The Bill Will Come Due on Biden's Trillions

Biden's infrastructure package is really a jackpot for public unions and big business.

You know we have crossed a fiscal Rubicon when a presidential administration does not attempt to justify its spending, instead simply claiming that because of the COVID-19 pandemic, Americans must now welcome with joy and gratitude any spending bill, no matter how big, frivolous, or cronyist.

Based on that belief, President Joe Biden first backed a $1.9 trillion coronavirus relief bill that could not be justified by any broadly accepted economic theory. He then announced a $2.3 trillion "infrastructure" package that he described as a "once-in-a-generation investment in America unlike anything we've done since we built the interstate highway system and the space race decades ago."

A closer look reveals that the plan is instead a jackpot for public unions and big business. Coming after two decades of spending indulgence under the last three presidents, culminating in an explosion of outlays during Washington's COVID-fighting efforts, Biden's spending extravaganza is in effect the final stage of an effort to centralize power in the federal government, which will fund ever more private, state, and local government -functions.

Gesturing toward fiscal responsibility, Biden plans to pay for most of his latest plan with a $2 trillion increase in corporate taxes, arguably the largest hike since World War II. The combined tax hikes, according to the Tax Foundation, likely will reduce private infrastructure investment by $1 trillion. A corporate tax increase from 21 to 28 percent, for instance, would reduce the after-tax rate of return on corporate investment in America and in turn reduce the amount of investment. The hikes will nevertheless please the anti-corporate wing of the Democratic Party. Never mind that the price will be paid by workers whose wages won't grow and small-business owners who will have less access to capital.

The infrastructure bill creates an interesting tension. On one hand, Wall Street will hate these tax increases, the full effect of which will be felt in the next decade and a half. On the other hand, corporate titans probably are banking on their ability to fight these taxes while enjoying Biden's $2 trillion corporate welfare handout today.

How else to explain the stock market upswing after Biden's Pittsburgh speech announcing that trillions more dollars will be spent and taxed by Washington? Could it be that years of Federal Reserve liquidity injections, the promise of rescue, and artificially low interest rates have permanently transformed Wall Street into a corrupt moocher? It is as if corporate America believes the Fed will never let the market correct, guaranteeing growing corporate profits in perpetuity.

But there's a reason we economists always remind people that the stock market isn't the economy and the economy isn't the market. In the short run, the stock market's success tells you little about the soundness of policy decisions made by people in Washington. The reality is that one day, all that debt, cronyism, and lack of accountability will explode in our faces. It might take some time, but when the time draws near, don't assume that interest rates will alert us to the impending disaster or that the Fed can save us without inflicting massive pain.

When we look back and wonder how we got there, we will see that there is a lot of blame to go around. By recklessly monetizing the public debt and suppressing interest rates, the Federal Reserve allowed deficit spending to become the norm. The party of small government, meanwhile, simply gave up the small part. Congressional Republicans remained mostly silent while the Trump administration ran up the public debt by nearly $9 trillion in just four years, slowed down the economy with protective tariffs, and imposed disgusting and costly immigration restrictions. Some Republicans offered their own central planning proposals in the name of fighting China; others endorsed plans for a federal paid leave law and a universal basic income for kids.

On the other side of the aisle, even the Keynesians seem lost in our brave new world. Lawrence Summers—secretary of the treasury in the Clinton administration, director of the National Economic Council in the Obama administration, and president of Harvard in the interregnum—fought a good fight to reduce the size of the $1.9 trillion coronavirus relief bill. He argued that economic theory could not justify the package's size. He lost.