Biden's Spending Plans May Overheat the Economy and Fuel Inflation
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Understanding GDP Growth and Inflation
The Commerce Department recently reported a robust GDP growth rate of 6.4% for the first quarter of this year. This indicates a swift recovery from the brief recession that occurred after May 1, 2020. However, with inflation nearing 4%, further economic stimulus may not only be unnecessary but could also be detrimental.
Section 1.1 Analyzing Inflation Trends
The Federal Reserve aims for an inflation rate of 2% or less, yet the current rate has surged to nearly 4%. While the Fed suggests this rise is temporary and will subside as the economy fully reopens, a closer examination of the data suggests that this might not be the case.
Subsection 1.1.1 Causes of Current Inflation
The Fed attributes the inflation spikes to supply chain disruptions stemming from COVID-19 closures. While this explanation holds some validity, several other factors contribute to ongoing inflation, including:
- Increasing energy costs
- Rapid growth in the money supply
- Significant government budget deficits
- A potential shortage of capital
With global demand for energy on the rise, and the Biden administration's efforts to limit fossil fuel production, energy prices are expected to climb further.
Section 1.2 Economic Policies and Their Implications
The Federal Reserve continues to purchase government bonds, injecting between $80 billion and $120 billion into the economy each month by creating new money. This practice is set to persist, which raises concerns about inflation.
The federal budget deficit reached $3 trillion last year and is projected to increase to around $3.5 trillion this year, assuming no additional spending. President Biden has proposed an additional $4 trillion in spending, which would exacerbate the deficit.
Biden's planned deficit spending will predominantly be financed by issuing bonds, which diminishes the capital available for businesses. Additionally, proposed tax increases on capital gains, corporate profits, and high-income earners could further stifle capital formation.
Chapter 2 Title: The Risk of Overstimulation
With energy prices, an expanding money supply, soaring budget deficits, and a potential capital shortage, the Fed's belief that supply chain improvements will alleviate inflation is likely misguided.
The Fed may soon revise its GDP growth forecast for 2021 from 6.4% to between 8% and 10%, based on anticipated growth in subsequent quarters. While this view may be contested by Biden's economists and the Fed itself, there is consensus that additional stimulus could lead to an overheated economy and severe inflationary pressures.
Biden's ambitious spending agenda, totaling an additional $4 trillion, poses significant inflationary risks. Instead of fostering job creation, this spending could contribute to rising costs while bond sales may hinder economic expansion.
The broader implications of Biden’s spending proposals extend beyond economics. They risk undermining individual freedoms and personal responsibility, promoting a model where the government assumes a larger role in citizens' lives, from early childhood through adulthood. This shift could dilute the essence of American exceptionalism.
For instance, Biden's initiative for free college tuition effectively transfers the financial burden from students to taxpayers. While appealing to younger voters, this plan may result in decades of higher taxes in exchange for four years of education.
Historically, the U.S. has transformed from a nascent nation to the world's most powerful economy within about 150 years, contrasting with nations that have existed for centuries. This success stemmed from an economic framework that championed individual freedoms, personal accountability, low taxes, and limited government intervention.
Biden's current and proposed policies appear to contradict these foundational principles, potentially resulting in diminished freedoms, increased taxation, and expanded governmental influence, ultimately leading to inflation and stagnation.
A Call to Action
It is crucial for President Biden to adhere to the principles that have historically underpinned America's greatness.