President Joe Biden has declared that his proposed $3.5 (or is it $5.5?) trillion “Build Back Better” social agenda will have a “zero” cost—as in $0.00! Why? Because the added expenditures will be covered by increased revenues drawn from businesses and the “rich.”
The President and other progressive Democrats, who have parroted the Biden claim, should reflect on the wisdom of the late Milton Friedman, who had a knack for crystallizing stark economic truths.
During the early 1980s, when supply-side economics was the rage, Reagan Republicans promoted tax-rate cuts as a means of reviving the economy (because the cuts would increase people’s incentives to work, save, and invest), which Friedman believed distracted them from concern about what was happening to government outlays, which continued to rise throughout the decade.
Friedman framed the fiscal issues of the day differently, and with far greater clarity than anyone else. He admonished everyone (including President Reagan’s advisors), to “Keep your eye on one thing and one thing only: how much government is spending, because that’s the true tax. . . If you’re not paying for it in the form of explicit taxes, you’re paying for it indirectly in the form of inflation or in the form of borrowing.”
And make no mistake, government outlays have risen substantially, especially lately, increasing from $3.9 trillion in 2016 to $6.6 trillion in 2020 (including Covid outlays). Even without passage of the reconciliation bill, the White House estimates that federal outlays will continue their upward march through 2026.
Friedman understood that the real taxes on the economy ultimately come in the form of government outlays siphoning off resources for public purposes that would otherwise be used in the private sector. If the government chooses to build a bridge or road, the concrete and steel could have been used to produce houses and office buildings.
How the added government outlays are financed—through taxes, newly printed dollars and inflation, or debt—is of secondary importance, perhaps only marginally affecting people’s incentives. The costs of expanded government outlays will be incurred through the shift of resources from private-directed uses to public-directed uses.
By declaring that his “Build Back Better” agenda has no costs, President Biden must be confused—if he truly means what he has been saying. He may think that the dollars expended for an expanded array of welfare recipients will come only at the expense of the “rich.” Not so at all. Those transferred dollars will enable the recipients to buy goods they could not otherwise buy, which means they can pull resources away from the production of the variety of goods that ordinary Walmart (and Home Depot and Kroger) shoppers, many with far less-than-privileged means, would have bought.
Richard McKenzie is an economics professor (emeritus) in the Merage Business School at the University of California, Irvine. His latest book is The Selfish Brain: A Layman’s Guide to a New Way of Economic Thinking (2021).
READER COMMENTS
David Seltzer
Oct 15 2021 at 6:08pm
Illiteracy is the inability to read and write. Innumeracy is defined as being unfamiliar with mathematical concepts and methods. Is there a similar term for being unable to understand economics 101?
David Henderson
Oct 16 2021 at 2:23pm
Yes: economic illiteracy.
rsm
Oct 17 2021 at 1:05am
Doesn’t finance obviate your naive economic constraints? Did Friedman understand how private credit creation uses government debt as solvency tokens (multiplied through rehypothecation and collateral transformation)?
Where is the tax, when financial returns greatly outstrip inflation?
Isn’t “crowding out” a quaint old notion relying on zero-sum assumptions that simply are not observed?
Matthias
Oct 22 2021 at 6:20am
There’s only so many real manhours and real resources to go around.
We can increase productivity to get more from less. But that’s not magic, and government doesn’t exactly have a track record of great productivity.
rsm
Oct 23 2021 at 8:10am
Right now, are physical resources actually scarce or are suppliers deliberately throttling production, because they can get a lot of attention by creating artificial scarcity?
If you need workers, why not invest in Fed-insured financial markets so you can pay them more without needing to raise prices?
Thomas Lee Hutcheson
Oct 15 2021 at 6:28pm
True, but better that the tax fall squarely on the incomes of those with higher incomes rather than investment stifling deficits.
Mark Brophy
Oct 16 2021 at 3:38pm
Most investments come from people with higher incomes. Poor people spend their money on necessities, booze, and drugs.
Thomas Lee Hutcheson
Oct 16 2021 at 4:51pm
True, but deficits are “financed” with higher interest rates which probably falls more on investment than consumption, so I say taxation is better than deficits amd I think the elasticity of entrepreneurship and innovation are, thankfully, pretty inelastic wrt the marginal tax on income. which is not to say that a progressive’s consumption tax would not be better than a progressive income tax.
robc
Oct 19 2021 at 1:15pm
Taxation is better than deficits but not spending is even better than taxation.
Mark Brophy
Oct 16 2021 at 3:42pm
Biden doesn’t truly mean what he has been saying, he knows that he’s lying. Very few politicians can be elected without lying, surely no President could be elected without lying.
Monte
Oct 18 2021 at 12:27pm
Build Back Better is just another incarnation of the welfare state designed to create heretofore unprecedented levels of dependence on government. Friedman’s treatment of category iii/iv spending using his cost matrix in “Free to Choose” is a brilliant, yet simple, expose of the welfare state fallacy.
Niko Davor
Oct 18 2021 at 1:42pm
The Democratic talking point that the $3.5 trillion bill costs $0 is political rhetoric designed to build leverage and diffuse opposition talking points. Of course, it’s not honest. The smart Democratic strategists know that is dishonest, but they are focused on winning, not on honest communication.
Lots of people will get angry at such an obvious lie, but those are mostly committed Republican voters that Democrats had no chance of reaching anyway, so the political cost of that is negligible. People who like the Democrats, including many authors at econlib, will shrug their shoulders and ignore it or say politicians lie all the time, it’s how the game is played. Lots of Americans don’t pay serious attention to politics, and I have no idea how this will influence their perceptions and voting preferences, but I presume professional strategists do know.
Most authors at econlib seem committed to a both sides are equally bad position on fiscal spending. Recent Republican administrations were far from perfect on spending. Whether current Democrats let things coast as they were or push for spectacular new spending sprees and giant new permanent entitlements, the pundits here have been committed to blurring the difference between the political options, and I can’t imagine them budging from that, even when that is’t reasonable.
Comments are closed.