Biden’s Sugar-High Economy Should Raise Alarms

This post first appeared in The Washington Times.

President Biden is betting big government can boost long-term growth and vanquish inequality and racism.

His infrastructure and social spending proposals would increase the federal deficit well above last year’s crisis-driven $3.1 trillion. A pandemic bounce will yield 6.5 percent GDP growth this year but longer term, Mr. Biden’s policies will bequeath higher interest rates, inflation, fleeing private investment and many fewer good paying jobs.

Fed Chairman Jerome Powell says the likes of Kimberly-Clark (KMB) hiking prices on Huggies is a temporary phenomenon, but he is already tightening monetary policy. The 10-year Treasury rate, which provides the benchmark for everything from credit cards to mortgages, has jumped precipitously.

The dismal science and the financial press say higher interest rates reflect expectations for some combination of higher growth and inflation but whatever happened to supply and demand?

In 2020, the Fed purchased Treasuries and other securities approximately equaling the massive federal deficit, but this year its stated policy is to purchase half as many.

Without the Fed mopping up all the bonds the Treasury is spilling, demand is tanking. Longer-term interest rates must rise, and new home construction, auto purchases and shaky businesses propped up by junk bonds will eventually falter.

Raising corporate and capital gains taxes to some of the highest in the world are a biblical imperative for progressives with their disdain for thrift, enterprise, hard work and success.

Along with more government spending, higher interest rates and taxes will crowd out private investment and discourage risk taking on new products — the mother’s milk of productivity growth, higher living standards and international competitiveness.

Mr. Biden’s public investments are a child’s sugary drink when the economy needs Grade A Fortified. His infrastructure programs do too little — and do it badly.

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Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.

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