Peach Tree Times

Trillions of dollars in spending as well as additional taxing increases are sitting on the table in Congress at a time when the pressure of rising inflation already brings anxiety to many Americans, according to one economics professor. 

As Democrats in Washington continue to debate the contents of President Joe Biden’s massive social welfare spending package, infighting could complicate a looming Oct. 31 deadline to pass the bill, according to the Washington Examiner.

Antony Davies, distinguished fellow for the Foundation for Economic Education and associate professor of economics at Duquesne University, pointed out that Biden's proposed budget for fiscal year 2022 has the federal government spending $1.8 trillion more than it collects in taxes coming on the coattails of a $3.7 trillion deficit in 2021 and $3.1 trillion in 2021. 

"To finance these deficits, the government is increasingly relying on loans from the Federal Reserve," Davies said. "When the Federal Reserve loans to the government, the money supply increases, and that puts upward pressure on prices." 

The consequence of Washington's spending will manifest through inflation and increased cost of living; according to an Oct. 13 report from the U.S. Bureau of Labor Statistics, the Consumer Price Index (CPI) rose 5.4% over the last 12 months ending in September 2021. 

The Bureau of Labor Statistics’ Consumer Price Index (CPI) reported notable upticks over the past 12 months on items particularly important to average U.S. households, with food up 4.6% and energy 24.8%.

In what they deem the “inflation tax,” the Wall Street Journal editorial board points out that “workers are paying the price” for increased costs since “real hourly earnings are down 1.9% since January.”

According to Davies, consumer inflation on an annualized basis has fluctuated between 5% and 11% since February of this year, at least double the typical rate. 

"The president’s budget anticipates trillion-dollar-plus deficits for the next decade," Davies said. "As the government continues to borrow from the Federal Reserve, those deficits will continue to put upward pressure on prices. That will be particularly harmful to people living on fixed incomes, to savers and to borrowers with variable rate loans."

Biden has called this current period of inflation and price spikes “temporary,” according to Reuters. However, the Wall Street Journal recently reported that officials at the Federal Reserve see “‘transitory’ inflation lasting quite a while.”

Biden's massive spending bill was deemed a "reckless expansion of government programs" by Sen. Joe Manchin (D-W.Va.) who called for Congress to proceed with caution in allowing additional spending to be piled on. 

“Millions of jobs are open, supply chains are strained and unavoidable inflation taxes are draining workers’ hard-earned wages as the price of gasoline and groceries continues to climb," Manchin said according to the New York Post.

Some close advisers to Biden have indicated they do not think rising prices and inflation affect the average citizen. As reported by Fox News and others, Ronald Klain, Biden's chief of staff, shared a tweet captioned “This” and two downward-pointing emojis to a post from a Harvard professor calling inflation a “high class problem.”

"Struggling to pay for food, fuel, and housing because of rising prices is not a ‘high class problem,'" Republican National Committee rapid response director Tommy Piggott replied to the tweet. "Biden is making everyone worse off, but instead of stopping the damage, their strategy is to try to gaslight Americans."

The alternative to Washington borrowing more money to finance its deficit spending is to raise taxes, Davies said. 

"Here the government is increasingly turning its attention to the middle classes," he said. "The middle classes earn twice as much as the top 1%, and the government currently taxes them at half the rate that it taxes the top 1%. Politicians are beginning to view the middle classes as a largely untapped resource."

Several new taxes and tax rules proposed by the Biden administration are allegedly aimed at billionaires, including taxing unrealized capital gains and eliminating stepped-up basis accounting rules that Davies says partially shield inheritances from taxes. 

"Once instituted these new taxes and tax rules can just as easily be applied to the middle classes," he said. "Imagine having to pay a tax each year on the increase in value of your retirement portfolio or pension – even if you aren’t yet withdrawing money from them. That’s what a tax on unrealized capital gains will do. Imagine building a small family business and, when you leave it to your children, the government forcing them to sell off pieces of the business to pay taxes on the inheritance. That’s what removal of the stepped up basis rule will do."

Davies' observations are echoed by others. A recent study published in the Cato Journal by the Cato Institute concluded that reckless spending through increasing U.S. debts contributes to inflation considerably and will cause numerous economic issues in the months and years to come if nothing is done about it.

During a recent Fox Business segment, financial commentator and former Trump administration official Larry Kudlow said he believes increased government spending, like the one currently proposed, will negatively affect the economy.

“First, government spending brings government regulation,” Kudlow argued. “This regulatory avalanche will choke off business activity of all kinds,” creating what he calls a “supply side obstacle.”

Kudlow also said increased entitlements will dampen productivity and reduce the incentive to work.

A recent economic white paper by the Niskanen Center, a nonpartisan think tank working to promote an open society, echoes concerns that increased government spending on entitlements and subsidies can lead to increased prices and what they call “cost disease socialism."

Steven Teles, Samuel Hammond and Daniel Takash wrote the September 2021 paper wherein they acknowledge that while “soaring costs have blown a hole in the budgets of the working and the middle classes, offsetting the full benefits of a growing economy” some of the solutions proposed by progressive politicians such as “simply socializing the costs and blowing an equally large hole in the federal debt is not a sustainable alternative."

Teles, Hammond, and Takash find “the root cause of escalating costs is overwhelmingly regulatory, rather than budgetary,” and that “shifting costs onto the public would not only fail to fix the underlying problem could also make cost disease substantially worse” resulting in a “vicious cycle in which subsidies for supply-constrained goods or services merely push up prices, necessitating greater subsidies, which then push up prices, ad infinitum.”

U.S. wages will not be able to keep up, some argue. Jason Furman, former Obama chairman of the Council of Economic Advisors, and current Harvard economist, says inflation has eaten up all of the wage gains for Americans going back to the Trump administration.

Davies pointed out that the pressure on the middle class is not likely to alleviate anytime soon. 

"The rich can afford lobbyists, lawyers and accountants to soften the effects of tax increases. Not so the middle classes," he said. "As politicians have squeezed about as much out of the rich as they can get, they’ll now be turning to the rest of us."