Moderates such as U.S. Sen. Joe Manchin, D-W.Va, III are already cautioning the $3.5 trillion mark may be too high (Getty Images)
To return to an earlier column can be like entering another world. In November 2021, I wrote a column urging, in light of inflation, that Democrats not enact another large spending bill without increasing taxes to pay for it. The headline of the column was “Maybe deficits do matter after all.”
At the time, inflation was not too bad—around a 5 percent annual rate—and most experts expected it to abate relatively quickly. Not many expected that slowing inflation would require anything dramatic, like an interest-rate-induced-recession.
However, there were at that time liberal economists, including Paul Krugman, arguing that more borrowing and spending would not cause damage to the economy, especially since borrowing costs were still very low. Progressives were still dreaming of eliminating childhood poverty by making a Child Tax Credit permanent, without much explanation of how it would be paid for.
Those plans collapsed in December, when U.S. Sen. Joe Manchin, D-W.Va., announced he would not support President Joe Biden’s Build Back Better bill as then formulated.
Democrats are probably lucky in a political sense that Manchin did that. Inflation is now surging at more than an annual rate of 8 percent and shows no sign of going away soon. The Fed is raising interest rates to combat it and former Federal Reserve vice chair Alan Blinder now says that a “mild” recession in 2023 is a 50 percent to 60 percent possibility.
Democrats likely will be punished for this state of affairs in the November elections. But just imagine voter reaction if Democrats, in the teeth of this threat, had just passed another big spending bill without paying for it.
Inflation is complex. Today’s higher prices are not just the result of pandemic spending. There are continuing supply chain shortages, hiring problems, China just coming out of lockdown, and, on top of all that, the war in Ukraine, affecting energy and food prices.
Nevertheless, the massive deficit spending that the pandemic necessitated—there is no exact figure, but certainly more than $4 trillion spent already—left the world awash in dollars. That is in part why inflation is proving so hard to tame.
So, even though the pandemic was precisely the kind of emergency that required massive borrowing, we are now paying a price for it.
But, if deficit spending is part of the cause, then it is not just spending that must be considered. That same column pointed out that if inflation is too many dollars chasing too few goods and services, it doesn’t matter whether those extra dollars come from increasing spending or decreasing taxes.
For two decades, we have imagined a free lunch. But there really is no such thing.
In other words, tax cuts, also, cause inflation.
This is important because for years, Republicans have falsely claimed that tax cuts pay for themselves and do not increase the deficit. This claim was just as irresponsible as the Democrats touting Modern Monetary Theory as showing that increased spending is free.
In retrospect, the biggest piece of fiscal folly in recent years was not propping up the economy during a pandemic shutdown, but the 2017 tax cut that gave us $1 trillion annual deficits in the middle of an economic boom. A boom is exactly when America should have been running a budget surplus. In 2017, the federal budget was already in deficit, although the deficit had been decreasing.
It is easy to see that higher spending might cause inflation. But it is vital that voters understand that without reductions in spending, which tend never to happen, tax cuts and tax credits have precisely the same effect.
Voters are right to hate inflation. Inflation punishes responsible behavior, like saving, and increases economic inequality—it is workers at the bottom who are least likely to keep up with rising prices. Inflation worsens all other policy challenges and renders prosperity unattainable. At least at high levels, inflation is bad in every sense.
Conservatives who argue that tax increases are never justified, even in the face of huge deficits, ignore these effects of inflation. Inflation is far worse than higher taxes.
There are other reasons to oppose deficit spending in general, not the least of which is that someone else—right now, China—will hold the debt, and to some extent, our future, in its hands. But preventing inflation is the most important reason.
The current round of inflation will end, of course, as all other episodes have, hopefully without too much damage. The lesson I hope we will learn from this instance of inflation is a simple one. If policies are worth pursuing—and ending childhood poverty is certainly that — we must be willing to pay for them. We cannot just spend money and cut taxes without consequences.
The wisdom of the economist John Maynard Keynes has proved lasting. During downturns, governments should run deficits to stimulate demand. Then, during the good times, surpluses on the current account should be run to make up the difference.
Since the last time the federal budget ran a surplus, in fiscal year 2001, America has been living in a dream world. For two decades, we have imagined a free lunch. But there really is no such thing.
So, the next time a politician offers you a new program, or a tax cut, or a tax credit, ask this question: how will this be paid for? If there is no answer, then you are not being offered anything at all. That is a lesson I hope we have learned for all time.
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