President Biden finally released his FY22 budget proposal on a Friday afternoon before a long Memorial Day weekend. This was good timing for the White House because it helps hide how irresponsible his budget is for America. But Americans know better, and his budget should be rejected and replaced with one that follows a responsible, pro-growth path forward.
During my year as the chief economist of the White House’s OMB during the Trump administration, I helped determine the economic assumptions and other key decisions in the President’s last FY21 budget. We advocated for a path toward more free market capitalism-supporting robust economic assumptions.
This policy forecast included faster economic growth resulting from making almost all of the Trump tax cuts permanent, further deregulations, and fiscal restraint of nearly $5 trillion in savings over a decade to balance the budget and to support opportunities for Americans. The path built on what was already working—an agenda that helped America reach a record low poverty rate and a record high in real median household income in 2019.
As someone who has worked at a think tank in Austin, Texas for years, I’ve seen the gains made by the Texas Model—no personal income tax and relatively lower government spending, taxing, and regulations, which contributes to more economic freedom, lower cost-of-living, and greater human flourishing compared to most states. Alternatively, California has taken a different approach—with now the second-highest personal income tax rate, stricter regulations, and substantially more spending that crowds out economic activity and destroys prosperity.
Given our system of federalism that was designed to produce a laboratory of competition among states, we can clearly see that the Texas Model works well over time, compared to states like California.
The Trump administration learned from the more fiscally responsible states, and used the Texas approach when it came to criminal justice reform, deregulation, lower taxes and proposed spending restraint, which resulted in substantial, tangible economic gains. Unfortunately, the Biden administration is following the folly of the big-government California model—which demonstrably doesn’t work.
There are at least three ways that President Biden’s first budget is irresponsible. First, Biden’s $6 trillion budget sends us down the road toward socialism.
The increase in the budget from the pre-pandemic baseline FY20 budget of $4.81 trillion shows that Biden’s budget is 25% higher. If Biden’s budget was limited to the average taxpayer’s ability to pay for it, as measured by population growth plus inflation of 1.37% in the Foundation’s Responsible American Budget, then taxpayers would foot the bill for a maximum of $4.88 trillion. The president’s budget is $1 trillion, or 23%, more than this metric, meaning that his budget proposal takes ownership of more means of production throughout economy and livelihoods (which is the definition of socialism).
The excess spending continues over time as the budget expands by $69 trillion over a decade, increasing the national debt by 50% or by $14.5 trillion, and results in the debt owed by each American rising by 50%, to about $120,000. The American Jobs Plan would add $529 billion and the American Families Plan adds $270 billion. These expansions of government are really anti-jobs, anti-families, and anti-American, as this is a road without a good destination.
Second, the Biden budget makes flawed economic assumptions.
As someone who helped determine the economic assumptions in President Trump’s final budget, I understand how there are many variables underlying the president’s budget. It’s not an exact science, but it’s important to do your due diligence.
An unlikely economic assumption in Biden’s budget is that real gross domestic product keeps increasing over time, despite the substantial tax hikes of more than $3 trillion. Additionally, the administration is acknowledging its proposals are more about socially engineering society to its preferred outcomes rather than achieving more economic prosperity. Economic growth in his budget is just 3.2% in 2022 and just 2% in 2023 after rampant government spending, with less growth thereafter. These growth rates are substantially less than the post-WWII average of 3% and lower than the three pre-pandemic Trump years. In short, the economic assumptions are weak even given a Keynesian view that government spending drives more growth, which I don’t share.
And even those growth rates are optimistic as higher taxes slow growth, just as substantially higher debt from the excessive spending does. Higher debt means either interest rates will have to rise as more debt is issued or the Federal Reserve will have to continue monetizing it and bring about inflation, which also contributes to higher interest rates.
Currently, inflation is about 4% (at an annualized rate), and will likely stay that high. It could even increase with the large increases in the money supply and the continued purchases by the Fed of $120 billion in Treasury securities monthly. Again, Biden’s budget fails again as it assumes inflation is only 1.8% in 2021 and plateaus at 2.3% starting in 2025, which is unlikely given the situation.
Meanwhile, the 10-year Treasury note rate is about 1.6%, but the proposed budget has it at only 1.2% for this year and rising to only 2.8% by 2031. With $14.5 trillion added to the debt (including net interest rising from $345 billion to $883 billion in 2031) and the probable higher inflation that will need to be subdued with less money creation and resulting higher interest rates, we could see much higher interest rates than what his budget assumes. This would result in even less economic growth than what’s in Biden’s budget, thereby increasing the number on welfare programs, which will itself drive up government spending. This will also influence other budget items.
Assuming lower interest rates in the Trump budget made more sense, given we were putting the budget on a path toward balancing over time. But the Biden budget maintains deficits of more than $1.3 trillion every year, with the deficit-to-GDP ratio only going down to 4.2% in 2029, which is well above the historical rate of 3%.
This brings us to the third way that Biden’s budget is irresponsible: It mortgages ours and our kids’ and grandkids’ futures.
Irresponsible government spending causing massive deficits along with rising net interest over time will cost us more and reduce opportunities for good-paying jobs, affordable credit, and a lower cost-of-living. It will also raise interest rates, resulting in lower real incomes and fewer job opportunities.
Fortunately, we know that the pre-pandemic policy approach taken by President Trump supported record levels of human flourishing. Congress should have done a better job of reining in government spending, and the administration could have touted spending restraint more. But even then, the growth in spending wasn’t at the level proposed by Biden. If Congress had controlled its spending, then the deficit, interest rates, inflation, and trade deficits would likely have been lower. Those goals are still worth pursuing.
That’s why TPPF created the Responsible American Budget, which is supported by many policymakers, economists, and thought leaders. It sets a maximum threshold for the federal budget every year based on the average taxpayer’s ability to pay for it (based on population growth plus inflation). This is supported by research on fiscal rules that have worked well in other countries and states, including Texas, Montana, Iowa, and Alaska.
By rejecting President Biden’s irresponsible budget proposal and instead incorporating the RAB in the budget process, Congress could enact a budget that meets the needs of the country without excessively burdening American families. The budget is already far too big; its size and scope are well above what our Founding Fathers imagined, which is why fat should be cut and the budget growth should be limited to the RAB, which will leave more money with families and allow entrepreneurs to build on the success of free-market capitalism.
Join us in ending the days of fiscal insanity in D.C. and replacing it with fiscal responsibility.