“It was the best of times, it was the worst of times…“, the opening line in Charles Dickens’ A Tale of Two Cities, came to mind on Wednesday afternoon and Thursday evening of this week. In a tale of two speeches, Fed Chairman Jerome Powell first admitted that the Federal Reserve expects to see “transitory inflation” well in excess of their preferences, later this year. Late Thursday night, in his first speech before a joint session of Congress, President Biden attempted to justify what so far is nearly $7 trillion in new spending, something that many believe is causing the very inflation that Powell is warning about.
Across the country, frustrated Americans are telling both men that the causes of that inflation are right under their noses, and that full-blown inflation has been here for months. As the chart on the right shows, lumber prices are up nationwide over 262% in the past year, shortages left over from the Covid Lockdowns that many governors are still enforcing. Sugar, a common ingredient in many foods, is up 50%. Gasoline prices at the pump are up $1.11 in the past year, and anybody who’s tried to buy a house in this environment has faced a bidding war of multiple full price offers, many of them cash. Nationwide, home prices are up 17% in a year, led by Coeur d’Alene, Idaho where they are up a whopping 47% due to the massive migration of Californians out of that state. In fact, the migration of citizens from high-tax lockdown states to low-tax open states—where governors have lifted mask mandates and have re-opened their economies—is so pronounced that the former are losing Congressional House seats that the latter are gaining in the most recent redistricting.
Taxes, Taxes, and More Taxes…
When you and I want to purchase something, we don’t do so on credit financed over 30 years. Most of us save up for purchases and make them out of savings or income instead. Not so our government. “We need to raise the money to pay for all of this“, said Joe Biden on multiple occasions this month. As the chart on the left shows, the first four Covid relief bills are still not fully spent, with over $1.2 trillion yet to hit the economy. The fifth such “Covid relief” bill, another $1.9 trillion in cost, didn’t attract a single Republican vote, not because these legislators are heartless or blind to the plight of American small business amid the lockdowns, but because less than 9% of that bill was earmarked as Covid relief. The same holds true for the $2.25 trillion “infrastructure” package Biden just proposed, less than 6% of which is going to roads and bridges. His latest proposal dubbed the American Families Plan is asking for another $1.8 trillion in new social programs.
The funding for all of this according to Biden, will come from new taxes on “the wealthy”, businesses and job creators, the people whose risk-taking, real estate and business purchases create jobs and new tax payers. Included is a nearly doubling of the capital gains tax on, for example, the sale of a business or a family farm. Using the same old tired mantra of having “the rich pay their fair share“, such legislation draws the support of those ignorant to basic economics (something we don’t teach in our public schools any longer), and the ire of business owners and investors. The Rev. William John Henry Boetcker originally said “you cannot lift up the wage earner by pulling down the wage payor”, and proposals that do so forget that money is mobile, that the wealthy became wealthy by not being stupid, and that when you remove the incentives for risk-taking you get less of it; less investment in fewer businesses starting, fewer struggling companies bailed out by investors, and less new job creation. Decades of these types of proposals have taught us that they rarely raise even close to what the authors predicted, and that unemployment typically rises dramatically in their wake. Instead of being employed by business owners taking risks, these would-be new employees instead become a drain on taxpayers via extended unemployment benefits.
This past week also brought some phenomenal new economic numbers and earnings on Wall Street. The first read on Q1 gross domestic product (GDP)—the pace of growth of the economy in the first quarter—was a whopping 6.4%. As if to confirm all of this, Facebook (+48%), Microsoft (+19%), Apple (+54%), and Amazon (+44%), all reported blowout earnings. In any other context, the stock market would have rallied 3-5% in the days that followed so many breathtaking reports. Instead, investors saw the wet blanket that the administration‘s tax and spending proposals was throwing over the fire, and looked the other way.
Thirty years ago, congressional Democrats, seeking to “have the super-wealthy pay their fair share“ of taxes, levied a luxury tax on the purchase of yachts in the United States. Did it stop the wealthy from purchasing the vessel of their dreams? Not at all. Instead of paying the American surtax, however, they chose to purchase their yachts from shipbuilders in Monaco, Greece, and from other non-American shipyards, benefiting those economies instead of ours. Here in the US, the yachting industry suffered a horrible recession, with sailmakers, brass fitting manufacturers, the teak and fiberglass industry, all seeing massive layoffs amid this punishing additional tax. Who was put out of work? Not the wealthy, but the people making $50-$80,000 a year as the employees of such companies, and not one dollar of tax was ever collected. In the end, it was the Democratic Majority Leader himself who eventually begged for the repeal of the tax that had put so many of his constituents out of business.
In 1991, that was just one example of the many who suffered from the good intentions of the misguided. In 2021-2, are we on track to once again have a Tale of Two Economies—one for this year’s “victim” constituency and another that punishes the envied? Will hyper-inflation eventually overtake both next year? As our congressional leaders play their high-stakes game of chicken with our grandchildren‘s futures, will we sit by silently saying nothing? Jefferson and his compatriots warned us about pure democracies wherein 51 wolves and 49 sheep vote on what’s for dinner. In the Senate, the split is 50-50. Will we have to learn the hard lessons of the past yet again? As Reagan once reminded us, freedom comes with the responsibility of civic action:
“Freedom is never more than one generation away from extinction. We didn’t pass it to our children in the bloodstream. It must be fought for, protected, and handed on for them to do the same, or one day we will spend our sunset years telling our children and our children’s children what it was once like in the United States where men were free.”
All the best,