sector. They increase the amount of risk one has to take to get a return. Besides, capital gains also don’t bring that amount to the table when it comes to the total tax revenue of the United States. Again, Friedman said that the most efficient capital gains tax rate would be 0%.
Why? Because more investment in innovation and into growing a company would happen. Additionally, you see people rail against corporations buying back their stock all the time. With a 0% cap gains rate, the trade-off between a buyback and a dividend would be equivalent. Hence, you might see more dividends falling into the pockets of investors who would redeploy that money into other things. That can also happen with buybacks by the way.
Taxes on billionaires are very popular. Tax thee but not me. I remember when they instituted the alternative minimum tax in the 1970s. AMT was supposed to get rich people to pay more. Guess who gets snared by it? The upper-middle-class and middle class. What’s worse, they can’t afford the expensive accountants and attorneys to set up structures to avoid it. The governor of Illinois can. Most of his money is in Bermuda.
Inflation is a very messy thing to analyze. But, the root cause is government spending. If you want to see inflation end, radically cut government spending.
But be prepared for the wails and tears of the chattering class.
Last time I checked, government spending, especially when financed by deficits, had a negative multiplier.