The editors of the Wall Street Journal see President Biden’s budget proposal, released yesterday, as a flight from reality:
Most U.S. presidential budgets are exercises in fiscal deception, but even by that standard President Biden’s Monday proposal for fiscal year 2025 sets a record for unreality. It proposes defense spending as if the world is at peace, entitlement spending that isn’t sustainable, and tax increases that would hurt the economy if they passed, which they won’t. Congratulations, Team White House.
For me the most telling passage of their editorial is:
As a share of the economy, Mr. Biden wants spending to reach 24.8%, or a quarter of national wealth. The 1974-2023 average was only 21% and, as Mr. Biden told the country last week, the Covid crisis is over. But instead of letting outlays fall as a share of GDP, as they always have after a recession or crisis, the President wants the government to stay at a new and higher spending plateau.
I’ll return to that later.
Meanwhile, the editors of the Washington Post express a somewhat more charitable view of the budget proposal:
Like most presidential budgets before it, President Biden’s fiscal 2025 tax and spending blueprint is more of a political statement than an actual legislative proposal. Basically, it’s a reelection pitch straight from the “Middle Class Joe” playbook he ran on in 2020: raise taxes on the rich and businesses and spend much of the proceeds on federal support for child care, health care and housing. These traditional Democratic priorities failed to become law even when Mr. Biden’s party narrowly controlled Congress, so there is zero chance of enactment now.
with this as what I would assess is the most significant passage:
The short version is that Mr. Biden’s tax plan would be fairer and more fiscally responsible than Mr. Trump’s. The longer version is: Despite this reality, the country needs a reckoning on its unsustainable budgetary path, and Mr. Biden’s proposals, though better than the alternative, do not envisage one.
I have two questions for the White House and, I guess, the editors. First, federal revenues as a percent of GDP remaining fairly constant goes back a lot farther than 1973 as this graph from the St. Louis Federal Reserve illustrates:
Even at the height of World War II it was only 19%. Since World War II local and state government revenues as a percentage of GDP have ballooned from 7% of GDP in 1930 to nearly 10% now:
Here’s my question. How will the federal government increase its revenues as being proposed by the White House? Increasing marginal tax rates on individuals and corporations does not answer the question. Over the last 90 years marginal tax rates have varied enormously but the revenues as a percentage of GDP has hardly budged. More explanation is needed.
And then there’s the follow-up question. In January 2018 the prime rate was around 4.5%. Now it’s 8.5%. Here’s the market yield on Treasury securities:
As you can the rate is presently higher than it has been since the Bush II Administration. Interest on the debt is increasing faster than revenues by a considerable amount and the White House’s budget does nothing to address that. What is their plan for dealing with a budget that will grow fast regardless of whether federal spending on budget items other than interest increases or decreases?
C’mon, Dave. You know the answer. They have no plan other than to print money. Given that the propaganda about inflation is starting to crumble: energy and food costs are increasing far more than 3-4%, inflation is the biggest economic issue facing us. Or said another way, they intend to pay for it through the hidden tax.
Same as it’s been my entire life.
Biden’s proposed budget has $7.3 T for spending, and $5.5 T for revenues, yielding a deficit of $1.8 T. That might be optimistic. The current deficit is running at about $3.6 T per year. The possibility of a major war in Europe, or the Middle East, or East Asia, or any two, or all three is significant, and any such event would wreck the budget.
I have been following interviews of Gary Stevenson, a stock trader, on British blogs. He notes that households and governments in the UK are getting progressively deeper in debt. One man’s debt is another’s asset, and the British One Percent is, like ours, gradually attaining ownership of the whole country, while more and more people fall into immiseration.
These are always political documents that are as much aspiration and signaling as anything else. Everyone understands that Congress ignores them and does what it wants.
That’s even more true because it’s an election year. The purpose is even more political – to provide campaign fodder to buttress claims about what the administration would like to do if reelected and contrast that with a Trump administration.
This is nothing new, it happens with every election year budget submission. There is no point in submitting something serious or with actual tradeoffs that can be politically criticized because the House is controlled by the GoP and no budget proposal submitted by the opposite party ever goes anywhere.
It is, however, useful in gauging what Biden thinks will be important in the election. And he’s once again making a move to shore up the left of the party. If he wants to have any chance at winning he will have to – IMO – start moving strongly toward marginal and swing voters in swing states.
I think he’s doing what I predicted four years ago: he’s trying to position himself in the middle of the Democratic Party while the Democratic Party leadership dashes to the left as fast as they can. They’re abandoning working class voters of all races in pursuit of the Brahmin class. Ruy Teixeira thinks that’s mathematically possible to achieve but practically quite difficult. I think it’s practically impossible.
“ Interest on the debt is increasing faster than revenues by a considerable amount and the White House’s budget does nothing to address that.”
That’s because the problem of interest won’t be solved via the budget.
Not to sound conspiracy minded; but why is Jerome Powell and the Federal Reserve seemingly laser focused on lowering interest rates when by any measure inflation is well above their current target or their historic target. Maybe they were read the “zeroth” mandate from Treasury, that goes before the dual mandates — to ensure funding for the Federal Government.
There are only a handful of alternatives. For the last 80 years we’ve been depending on growth but that was when debt was a small fraction of GDP. We’ve learned that debt overhang actually impedes growth. So we’re unlikely to outgrow the debt. However, I think we should be mining more, lumbering more, and making more stuff, etc. than we are at present.
We could abrogate it. Besides being unconstitutional that would create international chaos from which the dollar might never recover.
That leaves the budget. We will need to resolve it through a combination of slow growth and budgetary prudence.
Just as a reminder I opposed both the Bush II era and Trump era cuts in the personal income tax rates. I thought they were both fiscally irresponsible. I supported the reduction in the corporate tax rate because corporate taxes are different from personal taxes. We HAD to cut the corporate tax to remain competitive. President Biden’s “companies have to pay their fair share” is bushwah. Their fair share is zero. The CEO’s fair share is something else again.
“We could abrogate it. Besides being unconstitutional that would create international chaos from which the dollar might never recover.”
I know that you know that abrogation can be de jure, or de facto via monetary policy. A small example would be the Federal Reserve buying treasures to ensure the interest on treasuries was below the rate of inflation — eroding their value over time.
That is constitutional, legal and was done in WW2. It carries tradeoffs — like higher inflation; its probably the easiest solution possible at this point so I resign that it’s probably going to happen.
On the dollars future reputation; look at the German mark. It suffered hyperinflation yet it eventually become the core of the Euro.
Arent you over the age of 30? You know that the budget, as Andy noted, is a political document. The GOP House will do what it wants so Biden has already set this for contrast. On the larger issue, yes our debt is an issue but it’s only an issue when a Dem is in office. The GOP expects Trump to win, which is pretty likely, so they will just posture and when Trump is back in office cut taxes again while telling us it will increase revenue.
BTW, using your own chart revenues have varied between 15%-20% and there is a lot of difference between those 2 numbers. Note that the decrease from the 2000 peak was not due to anything going on in the economy but a Bush tax cut. Yet another one that was supposed to increase revenue and cut the debt.
Steve
You’re missing the point. Revenues have NOT gone OVER that over a period of nearly a century. They’ve gone under but not over.
CuriousOnlooker is right. They could monetize the debt but today is much, much different than WWII. They can monetize the debt but what they can’t do is monetize the debt without repercussions. I don’t think they let alone we can bear the repercussions.
Dave Schuler: Revenues have NOT gone OVER that over a period of nearly a century.
Revenues reached nearly 20% under Clinton, then they plummeted to almost 14% under Bush. That’s a huge difference. Now, consider that if the United States wasn’t beset with political dysfunction, and the American people thought it best to pay for the programs they wanted.
Amazing, isn’t it, how a boom can boost revenues? Producing another boom similar to the .com boom will be difficult for reasons I have already discussed. Keeping it going permanently is impossible.
So, how do we push federal revenues to 25% of GDP? What’s your plan? You’re smart enough to recognize that marginal tax rates and federal revenues are two different things.
Political dysfunction takes many forms. IMO both Democrats who assume that any level of spending can be accommodated and Republicans who think that cutting taxes always pays for itself are making bad, dysfunctional assumptions. Furthermore, the mutual hatred presently apparent in which ensuring that the other party loses assumes as much if not more importance than ensuring your party wins is a form of dysfunction.
As a reminder: I opposed the Bush tax cuts and the Trump tax cuts. But we don’t just have a problem of insufficient revenue; we have a problem of too much spending, too.
CuriousOnlooker is right: we will end up monetizing the debt and that will produce inflation. There is a word for ongoing, repeated, continuous monetization of debt.
Dave Schuler: So, how do we push federal revenues to 25% of GDP?
Country, revenue
Germany, 37.5%
Japan, 30.6%
Norway, 38.2%
United States, 27.1%
It’s obviously not an unsolvable problem.
Dave Schuler: What’s your plan?
Americans have to be willing to pay for what they want. It can make sense to borrow for infrastructure, but not for ongoing consumption, such as social programs. If they want to keep their current level of services, it will require more taxes. While taxing the rich will be insufficient, allowing the rich to skate on paying makes taxing the middle class politically untenable.
That’s not an answer. That’s a claim that there must be an answer. So, what’s your plan?
Our problem is a lack of social cohesion. Comparing us with Japan and Norway is fatuous.
Dave Schuler: That’s not an answer.
Of course it’s an answer. Just not one Americans are ready to acknowledge.
Dave Schuler: Our problem is a lack of social cohesion.
The U.S. has the lowest government revenues of any G7 country. If by lack of cohesion, you mean the rich having inordinate power, then sure. For more than a generation, the rich have convinced Americans that they can have tax cuts AND social services. Americans can either address their fiscal problem today, or future events will address it for them. But it is well within the power of the American people to address their fiscal problems.