Joe Biden’s Bajillion-Dollar Budget: How To Think About It

For the next several days, the media (in general, not just financial portals) will be awash in headlines trumpeting Joe Biden’s budget and specifically, the size of it.

Under Biden’s proposal, federal spending would be some $6 trillion next fiscal year, and annual deficits would exceed $1.3 trillion for a decade. Within 10 years, the national “debt” would be nearly 117% of GDP and spending would exceed $8 trillion.

The first thing you should note is that these numbers are meaningless because, as Bloomberg reminded its readers on Thursday, almost all presidential budgets are “aspirational.” The official proposal, due to be released Friday, is just that — a proposal. Because Democrats enjoy (or maybe “don’t enjoy” is more apt) very narrow majorities in both chambers, adoption of the plan in its entirety, to the letter (and decimal), isn’t in the cards.

Beyond that, though, the numbers are meaningless in very literal sense. This whole conversation is couched in nonsense terms.

Regular readers are well apprised of my position on this, and I was actually loath to recapitulate because, frankly, my position is unassailable from a kind of philosophical perspective and most readers aren’t willing to look at things through that lens.

However, because this is the very definition of “topical,” I’ll recap. Below, I’ll pull some language verbatim from a previous article. I see little point in repeatedly paraphrasing myself for the sake of it. If you found the right words and cadence to get your point across, there’s no utility in tweaking it when you need to make the same point later.

Like MMTers, I acknowledge that the deficit is mostly meaningless. But beyond that, I argue that because we have no working theory of inflation, it’s pointless to suggest we’ll somehow be able to divine the threshold beyond which deficit-financed spending (or fully-funded spending for that matter), is conducive to a broad-based, sustained rise in prices for all (or most) goods and services.

Day in and day out, folks bring up lumber prices or charts showing multi-year highs in commodities and claim they’ve said something meaningful about inflation. They “explain” that instances of demand outstripping supply can lead to higher prices. (Oh, people want wood? And there’s not enough wood? So now wood prices are higher? Thanks for the explainer, I’d have never connected those dots!)

Or they put a lot of emphasis on logistics and supply chains while regurgitating chapters from a business school textbook. (Because that sounds more sophisticated than the colloquial version, which is basically just your standard explanation for every drought in the cocaine market: “Well, the guy I get it from is having trouble getting it from his guy, who can’t get ahold of his guy whose guy is the main guy.”)

I hate to undermine the mystique of all this daily “analysis,” but the truth is, any idiot can explain why prices are rising at a given time for a single good or service, and even for several types of goods and services, precisely because there’s nothing to “explain.” People want it (whatever it is) and there’s not enough of it. So unless and until the people who want it run out of money, more of it becomes available or both, the price of whatever quantity is available will be higher. (Opioid addicts understand this better than anyone. If your go-to gal is running low on roxys and she’s lost the doctor who writes the prescription, you — the addict in this hypothetical — will gladly pay double or triple the market price to secure whatever’s left in that pill bottle, because you know if you don’t, the next guy calling her will.)

What’s more difficult to explain is broad-based, across-the-board inflation. In fact, it’s not just difficult, it’s impossible, because instances of runaway inflation for everything in the economy are, at least partly, psychological phenomena.

The Biden budget predicts consumer prices won’t rise faster than 2.3% per year. That may be right. Or it may be wrong. Or it may be somewhere in-between right and wrong. The truth is, we have absolutely no idea, because when “consumer prices” means a big ol’ basket of “stuff,” part of what determines the price is the psychology of the people doing the buying.

You can have runaway lumber prices without runaway inflation. Same for oil or apples or yogurt (or roxys). It’s only when prices for lumber, oil, apples and yogurt are all rising sharply at once that you’re experiencing runaway inflation.

Of course, the chances that the supply chain for such disparate items as oranges, wood, semiconductors and, I don’t know, cheese, are all mucked up at once are virtually zero, so if prices are spiraling for everything at once, you probably have a currency problem, which is just another way of saying you have a crisis of confidence.

The bottom line is that you can’t have runaway inflation without unanchored inflation expectations, and while expectations in the near-term can be affected by fluctuations in the price for high-profile necessities like gas, a sudden unmooring of longer-term inflation expectations is usually due to a legitimacy crisis for some intersubjective, shared myth like the dollar or the euro and the governmental structures that stand behind them.

Legitimacy crises of that sort (i.e., of the existential sort) can come about in a variety of ways, but in an ignorant society (like America’s) it isn’t likely that enough people care about, or understand, the details of a budget plan to destabilize the myth that says the US dollar is a thing that’s not only worth having, but worth hoarding (if you can) and rubbing all over your face (if you’re shooting a rap video).

I said I was going to recapitulate by quoting myself, but everything you’ve just read is actually new material. Once my pen starts going, it’s not so easily stopped.

Having given you a bit of new (and hopefully entertaining) color, I’ll leave you with several lengthy quotes from a previous article which help drive home the point. I encourage you to consider the Biden budget (and all of the commentary you’ll invariably hear lauding it or criticizing it) in the context of everything said above and below.

From “The Wealth Tax And Our Shared Insanity“:

If the economy ever does claw its way back to something like full capacity, taxing rich people isn’t going to ameliorate inflationary pressures. Just because you “pay for” something like a multi-trillion-dollar infrastructure push doesn’t mean it won’t be inflationary. The crucial point is the economy’s “speed limit,” not any imaginary budget constraints.

But even that higher-level thinking doesn’t go far enough for me.

All of these discussions are, at heart, couched in nonsensical terms. To be sure, it’s refreshing when someone like Stephanie Kelton comes along and lifts the veil for the masses on something as crucial as federal government financing in developed, currency-issuing economies. She’s done the world an incredible service and we’re all in her debt, especially to the extent her advocacy ends up manifesting in more utilitarian outcomes for a society that’s rife with inequality.

That said, in order to truly break free from the trap that causes us all to traffic in nonsense on a daily basis, we have to realize that all of these discussions are rooted in myths.

Money, for instance, is everywhere and always a myth. Inflation doesn’t come about “because” we hit some “speed limit” or some “capacity constraint.” And, with the utmost respect to Harley Bassman (who regular readers know I’m very fond of), it doesn’t come about due to “the excessive creation of fiat currency” either.

There is no quantifiable line in the sand marked “excessive.” And there are no “speed limit” signs. It’s true that lumber prices will surge in the event there’s huge demand for new homes and not enough wood to build them with. People will bid up the scarce wood. But that’s a narrow example. Sure, it can become less narrow. As Kelton suggested, a broad-based infrastructure initiative implemented when the economy is already running hot could result in price increases for all the goods and services needed for building and construction.

But let’s dig a little deeper. All of those considerations accept that there’s something real at the bottom of this. But there isn’t.

Spiraling, across-the-board, hyperinflation — e.g., the visceral images of people wheeling in cartloads of paper money to pay for a single loaf of bread — can only come about if people lose confidence in each other’s belief in the value of something that had no value in the first place. The value of the currency is derived from the strength of that confidence network. Nothing else. You believe the dollar has value because you know I believe it. And I believe it because I’m confident the next person believes it. And so on.

That confidence isn’t the result of scarcity. The fact that the government demands it in taxes helps legitimize a given currency (e.g., by creating demand), but it’s not the source of the confidence either. Confidence in money, like confidence in anything else that’s not real, is built over time. Like the triumph of monotheism, the “victory” of the dollar is a historical accident. It could collapse tomorrow or it could reign for several more millennia. We have no idea.

What we do know, using the example of religion, is that irrefutable empirical evidence to suggest that something is a fairy tale is certainly not sufficient to undermine the myth. The same people (us) who set foot on the moon still believe in Creationism. That’s an incredible feat of cognitive dissonance.

If we can persist in that state of insanity, then there’s absolutely no reason we can’t, for example, simply conjure up $10 trillion and rebuild the nation’s infrastructure, or fund universal healthcare, or whatever else we want to do, without taxing anyone and without causing hyperinflation.

The idea that people’s faith in the dollar is going to be shaken by presenting the public with a calculation showing that historically, it’s dangerous to create money at a rate that exceeds economic growth, seems inconsistent with how the public processes other such evidence.