Jerry Bowyer | On March 23, 2021

On Monday, the New York Times ran a piece reporting that unnamed sources were indicating the Biden administration was about to release a gigantic spending proposal, one costing at least 3 trillion dollars.

“President Biden’s economic advisers are preparing to recommend spending as much as $3 trillion on a sweeping set of efforts aimed at boosting the economy, reducing carbon emissions and narrowing economic inequality, beginning with a giant infrastructure plan that may be financed in part through tax increases on corporations and the rich.”

I mention that the cost is at least $3 trillion because the $3 trillion in recommended spending does not count the “cost” of what are called “tax expenditures” such as targeted tax credits. Such programs often “refund” taxes to people who have not paid taxes. In other words, while done through the tax code, they are not really tax cuts, but rather expenditures.

The total new spending in the plans would likely be $3 trillion, a person familiar with them said. That figure does not include the cost of extending new temporary tax cuts meant to fight poverty, which could reach hundreds of billions of dollars, according to estimates prepared by administration officials.

Whether you call such programs tax expenditures or tax cuts, they are not likely to be supply-side in nature; that is, they are unlikely to change incentives towards long-run productivity. They will, however, cause decreases in revenues, which means that this new spending would likely be almost entirely new borrowing, especially if Senator McConnell is right that tax hikes on corporations and the wealthy are not expected to receive needed GOP support.

““I don’t think there’s going to be any enthusiasm on our side for a tax increase,” Senator Mitch McConnell of Kentucky, the Republican leader, told reporters last week. He predicted the administration’s infrastructure plan would be a “Trojan horse” for tax increases.”

So, if the base case is: massive new spending, no new taxes to pay for them, and tax expenditures which decrease revenues without offsetting growth effects, the inevitable result will be additional federal borrowing. Unless you think Americans are suddenly going to turn Japanese and shift towards becoming a saving society, and park their savings in very low-yield new treasury offerings, it is inevitable that the Fed remains the lender of last resort to the neediest borrower, the US government. Whoever said that if you want a friend in Washington you should buy a dog wasn’t an observer of modern central banking. Or maybe monetary lap dogs count, too. This all amounts to maybe $3 trillion of additional money creation, money which the Biden administration will not want to lie around moldering in money center bank vaults.

That’s probably why, right on cue, the dollar dropped, broad bond indices rallied, and (inflation-protective) TIPS rallied even more. So did commodities. Gold was down for the day, but that’s only when looked at from the baseline of midnight. It was up during the trading day. It seems like the market’s interpretation of the news led to a reflation trade.

Originally published on Townhall Finance.

Jerry Bowyer

Jerry Bowyer is a Forbes contributor, contributing editor of AffluentInvestor.com, and Senior Fellow in Business Economics at The Center for Cultural Leadership.

Jerry has compiled an impressive record as a leading thinker in finance and economics. He worked as an auditor and a tax consultant with Arthur Anderson, as Vice President of the Beechwood Company which is the family office associated with Federated Investors, and has consulted in various privatization efforts for Allegheny County, Pennsylvania. He founded the influential economic think tank, the Allegheny Institute, and has lectured extensively at universities, businesses and civic groups.

Jerry has been a member of three investment committees, among which is Benchmark Financial, Pittsburgh’s largest financial services firm. Jerry had been a regular commentator on Fox Business News and Fox News. He was formerly a CNBC Contributor, has guest-hosted “The Kudlow Report”, and has written for CNBC.com, National Review Online, and The Wall Street Journal, as well as many other publications. He is the author of The Bush Boom and more recently The Free Market Capitalist’s Survival Guide, published by HarperCollins. Jerry is the President of Bowyer Research.

Jerry consulted extensively with the Bush White House on matters pertaining to the recent economic crisis. He has been quoted in the New York Times, The Wall Street Journal, Forbes Magazine, The International Herald Tribune and various local newspapers. He has been a contributing editor of National Review Online, The New York Sun and Townhall Magazine. Jerry has hosted daily radio and TV programs and was one of the founding members of WQED’s On-Q Friday Roundtable. He has guest-hosted the Bill Bennett radio program as well as radio programs in Chicago, Dallas and Los Angeles.

Jerry is the former host of WorldView, a nationally syndicated Sunday-morning political talk show created on the model of Meet The Press. On WorldView, Jerry interviewed distinguished guests including the Vice President, Treasury Secretary, HUD Secretary, former Secretary of Sate Condoleezza Rice, former Presidential Advisor Carl Rove, former Attorney General Edwin Meese and publisher Steve Forbes.

Jerry has taught social ethics at Ottawa Theological Hall, public policy at Saint Vincent’s College, and guest lectured at Carnegie Mellon’s graduate Heinz School of Public Policy. In 1997 Jerry gave the commencement address at his alma mater, Robert Morris University. He was the youngest speaker in the history of the school, and the school received more requests for transcripts of Jerry’s speech than at any other time in its 120-year history.

Jerry lives in Pennsylvania with his wife, Susan, and the youngest three of their seven children.