$1.9 Trillion . . . That’s Trillion

Remember who got us here.

After an embarrassingly short episode of feigned bipartisanship, Congress will use the misnamed procedure called “reconciliation” to pass a massive borrow and spend bill. I will attempt to give you a lens through which to view this fiasco.

Politics is all about power — the power of coercion and the power of allocation.

By means of laws, regulations, police, courts, jails (concentration camps in the case of China and North Korea and the gallows in Iran), governments prohibit certain behaviors and mandate other behaviors. Government allocates resources by deciding who to tax and how much, and where to spend the money it takes in.

The American Revolution was a response to perceived abuses of those powers by the English King and Parliament. The founders attempted to construct a governing structure that would limit the bounds of government power. The Bill of Rights protects all citizens from government at all levels. The Constitution specifies the limits of action vested in the Federal government, and reserves all other power to state and local government and the “people”.

For the first 100 years of our Republic, the limits were mostly observed. Starting in the 20th Century, government, especially the federal branch thereof, began to expand. We now have hundreds of thousands of pages of laws and regulations touching every facet of life, including the chemical composition of dishwasher soap (which used to be a lot more effective at doing its job before it was regulated). The aggregate of federal, state and local government collects, borrows and spends an amount equal to one third of our entire economic output (a lot more in 2020 and 2021). The powers of coercion and allocation are ubiquitous!

Elections matter. The winners coerce and allocate to benefit their supporters and to increase their chances of getting reelected. Try to remember that when you enter the voting booth and when you analyze the efficacy of the $1.9 trillion we are about to borrow.

The main beneficiaries are public sector labor unions and their members. $350 billion for state and local governments. $130 billion for schools. $20 billion for mass transit. The $1,400 payments are to be made to those making $75,000 per year or less, most of whom have not lost their jobs. The intended message is “vote for me; I sent you money”. The only economically useful parts of the bill are the unemployment insurance supplement, money to facilitate vaccine rollout, and those checks going to people who were actually impoverished by the pandemic. The minimum wage increase and duration of the unemployment supplement will disincentivize hiring.

The rationale is that “stimulus” will create economic growth because of the so-called multiplier. Every dollar of government spending is supposed to produce more than a dollar’s worth of growth in the economy. That multiplier is a myth. The evidence is that the dollar spent, after overhead and interest cost, generates considerably less than a dollar in growth. The debt lives long after the stimulus money is spent, to the detriment of the economy and future generations.

At the end of the day, our national debt (including muni bonds) will exceed $125% of GDP, the highest in our history. We may end up as the Argentina of the 21st Century. When that happens, remember that we voted for the politicians who did this to us.

A Different View