BIG Government Just Got Bigger

 

 

By Richard Colman

Franklin D. Roosevelt is alive and well.

No, not really.  But, politically, Roosevelt’s legacy remains vibrant.

Roosevelt, a Democrat and president of the United States from 1933 to 1945, has become the symbol of big government, and big government just got bigger with the passage of the American Rescue Plan Act on March 11, 2021.

The act was signed into law by President Joseph Biden, a Democrat.  The act provides $1.9 trillion in aid to address the Covid-19 pandemic.  The act also provides money for state and local governments, funds for schools (public and private), cash for businesses, and money for low-income and middle-income citizens.

In Congress, not one Republican senator or member of the House of Representatives voted for the act.  But enough Congressional Democrats voted for the bill to assure its passage.

Will the act do what its supporters claim it will?  No one knows.

Injecting $1.9 trillion into the American economy, which has a debt of nearly $30 trillion dollars, could bring about strong economic growth, more jobs, and a higher stock market.

But the act may not work as planned.

If the money appropriated is not spent, the act will have little impact on American society.

However, if the money is spent, plenty of funds will be available to buy cars, homes, food, and vacations.  Rent that up to now has not been paid will be paid.

The big risk associated with the act is that so much money will be put into the consumption of goods and services that prices will rise.  The phenomenon is called inflation.

For the last 50 years, inflation has been a large force in the American economy.  The 1970 dollar, for example, is now worth 15 cents.

Inflation is a tax.  The Nobel Prize-winning economist, Milton Friedman, said, “Inflation is taxation without legislation.”

When prices go up faster than individuals’ incomes, the effect is the same as a tax increase.  If what cost $100 in 2021 costs $110 in 2022, an individual who has not received a compensation increase is $10 poorer, just as if he got a $10 tax bill.

After the presidency of Calvin Coolidge (1923 to 1929), the federal government has become bigger and bigger.  Coolidge, a Republican and once the governor of Massachusetts, disliked government spending and disliked debt.  As president, he opposed aid to such powerful interest groups as farmers and veterans.  Coolidge wanted balanced budgets.  He also wanted to pay off the debt the nation acquired while fighting World War I.  During Coolidge’s years as president, the American economy grew strongly.

In October 1929, the New York Stock Exchange crashed.  At the time, Herbert Hoover, a Republican, was president.  During the following years, interest rates remained relatively high, making loans for cars and homes expensive.  The economy got worse.

By 1932, the nation was mired in the Great Depression.  Unemployment soared.  Banks collapsed.  Individuals lost their homes and their savings.  In November 1932, the Democratic candidate for president, Franklin D. Roosevelt, was overwhelming elected as commander in chief.

Roosevelt, to alleviate unemployment, created the New Deal, a series of projects to build schools, hospitals, dams, bridges, and roads.  Under Roosevelt, the nation got, in 1935, Social Security, a program to provide funds for elderly Americans.

In 1936, Roosevelt was overwhelmingly reelected, winning 46 of America’s then 48 states.  Roosevelt lost only Maine and Vermont. 

Despite Roosevelt’s efforts, the Great Depression did not really end until the U.S. became involved in World War II in 1941.  During the war, which ended in 1945, American unemployment virtually disappeared.  The war also brought huge debt to the U.S. Treasury.

Roosevelt’s presidency made the federal government responsible for the material well-being of the nation’s citizens.  During later Democratic presidencies — such as those of Lyndon Johnson and Barack Obama — government became ever bigger.  Johnson launched the war and poverty and massive spending programs in areas like housing and transportation.  Johnson’s efforts were dubbed the Great Society.  Obama in 2010 signed the Affordable Care Act (often called Obamacare) into law.  Obamacare was designed to give almost every American insurance in case of illness.

Curiously, under two Republican presidents, Richard Nixon and Ronald Reagan, government also grew.  Nixon supported legislation for clean water and clean air.  Nixon also spent money to end the Vietnam war.

Reagan spent huge sums on a military build-up.

In 1981, Reagan’s first year as president, the nation’s national debt reached $1 trillion.  Now, 40 years later, that debt is $28 trillion.  In 1837, when Andrew Jackson, a Democrat, was president there was no national debt.

Debt is basically financed by selling bonds, often called U.S. Treasuries.  Bonds pay an interest rate, so the buyer is expected to receive more money than he originally invested.  However, if inflation occurs, the bond-holder will still receive his interest payments.  Yet he may be worse off financially because inflation ate up more money than he was paid in bond interest.

If the American Rescue Plan Act produces prosperity, President Biden and his Democratic supporters should reap political gains.

But if the act produces inflation and no or little economic growth, then Biden’s plan will become vastly unpopular and should produce electoral gains for Republicans.

Can Americans protect themselves from inflation by buying gold, real estate, or stocks? No one knows. 

But Americans need to be prepared for higher prices in the coming years.

_____________________________________________________________________________

Richard Colman, a biochemist, received masters and doctoral degrees from the University of California at Berkeley.  He is the founder and president of Biomed Inc.,  a biotechnology, publishing, and informatics company.  He lives in Orinda, California.  

The views and opinions expressed in this commentary are those of the author and do not necessarily reflect the official position of Citizens Journal


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