Biden wins for ‘the most economically illiterate presidential utterance since Jimmy Carter’

While every president makes foolish statements, this must be the most economically illiterate presidential utterance since Jimmy Carter’s demand that the Federal Reserve lower interest rates in the midst of surging double-digit inflation. This is a dummy in the shape of a man.

There are three fundamental errors in Biden’s “zero-cost” argument. First is the suggestion that the proper measure of cost is the impact on the federal fiscal position. The notion that a country’s wealth lies in the value of the sovereign’s Treasury was destroyed by Adam Smith 245 years ago. Smith showed wealth comes from the country’s ability to produce goods and services that people need and want. For any country, the cost of government spending is the value of the foregone opportunities from shifting resources from the private sector to the government. Less private consumption and less private investment leads to less housing and fewer factories.

Second, taxes are far from costless, because they divert resources from the private sector and thus impose an opportunity cost. Just as sales taxes primarily affect consumption, corporate income taxes affect investment. The cost is the value of the displaced private consumption and/or investment.

The third fundamental flaw in Biden’s approach is the notion that cost can be measured just by the dollar amounts involved. In reality, these are far higher than stated. Not only are there administrative and compliance costs, but there is also the economic damage that taxes cause by distorting incentives. For example, income taxes reduce incentives to work and to save; corporate taxes reduce incentives to invest; and progressive tax rates decrease incentives to invest in one’s skills. Three disasters of which Biden is ignorant.

Every introductory economics class teaches that the harm these distortions cause rises with the square of the tax rate and the responsiveness of the taxed activities. Doubling the rate quadruples the inefficiency cost (what economists call deadweight loss) of the tax. The effective tax rate takes into account all taxes on the activity, for example, state, local, and federal income taxes.

This is not a mere doctrinal issue; it is simply a description of what is happening in the areas under the supply and demand curves on a graph. Spending $5 trillion will cost the economy about $6.5 trillion, because the marginal cost of federal dollars is estimated to fall in the $1.30 range. For a government spending program to be considered sensible, it must provide benefits of at least $1.30 per dollar of spending. Biden didn’t do that. He didn’t because he can’t.