Part 2 of 2
Given the Biden victory in the 2020 Presidential election Mark Zandy’s (of Moody’s Analytics) prognostications are going to face a difficult reality check over a four year horizon that is likely to require some major “spin” with the usual media support as damage control. These projections which effectively envision greater economic growth and well being under a Keynesian style government sponsored (underwritten) spending spree than under a low tax, less regulatory environment are discussed, in greater detail, in the paper, “A Keynesian Thumb on the Scale – Written Pre 2020 Presidential Election” published (viewable) in Georgeeconomics.com. Prior to a discussion relating to the prospects of Mark Zandy’s future economic growth projections (post 2020 presidential election) the following bullet points are presented, which summarize the economic tailwinds and headwinds that will impact stable future economic growth.
Tailwinds:
1. Prior to the Communist China Virus Pandemic the American economy was never in a stronger position, with robust economic growth, low inflation, unemployment for all income levels at historic lows, and Obama’s new normal of dismal economic growth in the rear view mirror.
2. The pandemic, which shut down the economy to a greater extent than necessary, created a backlog of pent up demand that is going to push short run economic growth as the economy opens back up.* Regardless of Biden’s economic policies the economy will tend to move back towards its pre-pandemic level in the short run. The massive effort by the Trump Administration that facilitated the development of numerous vaccines in record time has been the key to reopening the American economy quickly and the world economy at a slightly slower pace.
4. In the short run Biden’s massive unbalanced fiscal Keynesian style spending spree will create an increase in demand (well in excess of supply), but in the longer term the prospects of stable growth are, at best, questionable. Inflation is inevitable at some point if such legislation is passed.
5. Biden’s soft handling of China’ improper trade and intellectual property activities and ongoing policies may exert some slight positive pressure on GNP.
Headwinds:
Note that many of these are directly attributable to anticipated legislative actions.
1. Taxes of many types are to increase significantly – individual, corporate, inheritance, capital gains, etc. It is complete nonsense to believe that increased taxes won’t hurt a free market economy, except in the short run before they take effect. The tax plan, as described by the Biden Administration will land directly on successful entrepreneurs whose ability to expand will be diminished by higher personal tax rates (note that most entrepreneurs operate as limited liability partnerships and corporations which allows them to pass profit through to the owners as passive income. There will be further discussion later regarding who is really impacted by different types of tax increases.
2. A Keynesian spending spree coupled with the increased demand for goods and services that are and will continue to grow for a little while with the opening up of the economy will, without doubt, exert upward pressure on prices (inflation). Unnecessary stimulus checks has, and if continued as the economy opens, will not only put upward pressure on prices, but also discourage job seeking (which, in turn, slows down the reemerging supply side of the economy and increases inflation – greater demand chasing fewer goods).
3. Increased regulation of all sorts will slow economic growth and impact employment in free market sectors including, but not restricted to, energy, manufacturing jobs and, most of all, the activities of entrepreneurs (the backbone of our economy).
4. The global cooling, global warming, climate change, green new deal deserves its own category. With the immediate impact of stopping the completion of the XL pipeline and access to federal lands for energy exploration to satisfy the far left green new deal will, at least, partially undo the recently gained energy independence and availability of low cost energy.
5. Coupled with the amount of debt incurred during the pandemic to keep the economy afloat, the anticipated budget proposed by the Biden forebodes a mind numbing level of national debt that scares the pants off of even many devout Keynesians. As an economist I do not overly fret about debt that grows slower than the GNP, but is that going to be the case (to be discussed later) and will that debt spending be a net positive for the economy.?
The most important factor in assessing the potential accuracy of Mark Zandy’s projections leading into the 2016 presidential election is his massive miss regarding the economic growth implications of Trump’s anticipated fiscal policies (which primarily addressed taxation and regulation). His concluding statement was that if Trump was successful in getting his agenda passed, the economy would be meaningfully harmed. He doubled down on that basic theme leading into the 2020 election by taking the position that Biden’s fiscal agenda would have a significantly more positive impact on economic growth general well being than the continuation of Trump era policies. Even a cursory perusal
of the tailwinds and headwinds presented above should make it obvious that a debate which fully vets each point would be tediously lengthy.
To cut to the chase, the ultimate question is whether or not the built up momentum of the underlying economy and the short run demand side spending spree will be able to outlive the longer term damage Biden’s tax policies and overall socialist agenda will inflict within the four years of his presidential term. If he cannot get has overall tax plan through Congress (via Joe Manchin), then the economy will remain viable until the negative impact of inflation and debt takes their toll. Virtually all of the tailwinds noted above create a sugar high for the economy which is extremely short lived, except for the strength of the underlying economy and the ongoing assault on the free market through a myriad socialist agenda driven actions such as the green new deal, critical race theory, etc. The underlying strength of the American economy will cover up just so much fiscal stupidity for just so long before we will return to Obama’s new normal of little to no growth (as is common for virtually all socialist style economies). Over time the socialist inspired onslaught on the free market will kill the golden goose, the entrepreneur, unless the American voters wake up and confront the danger. Most of the headwinds are longer term in nature except for the proposed tax increases. Tax policy, however, is the elephant in the room and if the proposed tax increases are instituted in conjunction with heavy handed regulation an economic slowdown is likely to come much sooner than the end of the Biden Administration. As a final note, regarding corporate tax increases, it is well documented that the impact of such increases are regressive in nature and that most of the increase is borne by labor and to a lesser extent by consumers in the form of increased prices.
Zandy’s Keynesian related bias related to low tax rate free market centric fiscal policies versus big government spending was the major source of his big miss prior to the 2016 presidential election which does not bode well for his similar projections prior to the 2020 election.. Although it may not be intended, his apparent conclusion that a low tax rate environment will not create as much economic growth as government directed transfer payments and investment implies that central decision making is as efficient as free market activity. If Biden is successful in significantly raising tax rates, coupled with ongoing non productive unnecessary transfer payments, then he will be wrong again. There are many blinds for him to hide behind, but a too big a miss, as happened before, cannot be hidden. If Zandy’s projections are to be deemed accurate, then after the economy is fully opened, the growth rate of GNP should exceed the rate that existed prior to the pandemic and the rate of unemployment should be lower than the rates across all income levels that existed prior to the pandemic.
The one out (excuse) I will afford Zandy is that he probably did not anticipate the radical socialist style spending spree proposed by Biden. I am curious to see if he will openly agree with Lawrence Summers, the former director of the National Economic Council during the Obama Administration, who has warned that the scale of Biden’s fiscal policies are dangerous and can be expected to overheat the economy, create the worst inflation in a generation and waste resources. In addition, Summers has criticized the Fed (US central bank) for being over complacent regarding inflation. In conclusion, I agree with Lawrence Summers on all of these points, especially relating to the Fed, because even a statement that they are watching for inflationary pressure could help avoid having to make an abrupt interest rate position change that has the potential to severely disrupt the market. Given the situation where the Fed makes a sudden unanticipated rate change, the “short run” usually ends in an unfortunate manner (when the sugar high comes home to roost). My concern is that the damaging effects of Biden’s socialist driven fiscal policy under the cover of a reemerging economy and a fawning media will not be observable to the voting public soon enough. It seems as though we have to constantly relearn the timeless lesson that for our democratic free market system in its entirety “there is no free lunch”.
*Note:
Looking specifically at published data, AARP has reported that 95% of Americans killed by Covid 19 (Communist China Virus) were over fifty. Given that we had the basic knowledge of that vulnerability early in the pandemic, the proper plan would have been to lock down all individuals above a target age, mandate, masks and some form of distancing, and not close down the economy to the extent that was mandated.