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The issue of income inequality divides the nation and is a source of social unrest. The government, led by the Democratic Party and President Biden propose a traditional approach of taxing “the wealthy” and providing broad social welfare programs to address income inequality. This is a classic redistribution of wealth where taxes are raised on one class of people and given to another to achieve “fairness” of some sort. Providing these kinds of social programs have been tried since the 1960’s and have not proven to end poverty or to deliver long-term prosperity to the country’s citizens. If they did, we would not still be talking about raising taxes to fund social programs that raise living standards.

Traditional social programs may help the political party proposing them to gain voter support, but they don’t permanently address issues like income inequality. Eventually they become a burden so great that taxpayers vote in a new set of government leaders who undo or “reform” the social program legislation that transfers wealth from one class to another. The less fortunate never seem to have their circumstances changed fundamentally as a result.

The best ways to attack income inequality include educating the people, or giving them an incentive to better educate themselves, and through helping citizens have a “stake” in the capitalist economy. Both of these goals can be achieved with long term approaches where the power of compounding returns in the public stock markets are used to improve the lives of U.S. citizens. This is a radical new approach that is intended to make people more reliant on the success of capitalism than the largess of government.

Root of The Problem

Most arguments I see around income inequality end up with the statement: “the top earners have access to financial assets, and the lower earners struggle paycheck to paycheck because they do not (have such access to financial assets)”.

These debates almost universally start with arguments about how “the wealthy” don’t pay enough in taxes and end in agreement (almost as an after thought) that the middle and upper classes have access to stock portfolios through ownership of 401K or IRA accounts, or outright stock ownership. leading to income disparity between the two groups. There is a lot of disagreement over what “the fair share” is that should be paid by the wealthy. There seems to be no disagreement that the issue is that lower income individuals don’t have financial assets, and that financial assets are the best way to grow wealth over the long term.

“New Thinking” for a Solution

So why don’t we give everyone interests in the capitalist economy by making sure that they have tax-advantaged access to stocks? Stocks have historically grown between 8% and 10% per year since the year 1900. This source calculates that the return on stocks has been 9.85% over this period of time. The same source shows that the inflation-adjusted return on equity assets over that period of time is 6.76%. Given that this includes a couple of highly inflationary periods (after World War II and again during the commodity shock driven inflation of the 1970’s), and that central banks may have a much better handle on monetary policy to fight runaway inflation than they once did, one could assume that inflation-adjusted returns in the stock market could (over long periods of time) average around 8% annually.

This assumption around 8% growth in the stock market is a bit on the optimistic side, and Stan Druckenmiller (famous investor) on CNBC recently, cast some serious doubt on the central bank’s ability to control inflation with all the recent stimulus spending proposed by the Biden administration, but for sake of argument, let’s go with the 8% assumption.

At 8% compounded annual returns, the government could fund two programs that take advantage of the growth that is possible with equities in the stock market. One that would help citizens gain an education and one that gives them a way to own stocks and financial assets that at least fund their retirement and give them some security in their retirement and older years.

These would be an “Educational Assistance Fund” and a “Birthright Fund” (the latter fund was proposed by Bill Ackman, famous hedge fund manager and private investor). These proposals would both start off with the Government providing an investment at the outset, but the money provided would be invested in zero-cost index funds where it would grow tax-free and benefit the owner (individual citizens) at some point in the future. The “Big Idea” behind both of these programs would be that the stock market and its compound growth over time would provide the funding for the benefits, not ongoing taxpayer dollars.

The Proposals

Educational Assistance Fund

The concept of an Educational Assistance Fund is simple. Have the government “seed fund” an initial investment of $100 billion and invest it in zero-cost index funds that would yield about 8% per year. Pay benefits out of this fund to graduates of training programs (technical trades, IT training, or traditional college degree programs) as the fund produces returns. Students would put “skin in the game” by borrowing the money to train themselves, but would qualify for payments from the Educational Assistance Fund to enable them to pay the tuition back to qualified institutions.

The program would have “stage one” where the initial government investment provides the available benefits for the first ten years of the fund. The second stage of the program (“stage two”) would be funded in the first ten years by a corporate tax on companies making $100 million or more in profits. This money would compound in value for ten years while the stage one investment return dollars are paid out as benefits. Stage one would provide help to graduates immediately, stage two would provide enormous benefits to graduates, contributing life-changing aid to those who are employed and who sought an education.

The stage one of the programs pays out benefits of around $8 billion per year (8% of the $100 billion invested by the government). During the first ten years (as stated above) a 1/2 of one percent corporate income tax on corporations that have more than $100 million in profits would be collected and invested in the zero-cost index funds that also contain the first $100 billion. After ten years that second stage fund would begin paying benefits too, but at that point the fund would have grown substantially larger and the benefits available to students would be much greater.

To qualify for access to the funds, and to give graduates an incentive to major in fields where employment is most likely, the educational assistance fund would only pay out to employed graduates. If a college graduate were employed, they could qualify for amounts as large as $20,000 (or more, depending on the performance of the index funds, and the number of participants requesting benefits) in benefits per person per year sometime after the ten year “second stage” phase of the proposal.

This would be a huge boost to graduates who would otherwise experience large debt burdens from earning their degrees. It would also encourage those who earned a degree in one discipline where employment is unlikely to get further education and obtain a degree where employment is more likely.

A student in any type of program (Four year baccalaureate program, graduate school, trade school, IT training, etc.) would qualify. They could borrow the money to attend training classes and gain access to the educational fund distributions to help them pay it back after they graduate and become employed. The payments would be made to the educational institution by the employer and the employer would be reimbursed by the educational assistance fund. Students could remain eligible for payments from the fund until their debts are paid off through distributions from the fund.

Seed funded Stage (first Ten Years)

The educational assistance fund would be “seed-funded” by the government initially. The first $100 billion would be a one time investment that would be invested in zero-cost index funds. With an 8% annual return this would provide $8 billion per year that could be spent to offset student debt for graduating students of specific trade or technical programs, or graduating seniors and graduate students from traditional college programs..

The government could earmark $100 billion as an “endowment” to fund the program and an additional $8 billion if benefits were to be paid out immediately (without waiting for the investments to compound), making the initial investment $108 billion in the Educational Assistance Fund.

There are around 2 million undergraduate (bachelor degrees) awarded per year, so this $8 billion could provide $2,000 – $4000 per person/year in immediate aid to offset borrowing costs. This is an estimate as vocational training and IT training programs are also included. As an estimate, somewhere in this range is a feasible assumption and would be a great benefit to those seeking job training.

In “stage two” of the fund (explained next) the fund will have grown in magnitude and the benefits paid out of the fund will be much larger than the benefits paid out of the fund in stage one. In stage two of the fund, the payments to graduates would increase approximately ten times from what they were in stage one.

Self-sustaining Stage (After Ten Years of Compounded Returns)

The second part of the educational assistance fund would be paid in to the fund by corporations with profits greater than $100 million per year. During the first ten years of the fund the corporate contributions will be reinvested in the stock market and allowed to grow. No benefits would be paid out from the collection of the funds from the corporations until after year ten of the fund.

The Fortune 500 last year posted profits of $14.2 trillion. A half-percent tax on the profits of Fortune 500 corporations alone would provide $71 billion a year. $71 billion invested in the fund every year for ten years (with 8% annual return compounding) would yield $1.1 trillion (at the end of ten years). The actual amount in the fund after ten years would be larger than the $71 billion because there are more than 500 companies making profits greater than $100 million. I just used the magnitude of the profits of the Fortune 500 to show the feasibility of the concept.

So the fund would be at least $1.1 trillion after ten years and probably much larger than $1.1 trillion with all companies making more than $100 million in profits (not just the Fortune 500) paying their contributions into the fund. This assumes that the assumption of 8% compounded annual returns holds true over the first ten years of the fund. Given the uncertainty of the returns but that there will be more than $71 billion per year paid into the fund (due to more than the Fortune 500 contributing) it is clear that this proposal is feasible.

If the fund were $1.1 trillion after ten years the amount invested in the fund would provide $88 billion in investment income per year. This assumes that no further corporate contributions were made into the fund after the ten year “waiting period”. With further contributions (which there would be) the fund would grow larger, albeit at a smaller rate of increase since the returns on the index funds would be getting paid to graduates. Also with a $1.1 trillion base and the original $100 billion “seed” amount from stage one of the proposal, the fund would be at least $1.2 trillion.

With $1.2 trillion available and an 8% return assumption, this could yield approximately $96 billion in benefits per year. This spread over 2 million – 4 million participating students graduating from some kind of program each year, would yield between $24,000 and $48,000 per student (depending on returns and participation rates).

If the average debt burden on a graduate were $40,000 per year and the returns of the fund were spread over existing and new graduates each year, participants in the program could retire their debt in a few years. After year ten (phase two of the plan) overall debts of newly graduating recipients could be paid off within one or five years (depending on the number of graduates and the performance of the invested platform assets). This is without the student making payments from their own funds.

This would be possible because during the second stage of the plan, those getting access to fund distributions could receive between $10,000/person/year and $40,000/person/year. This would relieve their debt burden more quickly than was possible in the first ten years of the plan. Because congress would be prohibited from taking any of the assets paid into the fund for any other purpose, and payments into the plan by corporations would continue every year, the fund would continue to grow and benefits could grow over time.

The important part of this plan is that it would not require ongoing taxation to fund the “educational trust fund” and it would provide incentives for graduates to remain employed to qualify for the automatic payoffs of their loans in a few years. Income redistribution (through taxation) would not be necessary and the trust fund would pay employers to relay the payments to qualifying graduates. The government would only be minimally involved.

The trust fund would be managed by index fund managers, not the government. Benefits would be tax-free to recipients and free them from the payments on their debt sooner. This would allow employed graduates to enjoy more disposable income and to build their lives more comfortably sooner than they could without such a plan.

The BirthRight Fund (Bill Ackman’s Idea)

This idea is brilliant and simple: give each newborn baby a stipend and invest it for them in a zero-cost index fund. The investment will grow tax-free throughout a person’s lifetime and at age 65 they are eligible to withdraw funds from it.

The idea of giving every new born baby a “stake” in the economy belongs to Bill Ackman, the famous hedge fund manager and CEO of Pershing Square Capital Management. In an article he authored for The NY Times Deal Book series, Mr. Ackman explains how $6,750 invested at the birth of a child will grow to over $1,000,000 by age 65 and $2 million after 74 years, assuming an 8% annual return. His “Birthright fund” (as he calls it in his article) would be invested in zero-cost equity index funds. Individuals would not be allowed to withdraw funds until at least age 65.

Mr. Ackman’s idea is brilliant as it harnesses the magical principal of compounding annual returns (just like the educational assistance fund). When returns (dividends and share growth) are allowed to be reinvested and to compound within the Birthright fund, the holder has an ever-growing asset tied to the success of the economy and the capitalist system. Growing tax-free within the account, the holder of the Birthright fund holds shares in a broad swath of the capitalist economy. Given historical growth rates of the stock market as a whole of 8% to 9% over the last 70 years, it is a reasonable assumption that the Birthright fund would be a great place to grow wealth for all Americans.

In the following chart, generated from this source, the concept is illustrated. A baby born into the BirthRight Fund will see the initial $6750 investment grow to be worth over $1 million in 65 years.

The initial stipend of $6750 would be invested at birth and held in the BirthRight Fund (as Mr. Ackman named it) until a given person with rights to the fund turned age 65. The funds would compound tax-free and there would be no tax penalty at the end of the investment period (a minimum of 65 years, the recipient could let it grow in the fund longer). At age 65, the money could be drawn to pay for living and retirement expenses.

Things I would add include that the fund (and the educational assistance fund) could never be diverted by congress to any government purpose, the fund amounts can never be borrowed against (like with an IRA) and the funds can be inherited by one’s family as part of their estate. In all respects the funds are theirs, the future recipient is the sole owner of the funds and they are not subject to inheritance or “wealth taxes” in any way.

This plan depends on the historic rates of return holding up over the 65 years of a person’s life, so that is a risk worthy of noting. The risk of inflation eroding the returns is larger with this plan than the educational assistance fund as the BirthRight Fund will pay for future expenses denominated in dollars.

The educational assistance fund will pay off dollar amounts set in the past so inflation is not as much a worry. The educational assistance funds will be paid toward a fixed amount of dollars that was the cost of a past education, the BirthRight fund will be paying for expenses in the future that might fluctuate higher than anticipated in dollar terms.

Over such a long period of time (65 years or more), the funds would grow significantly and a recipient of the BirthRight fund would still be imminently better off than they would without it. Within such a timeframe, the growth rates of equity investments are likely to remain near historical averages. The power of compounded annual returns is so strong that betting on the phenomenon is a worthwhile gamble. Inflation erosion aside, the BirthRight Fund is a brilliant idea and Mr. Ackman should be lauded for proposing it.

Benefits of this approach

This is very good for women. Women who decide to take care of children or another family member during their lifetime continue to accrue the benefits of the capitalist system. They are not tied to their husband’s earning power should they feel that they have to prioritize child or elder care over career earning power. Many women who get divorced are dealt a major long-term setback economically. This would cushion that blow significantly.

This allows the very disadvantaged and those from economically challenged backgrounds to achieve and build household wealth. African-American families, Latino families as well as poor white families would all benefit equally from the BirthRight Fund. Non-white families have much lower household net worth than white families in the United States. This would level the playing field in that respect significantly.

This could solve the Social Security problem entirely. With means testing of benefits, a family with the BirthRight benefits would not need Social Security. The Social Security system could eventually be phased out as it would no longer be needed. The current Social Security tax paid to the government could be eliminated or diverted to a health-care fund that could offset medical expenses in one’s later years.

The truly disadvantaged would be able to take risks they otherwise not have been able to take. Starting a business and knowing that one’s retirement is still available to them could allow a “burst” of entrepreneurial activity to occur. This would be a huge benefit of such a plan.

The biggest benefit would be that this ties (as Mr. Ackman points out) each citizen to the success of the American capitalist system. Instead of relying on the government to provide assistance to families in their retirement years, each person can count on the success of the places they work and the country as a whole to provide for them.

Overall Benefit

The tendency to think of corporations and “the wealthy” as the enemy would be reduced with both of these plans. The success of the economy would be paying individuals who educate themselves and take risks to build their careers. It also binds individuals to the “American Dream” of hard work and self fulfillment. Both of these plans would be worthy of implementation and would go a long way toward providing equal opportunity for all. Social cohesion, not social division would result as more Americans feel tied to the economy.

While I watched President Biden’s speech to both houses of congress last night I remained convinced that he is a good and decent man who truly wants to help the American people. I was also convinced that he is a product of Washington politics who has never done anything but be a politician. Therefore he does not understand the negative impact his policies will have on innovation and young start-up and private companies in general.

In addition to pursuing policies that will stifle innovation, he is using a lot of rhetoric to sell rather grandiose plans that he and his advisors may think are popular with some voters, but that in the long run will lead to more political division and strife within our fragile democracy. His administration does not seem to understand that what he proposes will not only harm innovation, but drive a great deal of cost into company operations that will stifle job growth. He clearly wants to help the “middle class” as he calls it, but he seems to have a 1950’s and 1960’s style outlook on how to provide that help.

Large scale government programs that will have to include private company involvement and much higher taxes may have worked in the 1960’s, but in a globally competitive world these ideas are no longer relevant. For example it is unclear how advocating union membership is going to help members of the middle class fit into a world of Artificial Intelligence, Machine Learning and Cryptography where advanced computer skills, not manufacturing assembly skills are the most important ones for citizens to obtain.

While helping people is a good goal, it seems like pushing such large plans through the legislative process in such a short time will lead to resistance that will drive the country farther apart. Given that a lot of the programs may not do much to aid the economy in its global modern form, pushing them through with a slim Democratic majority will also foster ill will. In describing the plans and what they are intended to address, the language used appears to vilify business and business leaders. The tone and rhetoric used to describe them, and the plans themselves seem quite harmful to not just the economy, but the state of political discourse overall.

In this post I want to explain how the tax plans President Biden proposes can stifle capital investment in start-ups, hurt small businesses of all kinds and lose jobs instead of “create millions of jobs” as he projected in last night’s speech.

Revenue Plans
Here are some of his plans that raise taxes to “pay for” some of the initiatives:

• Raise the corporate income tax rate to 28%
• Institute a “minimum corporate tax” of 15% on corporations over a certain size
• Raise the top marginal tax rate to 39.6%
• Raise the capital gains tax rate to be equal to the top earned income rate (plus the 3.8% Medicare surtax added due to the Affordable Care Act), placing the top rate for selling long term assets to 43.4%. Raising the capital gains rate to one higher than that paid on earned income

Problems with The Plans

-Raise the corporate income tax to 28%

The problem with raising the corporate tax rate is that under the Obama administration (when rates were 35%) we were seeing a number of corporate inversions where the headquarters of a company and a corresponding amount of investment was moving outside of the United States. After lowering the corporate tax rate to 21% in the 2017 tax reduction act this practice almost stopped. We have seen a boost in investment in the United States since the top corporate rates have been lowered and the talk of inversion is now non-existent.

We run the risk of losing investment in our own country by charging rates higher than they are now (21% nominal rate). Compared to countries in the EU that have educated workforces and a “business friendly” climate (like the Republic of Ireland) our top tax rate being higher would give corporations the incentive to move operations off shore again.

The argument Democrats make is that we “don’t want to precipitate a race to the bottom” (lowering corporate tax rates to levels of other countries like Ireland at 12.5%). However, CEO’s of public companies have to investigate the possibility of producing their technology and products in the most efficient manner possible. High tax countries will be less advantageous to certain companies than countries with lower tax rates where their products can be developed for those companies.

According to this source (tax foundation.org) the European OECD countries levy a 21.7% average corporate tax rate. Germany and France are at 29.9% and 28.4 percent respectively, with Portugal the highest in mainland Europe at 31.5%. So running our tax rate higher could precipitate a loss of investment to overseas locales. Far Peak Acquisition Corporation’s Tom Farley, past CEO of the NYSE, made the point that raising corporate rates is a very bad idea as capital is fungible. He mentions that it would be a breach of fiduciary duty to shareholders for a CEO of a public company to not pursue off-shore investment as an alternative to on-shore if the rates increase as proposed under the Biden plan.

-Institute a “minimum corporate tax” of 15% on corporations over a certain size.

This seems to be the “Amazon tax” because President Biden always uses Amazon Inc. as the “bad example” of the corporation “paying zero tax”. He states this in a way that implies they are cheating on their taxes (which they are not; they are following the law). The reason they don’t pay a lot of taxes is that they invest large amounts of their profits into capital equipment to grow their operations and make them more competitive. They build data centers, warehouses, distribution infrastructure, they buy trucks, planes and delivery vehicles. Amazon employs more and more people as a result of this investment. If the 15% of a huge ($54 billion) number is given to the government, then that is 15% not spent on expanding and hiring employees to work in Amazon facilities. I also am skeptical that the government will spend these funds as wisely as Amazon will.

Joe Lonsdale, co-founder of Palantier Inc. and founding partner of 8VC (venture capital firm) also has some interesting views on corporate tax hikes and their impact on start-ups and growing companies like Amazon who invest heavily to maintain growth and employment. Mr. Lonsdale states that rates are best left alone.

So my belief is that we should leave corporate income tax rates where they are and let the for-profit sector build as much infrastructure as they can to grow their businesses.

-Raise the top marginal tax rate to 39.6%

While I think that this is a generally bad idea, if this were the only thing done it may not be as damaging as the other parts of the plan. The next item where capital gains rates are raised beyond the rate of ordinary income is the problematic one.

-Raise the capital gains tax rate to be equal to the top earned income rate (plus the 3.8% Medicare surtax added due to the Affordable Care Act), placing the top rate for selling long term assets at 43.4%. This is a corporate tax rate higher than that charged on earned income

Unintended Consequences

Removes Incentives for Risk Taking

Having the capital gains rate to be higher than earned income undermines the entire venture investing model. It is common for founding members of venture backed start-ups to work literally for years for no or very little salary so that they can build their businesses into something valuable enough to invest in let alone sell for a capital gain. Then it can be years before they earn even a competitive salary that they would have had working at a job with Google, MicroSoft, etc.

My previous start-up was self-funded and I put all the money into the company from past investments I had made without ever taking any salary. For nearly three years I worked essentially “for free”, supporting five other families. My “payoff” occurred when I sold the business. The incentive was to make a good return on my investment. If I had to pay more (in taxes) than I would have had to pay if earning regular (W-2) income I would have been much worse off when I sold the business than I was at the end of the three years when I sold the business to Bloomberg LP. The capital gains rate being lower than the earned income rate enhances the incentive to take risk and innovate on behalf of the economy.

Mr. Lonsdale was again recently on CNBC squawk box explaining that he believes raising the capital gains rate removes incentive for people to leave jobs with large established Silicon Valley firms (Google, Facebook etc.) and take a chance on a start-up. Without a promise of a payoff beyond what one would get earning regular income, most would not choose to take the risk of a start-up and do something innovative. He recently moved his firm to Austin Texas because as he stated: “Silicon Valley is becoming filled with risk-averse individuals”.

He mentioned an example where a person making $3 million per year at Google would have little incentive to join a start-up and to help build something innovative if there were no favorable capital gains treatment. They would have more incentive to stay and earn regular income in such a case than to take a chance and help build a new company.

It takes a lot of courage, commitment and hard work to build a successful start-up and there is risk involved. Therefore, favorable tax treatment is a justifiable incentive to include in the tax code for companies seeking to innovate and build new products. Without this incentive, many jobs will never be created in new industries and the entire economy will suffer.

Makes Established Tech “Giants” even Larger and More Powerful

With less incentive to start companies, the large technology companies will get larger and more powerful. Now, even with a capital gains rate advantage, start-ups cannot compete with the salaries that Google, Apple, Facebook and others are able to offer employees. If this capital gains tax rate is hiked as President Biden proposes, then the technology companies will only get more powerful. Someone on Mr. Biden’s staff should go find Amy Klobuchar (Senator from Minnesota) and break the news to her that they are going to make her job even harder (she wants to break up Facebook, etc.). If Senator Klobuchar thinks Facebook is too big now, then she will be really surprised how powerful it gets when it does not have to compete with smaller, nimble start-ups.

Not Just Start-ups, but All Small Businesses are Affected

It also kills non-technical small businesses that have relied on “sweat equity” to build value into their businesses for years. When a small business owner decides to sell his or her entity they have often sacrificed salary and time with loved ones for years to make the business valuable. To have the sale of the assets taxed at a rate above the earned income rate, it makes the tax burden of completing the sale onerous. Contractors, plumbers, electricians, dry cleaners, restaurant owners will all be affected. This is not a “Wall Street only” issue. It is a “Main Street” issue as well.

Impact on Racial Inequality

Robert Johnson, founder of Black Entertainment Television and a very successful businessman, explained recently how raising corporate taxes and capital gains tax rates will harm black owned businesses. Mr. Johnson was a guest on CNBC Squawk box explaining a plan he proposes for providing tax breaks for investments in black-owned businesses.

Raising Corporate Taxes Harms Black Entrepreneurs

Mr. Johnson pointed out that raising corporate tax rates just reduces the amount of capital available for black businesses. He was interviewed in relation to a plan he proposes where black-owned business should get tax advantaged treatment. Raising their taxes runs counter to that goal and of course stifles economic prosperity for people of color.

Raising Capital Gains Rates Harms Black Owned Private Equity Firms

Mr. Johnson further explained that the Biden plan proposing higher taxes on capital gains is a major blow to Black-owned private equity firms. Mr. Johnson explained that a number of Black-owned private equity firms are “just getting started” (in his words) so such a change in tax policy could damage or totally obliterate their business models.

Since such firms have raised or are raising capital on the basis of a reasonable capital gains rate below the earned income rate (not above it as explained previously) a capital gains rate increase as proposed by the Biden administration essentially puts these new firms out of business.

There are so many unintended negative consequences from the plans put forth by the Biden administration that it is clear they need to be revised. Hopefully they will be changed as they travel through the legislative process.

In my next post I will propose some ideas for how to help the middle class, and also help with racial inequality. There are market-oriented approaches some of which would not require a dollar of tax increases. These would be preferable to many of the things that have been proposed in this tax plan. These are “new thinking” as opposed to “old thinking” (the New Deal was fine in 1932 but it is now 2021).

Caveat: I am not a Republican or a Democrat. I am writing this and other blog posts about the level of spending being proposed by the Biden administration and the associated tax and societal costs these programs present. I am producing these viewpoints to illustrate the impact the proposed spending may have on the economy and business as a whole.

The Democratic Party, led by President Biden have enacted legislation to deal with the Covid-19 crisis, proposed a multi-trillion dollar “infrastructure” bill that includes spending on things well beyond the traditional definition of infrastructure such as roads, bridges and airports. This bill introduces the concept of spending on things such as in-home elder care, museums, and affordable housing as infrastructure. They plan another large “Family Act” that is also reported to be a multi-trillion dollar proposal.

The spending enacted or proposed by Democrats is supposed to transcend $6 trillion. This is an amazing amount of stimulus to add to the economy and may spawn wide-spread inflation in the future. The associated tax plans being proposed (a subject for another blog post) to accompany this spending can have deleterious effects on capital formation in general with a large negative impact on entrepreneurial activity of all kinds (startups in technology markets as well as contractors, plumbers, electricians).

Not All Spending is Bad

The first bill signed into law included a great deal of immediate help for people who have been thrown out of work by the pandemic. This (Covid-19 relief) seems a compassionate and wise use of public funds, and does a lot of good for those affected. Workers from the hospitality and travel industries were displaced economically through no fault of their own. I fully support helping them and wish that politicians had not waited until the Biden administration came into office to help them.

The magnitude of the $1.9 trillion bill was debatable but in the end it was probably wise to make sure help was given to those in need despite the size of the bill. The bill had $350 billion for state and local aid (that many thought mainly benefited highly Democratic areas), but again with the pandemic crisis hitting tax revenues in so many places, it is probably best to err on the larger side of caution and to get help to beleaguered communities.

Some Spending is Debatable but Could be Infrastructure

The infrastructure bill is another matter. The bill contains a lot of good and justifiable projects (Amtrak, roads, bridges, electrical power grid). It also contains many things that are well beyond the definition of infrastructure. It is hard to understand how hundreds of millions of dollars for museums (even though I love museums), Native American language preservation, and underground transit in Silicon Vally (a known earthquake zone) are valid infrastructure projects.

The infrastructure plan also includes items that are aimed at environmental causes and social problems. I think it is fine to expand the definition of infrastructure to broadband network expansion, electrical grid improvements and even projects involving highway infrastructure for electric vehicle charging.

Encouraging the use of electric vehicles may best fit into a transportation bill rather than an infrastructure bill, but I can see it related to electric power grid and vehicle charging projects (which can be seen as infrastructure along with bridges, roads and airports). Including these electric vehicle projects in a transportation bill instead of an infrastructure bill could allow them to be funded out of fossil fuel taxes instead of general tax increases. This may better fit the climate change agenda by trading fossil fuel disincentives for electric vehicle incentives. It may also ease the burden on income-tax payers overall while encouraging more ecologically responsible behavior.

Some Spending is Debatable and Not Really Infrastructure Anyway

Plans that are purely social programs (elder care for $400 billion and affordable housing, the aforementioned Native American language preservation, etc.) are totally suspect and seem disingenuous (when included as infrastructure). The cost of these and the fact that they are included with infrastructure when they are clearly social programs makes we analyze the intent of including them in an infrastructure bill.

Calling elder care “infrastructure” and now coining the term “human infrastructure” to describe them seems intellectually dishonest. Arthur Brooks of Harvard University and previously of the American Enterprise Institute made that statement on CNBC on April 19th of this year.

Mr. Brooks’ point was that something like elder care should be in “other bills” and that we should fairly and honestly debate them on their own merits. Including them in an infrastructure plan and then pushing this through with budget reconciliation and Vice President Kamala Harris casting the deciding vote (should all Democrats support the plans) seems to fly in the face of true bipartisan leadership. It looks more like a calculated political strategy to push through a far-left agenda.

Including them with an infrastructure bill seems excessive and purely political. In the end the bill may get negotiated to something more traditional and less expensive.There may be some bipartisan support if the social programs are removed and the infrastructure bill is amended to include more traditional projects. But it does seem likely that Democrats will push this through which can sow the seeds of discontent that may cause political problems in the future.

We have to wait and see on the other proposal for American Families. Many of the things that have been advertised to be in the proposal for “American Families” are noble and worthy of consideration but as our country is still dealing with the economic problems of a pandemic induced recession the timing and size of these plans concern me. Many of the things in the infrastructure plan and the American Family plan seem like good things to do, I just worry about their cost and the inflationary impact that they may have in the future.

Aggressive Agenda May be “Pyrrhic Victory”

Pushing these large spending programs through with budget reconciliation “because they can” will probably come back to haunt the Democrats at a later date. The political pushback of appearing to push an agenda that seems excessive and liberal may not be worth the good they think that they are doing. Not everyone in the country buys the “invest in America” message being espoused by the Democrats. Not everyone believes that bigger government works equitably and efficiently. We have seen over time that many of these liberal ideas can be reversed in a subsequent election. So rather than getting something with a more traditional set of legislation, this “swing for the fences” and spend trillions of dollars approach can inevitably backfire on Democrats.

Overall Impact on Economy – Inflation

The impact of this kind of spending will inevitably be inflationary. Inflation hits the poor disproportionately hard as it raises costs faster than wages can raise to meet them. It seems like a wiser approach would be to propose more rationally sized bills that can garner some bipartisan support. Having more of us agree on a path even if it leads to a less grandiose outcome than envisioned by Democrats is a good idea.

Mitch Albom is a thoughtful author and columnist. Recently he wrote this piece for the Detroit Free Press: “Mitch Albom: A trillion dollars is not a billion; why you can’t just print money”. In the article he lays out how spending at the rate we are on large social programs will have a cost, a very large cost.

In the article he explains how politicians are as Rahm Emanual said (para-phrased): “not letting a good crisis go to waste”. I don’t think that Mitch Albom is a partisan individual and don’t think he is favoring one party over another in his analysis of what is historically massive spending on huge government spending plans. The CARES act last year amounted to $2 trillion and was sorely needed but adding on the nearly $2 trillion “American Rescue Plan” last month, followed by a proposal for a $2.3 trillion infrastructure bill described as “The American Jobs Plan” with an advertised $2 trillion “American Family Plan” (soon to be proposed) seems to be incredibly excessive. 

Mr. Albom points out the inevitable devaluation of the US dollar that will result with such an infusion of capital into the economy, and inevitable inflation that will ensue and reminds that this hurts all of us in the long run. Besides higher taxes that always end up hitting the middle class, these programs don’t promote economic growth as they are purported to, and eventually become economic anchors as everyday Americans end up paying more and more of their income to the government which redistributes it unevenly in a way that does not benefit everyone. 

The important points that Mr. Albom makes include that the American Rescue Plan (in Joe Biden’s words) is aimed at “the very health of our nation” with the sales pitch being that it addresses the Covid-19 pandemic. The truth is that (again as Mr. Albom points out) the bill includes more money ($350 billion) for state and local government assistance than it does for direct aid related to Covid-19 vaccinations. Spending on state and local governments that have badly mismanaged pension systems is not directly related to health initiatives. It seems more targeted at helping governments with mostly leaders from the democratic party. This may help ensure democratic electoral success in future elections. This does not seem like wise spending to address “the very health of our nation”.

With the American Jobs Plan (infrastructure) items include $1.5 billion for Amtrak, and hundreds of millions for museums, Native American language preservation, and underground transit in Silicon Valley (a known earthquake zone by the way). The Amtrak expenditure is infrastructure related, but museums, language preservation initiatives, etc. may be lofty goals, but don’t seem to belong in an infrastructure bill. Spending on these types of programs may be aspirational for a minority of the American people, but it does not seem like wise spending in the context of a bill intended to address infrastructure issues.

The infrastructure plan includes more spending on programs to encourage the use of electric vehicles ($174 billion) than on actual construction of roads and bridges. Personally, I am a proponent of electric cars, but this is really an item for combatting climate change rather than something that belongs in an infrastructure bill. Going beyond this, another layer of audacity seems to be the inclusion of $400 billion in spending on senior and disabled person care, affordable housing ($300 billion) and another $35 billion for researching climate change. These are all worthy notions but packaging them into an “infrastructure bill” and selling them on that basis is dishonest. It will eventually lead to more political division as the debt burden will mount on ordinary citizens due to the cost of the programs (which may have no clear tangible benefit).

President Biden is probably a well-meaning and decent man. He has only lived in his adult life as a lawmaker in Washington and does not understand what life is like in the country as a whole. He has no idea how to run a business, meet a payroll, or build an economic entity (a business). He is a politician who believes in big government and wants to preserve power for his party, the Democratic Party. As we have seen over time, the party in power (democrats in this case) always overreach and push too liberal an agenda. In general, all politicians do this by pushing too liberal or too conservative an agenda (depending on who is in power). In this case, Biden is falling into the trap of assuming a mandate that does not really exist. It will lead to more political division within the country.

The Biden administration and the Democratic legislature is pushing a very liberal agenda and acts as if it has a huge mandate. The last election for the house and senate was not a sweeping mandate. The election results not related to our past President were not totally liberal (many voted against President Trump because they wanted a more reasoned and polished approach to government than his administration had provided). Many voting against Trump were not particularly liberal in their views at all. The election as a result did not produce a “Blue Wave” as many in the press and Washington seem to believe. The house of representatives lost seats to the republicans and if our past President had not been so hyperbolic and erratic toward the senatorial runoff elections in Georgia and had not pushed his “stolen election” narrative, the Senate may still be in Republican hands.

 In actual fact the country as a whole is not as liberal as the major east and west coast cities. The large spending and dishonesty over what the infrastructure bills contain will cause a backlash against the Democratic party. Our prior President was such a polarizing figure that it is easy to feel more comfortable with a President who is acting more “presidential” than the prior one. President Biden is much more gentlemanly and behaves in a more “presidential” way than Trump ever did. The mistake that President Biden is making is not just assuming that he has more of a mandate than he does, but also under-estimating the backlash that he is forming within the electorate. If Trump stays off the stage in 2022 then the Republicans are very likely to regain the house and the senate if this liberal agenda continues.

When the tax hikes that President Biden articulated in his campaign rhetoric are proposed, the illusion of a mandate will quickly evaporate. The citizens now are happy to receive checks, get extended unemployment assistance, and other promised government benefits. When the tax bill comes due on ordinary Americans (as it always does and no matter what Biden says it will fall on the middle class) then the electorate will no longer support the wild spending in Washington. The democratic party leadership will have overstepped its bounds and the political tables will likely turn. Biden would be wise to control members of his party who have such an aggressive agenda. Coming out of the “pandemic economy” the country and electorate need time to heal. President Biden is nearly inviting a backlash election that opens the electorate back up to “Trumpian” politics.

So it would seem prudent for President Biden to be mindful that pushing his policies of “trillions and trillions” of spending on an electorate that really does not overwhelmingly support that kind of spending is likely to be a losing proposition in the long run. It will also sadly push an enormous debt burden onto the American people for generations to come. This will inevitably reduce the quality of life here in the long run and sow the seeds of political strife in the short run.