Where Will the Money Come From?

The editors of the Wall Street Journal analyze the American Families Plan:

Our analysis shows that the American Families Plan would add 21 million Americans to the list of federal entitlement beneficiaries. With these additional recipients, 57% of all married-couple children would receive federal entitlement benefits, and more than 80% of single-parent households would be on the entitlement rolls.

The share of households receiving assistance would be higher in some areas of the U.S. than in others. This is primarily because federal eligibility for many of the American Families Plan’s programs, particularly its refundable tax credits, don’t account for geographical differences in incomes and living costs.

We estimate that most of the Biden plan’s entitlement benefits would go to middle- and upper-income households. Households in the upper half of the nonelderly income distribution would receive 40% of the new entitlement benefits.

Our estimates are for a full-employment economy, not one in recession. So the percentage of U.S. households receiving benefits from at least one federal entitlement program would only increase if the U.S. economy were to falter.

Where will the money come from to finance this largess? Mr. Biden claims that taxes on the rich will entirely finance his American Families Plan. But his proposed revenue heist falls woefully short of the plan’s true cost. Presidential budgets for years have been littered with gimmicks to hide their true expense. The American Families Plan is no exception.

I think I can answer that question. The money will be obtained by issuing ourselves credit, i.e. by expanding the Federal Reserve’s balance sheet. However, as the graph I published the other day suggested, we are at an inflection point in that process. What happens next is anybody’s guess. I think the editors closing assessment is about right:

Improving the safety net is one thing, but spending more than $1 trillion on mainly middle-class entitlements and financing this expenditure with debt robs future generations while enriching today’s.

There is an argument to be made for borrowing to finance improving infrastructure defined as roads, bridges, sewer systems, network connectivity, and so on. The argument is particularly strong when what’s being financed are public goods, defined as goods that are non-rivalrous and non-excludable. That argument doesn’t apply to personal consumption expenditures. Why create middle class entitlements? As George Bernard Shaw put it a government that robs Peter to pay Paul can always depend on the support of Paul.