Two things ought to be looming large over discussions in Washington about President Biden’s American Jobs Plan: inflation and uncertainty.
Milton Friedman, the Nobel Prize-winning economist, said, “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
Right now, money seems to be a lot more plentiful than output.
Nine years ago, the Federal Reserve Bank of San Francisco said, “We are currently engaged in a test of (Friedman’s) proposition.”
That was after a series of bailouts designed to counteract the effects of the Great Recession. But, to the surprise of many, inflation never came.
Today, the nation seems to be building on that good fortune by putting its money-printing machines on steroids. For two years now, spanning two presidential administrations, we’ve seen a series of stimulus measures, including direct checks to Americans and forgivable business loans.
Anecdotally, at least, prices are starting to rise. The annual inflation rate was 4.2% for the 12-month period ending in April, according to usinflationcalculator.com. That’s the highest monthly rate since September 2008. Economists are debating whether it’s a temporary thing brought on by the end of the pandemic, or something more serious.
Adding another trillion or two of government spending to the mix could settle that debate in a bad way.
Inflation makes it easier for Americans and their profligate federal government to pay off debt, because the money borrowed yesterday becomes increasingly less valuable today. But if prices rise too quickly, wages have trouble keeping pace and people feel discouraged to save or invest. Taken to the extreme, high inflation encourages hoarding, which leads to shortages of various items.
Uncertainty, on the other hand, is bad for people and businesses, and the pandemic already has given us plenty of it. People are unsure about their jobs. Many businesses have been at the mercy of government health decisions during the past year.
Add tax hikes to the mix, such as Biden’s proposal to sharply increase the corporate income tax rate, and it could stifle the post-pandemic recovery everyone seems to expect.
Tax worries
Rep. Blake Moore, Utah’s 1st District congressman, told the Deseret News and KSL editorial boards this week that he has met with several business leaders lately who worry about Biden’s plan to raise the tax rate.
“The difficulty that they’re going to face is this uncertainty, that at one point, they were (taxed at) 33%, then they were dropped down to 21%, and now they’re going to go back up to 28%,” he said.
Unlike House members, who have to think two years ahead to the next election, a business CEO would like to plan the next 10 to 15 years with some degree of certainty concerning governmental costs, Moore said.
“If we could get to a point where we were able to communicate to the business community, here’s what the next 10 to 15 years looks like, I think there would be several bipartisan efforts (at compromise), if it was like an increase from 21% to 25% (in the corporate rate),” he said.
But certainty is hard to find in politics, especially when control of Congress swings from one party to the other every few years.
Time to dance
Right now, Republicans and Democrats seem far apart on the dance floor of negotiations over Biden’s plan, but at least they are all still swaying to the music.
Republicans this week seem poised to offer a $1 trillion counterproposal to Biden, who already has dropped his plan from $2.3 trillion to $1.7 trillion. Republicans want to fund their plan with COVID-19 relief money, not new taxes. The president wants to increase taxes on the wealthiest Americans.
Moore said he supports greater investment in infrastructure such as roads, rail, interstate bridges and even access to broadband.
But he won’t support a bill that clearly tries to favor some businesses over others. And, like many of his Republican colleagues, he won’t support any sort of tax increase. The best way to increase tax revenue, he said, is to grow the economy.
In the end, the $700 billion dividing the two parties may be tough to bridge. But finding some sort of middle ground is better than having Democrats force-feed Americans a bill without any bipartisan support — something Republicans would likely answer by changing tax rates again when they are in power.
That would only add to the anger and uncertainty — not a good thing when the prices of everything seem to be rising.