The Failing Biden Economy
The Biden Administration’s Celebration of the Inflation Reduction Act
The Biden administration is enthusiastically celebrating the one-year anniversary of the misnamed Inflation Reduction Act (IRA), touting it as a catalyst for a “booming” economy. Treasury Secretary Janet Yellen goes so far as to hail the IRA as “the boldest climate action in the nation’s history,” emphasizing its role in addressing the destabilizing effects of climate change.
While the administration and Keynesian economists, who advocate for increased government spending, are reveling in the surge of federal spending, there are underlying concerns. These economists had urged the Federal Reserve to print more money in 2021, which has resulted in the predicted record inflation in 2022.
However, the consequences of this monetary advice extend beyond inflation. The challenge now lies in managing the excess money supply. The Federal Reserve’s attempts to combat inflation have already led to a decline of 10–30 percent in stock prices and housing activity. Throughout history, these sectors have been the first to react to monetary restraint, often signaling an impending downturn for the rest of the economy.
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Despite these challenges, the economy appears to be thriving due to two key factors:
- Reason #1—Explosive Increase in Money: The Federal Reserve’s restraint followed a significant surge in money supply. While my preferred money supply measure has decreased by 15 percent over the past year, the two-year average increase stands at 9 percent annually. Therefore, we have yet to witness the full impact of the Fed’s policy restraint.
- Reason #2—Massive Increases in Federal Spending: The economy has not yet experienced a decline due to the substantial increase in federal spending and subsidies from President Joe Biden’s Build Back Better legislation. The injection of money into the economy has resulted in a temporary surge in spending, but the long-term consequences are yet to be seen. Similar to the initial surge from new money, the current boost in business activity is both temporary and illusory.
The Biden administration proudly claims that its policies are leading to a comprehensive restructuring of the economy. They anticipate a 10 percent increase in federal spending this year, amounting to $700 billion. Additionally, they estimate that redirecting resources to achieve climate objectives will involve several hundreds of billions of dollars annually. However, there is no evidence to suggest that this restructuring will have any significant impact on the world’s climate.
Throughout history, the United States has relied heavily on market forces to allocate resources, resulting in the highest living standards among major economies. However, deviations from this reliance on free markets have often led to negative outcomes. Four major periods of excessive federal spending—during the Wilson, Hoover-Roosevelt, Johnson-Nixon-Ford-Carter, and Bush-Obama years—failed to increase the real take-home pay of the average worker. Progress in improving living standards has consistently occurred when the government allowed markets to function naturally.
Similar to the illusory boost from a surge in money creation, a surge in federal spending and resource reallocation may initially stimulate the economy. The initial influx of spending in politically favored areas creates jobs and generates profits. However, government planners often overlook the potential for these resources to be better utilized without reallocation.
An example of the failure of government spending to create real value can be seen in the Department of Energy’s $9 billion loan to Ford for battery plants in Kentucky and Tennessee. The objective was to jumpstart electric vehicle (EV) production by shifting resources to battery companies. However, even with massive subsidies, the public’s demand for EVs remains low.
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