Nearly the entirety of what is coming out of Washington lately are ideas and legislation to get our economy “back on track”. Now I could go into a loooonnnnngggg dissertation as to what we could have/should have done differently, but that is pointless. The fact of the matter is: Washington is committed to fixing the economy and it scares the hell out of me.
Washington’s latest effort is the $1.9 Trillion (that’s a lot of dollar bills) American Rescue Plan which includes up to $1,400 per citizen, extended unemployment benefits, additional funding for small businesses and a few other tidbits that I agree could help the economy. I don’t necessarily agree the entire country needs the same amounts of help, but I also don’t see an easy way to target this aid in a timely manner. Some of this may be economically sound – unfortunately, the bulk of this bills funding will go to problems that pre-date COVID-19 and have nothing to do with the nation’s economy.
Next on the agenda is slated to be a massive infrastructure bill to rebuild our crumbling roads, bridges, power grid, etc.. Note I said rebuild. While no one will dispute the need for infrastructure – I don’t believe trying to do it all at once is in the best interest of our country. Or economy.
Throughout all of this, there is talk of free college/tech school education, student loan debt forgiveness, expanded free health care and a host of other entitlements. And to add to the ‘fun’ – these entitlements are targeted at US Citizens and (I’ll be politically correct for once) undocumented immigrants. The word “free” is not used very often in economics.
The problem I have isn’t that some of these are necessary projects – many (but not all) are. The economy has been struggling for many years and is in need of strengthening. The problem I have is how we are going to pay for it.
Governments fund projects they don’t have the cash for by issuing debt. This debt – called bonds – is the same as if you were to go to a bank and borrow money; instead of paying back the bank, the government pays back the person or country that purchase the bonds (called bond holders). The current interest payment on the United State’s debt is about $345 Billion dollars per year. This equates to 1.6% of our Gross Domestic Product (GDP) – in other words 1.6% of every dollar for each item produced in the United States in a year goes to pay the interest on our national debt. The interest. Not Principal and Interest – just the interest. Once the bond matures, the government re-issues a bond in the same amount (smart economics – right?!?).
On the surface, this may not look bad, but what must be considered is that interest rate environment we are currently in is extremely low – near zero. And while interest rates have been low for quite some time, the sudden wash of money that Washington wants to unleash is going to result in massive spending. And massive spending generally leads to inflation, a rise in prices of goods as there is more demand than supply (Economics 101).
By now (if I haven’t lost you already), you are probably wondering why any of this matters. It matters for a lot of reasons. First, inflation means that a dollar in your pocket will purchase less tomorrow than in will today. So even if you have more money, you can do or get less with it. Second, governments try to control inflation primarily by raising interest rates so now not only is that car that you want more expensive, it will also cost more to finance.
What does this all have to do with government spending and the national debt? A lot!
Not only is all this government spending going to increase the national debt, it is also likely to bring on inflation resulting in interest rates. Interest payments as a percentage of GDP will increase as we will now have to deal with both a larger debt (loan balance) and a higher interest rate.
And how are we going to make this larger interest payment? Higher taxes.
Most may say this doesn’t apply to me – the current administration has stated they will raise taxes on corporations and high-income citizens – I won’t be affected. I disagree. Higher tax rates on corporations will lead to higher prices and/or manufactures moving offshore. Both are bad due to lower tax collections, lower direct employment as well as the negative spiderwebbing impact on the economy. If high income taxpayers don’t also take their investments offshore (a loss in tax revenue), they will also have less money to invest because of higher tax rates. Less investment equals less innovation, less jobs and less growth in the economy. And if corporations and high income taxpayers are no longer paying their fair share of taxes – guess who the burden falls on: you and me.
As you can see, I fear our government is setting us up for economic failure.
What can we do? First – contact your Congressmen. Let them know your concerns. Demand they examine every spending bill for its benefit to our country. Discourage entitlements like free college, free health insurance, etc.. Remind them that the United States was founded on Capitalism and we wish to remain a capitalistic society. Second – purchase American Made as much as possible – dollars that stay in the United States benefit the United States. Third – resist the temptation of “free” because nothing is free. Fourth – take stock in a quote from the 40th President of the United States “The most terrifying words in the English language are: “I’m from the government and I’m hear to help.” Fifth – prepare. A wise man is prepared for any contingency and begins preparations long in advance of a perceived threat. And throughout it all – pray. Pray for the leaders of our nation – those currently in office and those that will rise to lead us in the future. Pray that God continues to bless this great nation which we love.