Joe Manchin Needs Better Advice
Posted August 02, 2022
It is said the reason Joe Manchin agreed to support Build Back Better in its undead manifestation as the Inflation Reduction Act of 2022 is that Larry Summers, suddenly the world’s most respected economist, told him it would not be inflationary.
That’s pretty much what any macro-economist would say about a law that pays for most of its new expenditures with an accompanying tax increase. The macro-crowd, a greater threat to capitalism than any living Marxist (Are there living Marxists? College professors don’t count.) still believes it can control the world from the “commanding heights” of the economy using the Big Levers of money supply, aggregate demand, government-stipulated interest rates and other psychedelics.
Government spending, the macro guys figure, is inflationary because it increases aggregate demand, but tax increases are deflationary because they suck up said demand. Since the bill has both, they aren’t worried. Left or right, they agree with Milton Friedman’s admonition that “inflation is always and everywhere a monetary phenomenon.”
That’s as close to the opposite of the truth as you can get. Inflation is “always and everywhere” a result of the government constricting and displacing the real economy with its Potemkin version of phony production, phony work, and the phony money they pay for it.
The Wall Street Journal carps that the alleged deficit reduction won’t show up for almost a decade. The WSJ calls that too little and too late to Whip Inflation Now. I had not heard that the Journal had backslid to the notion that there is any correlation between deficits and inflation, but maybe they are just trying to speak in a language even senators can understand. (Show me a significant correlation between deficits and inflation any time in the past 50 years and I will paint your house. I choose the color.)
The bill would worsen inflation by reducing national production in two ways, increasing taxes and gumming up the gears of the economy with yet another effusion of Green goo.
The bill imposes a 15% minimum corporate tax. Based on GAAP rather than the tax code, it would erode or eliminate early depreciation on new investment, hitting the manufacturing sector hardest. That certainly will not boost production.
The saving grace of American economic policy for 40 years has been the resilience of and even occasional improvement on Reagan’s tax reforms. Even Obama’s regulatory orgy was not enough to kill the goose, though its waddle got a bit worse.
The second-best thing Trump did (after fixing the court) was push Reagan’s reform further by cutting the corporate income tax from 35% to 21%. As with Reagan’s, Trump’s tax cut rarely gets credit but has been the principal driver of additional U.S. wealth creation for almost five years now. It’s also the reason we finally got unemployment below the allegedly “natural” rate of four percent.
The “great resignation” is generally assumed to be the reason labor demand is outstripping supply and pushing wages north. But thanks to Trump, labor supply was already strained before the pandemic. Despite what the macros say, wages rising with an expanding economy is an unadulterated good. Rising wages can be inflationary only if workers are being paid more than they produce; with post-tax cut corporate profits at record levels that cannot have been the case.
The corporate minimum tax will erode production, wages, and the value of the dollar all making inflation worse. In the 1970s, macro-economists coined the term “stagflation” because those naïve souls were actually surprised to see inflation paired with a slowing economy. The paint your house offer stands if you can identify any modern period in which severe inflation accompanied a robust economy.
Even worse than the tax increase is the spending side of the bill. And for once the Devil is not in the details. All you have to know is that Congress intends to spend the money on increasing the availability of “affordable clean energy.”
Affordable clean energy “always and everywhere” means just one thing: subsidies for energy sources that wouldn’t exist without them. The energy will appear affordable only because it will be paid for twice, once by taxpayers and once by consumers.
Almost none of the Republican opposition to this bill focuses on the renewable energy scam because Republicans—in yet another illustration of their unfitness to govern—have rolled over on global warming. The idea that we should misallocate what will be trillions in capital for futile efforts to reduce emissions is probably the greatest current threat to our prosperity, progress and position in the world.
Republicans have not left Reagan behind. Just the opposite. They have gone all pre-Reagan. Like the post-Hoover GOP, the only strategy they know is to fight the long defeat; retreat rather than be routed. Reagan was the first Republican leader in 50 years to be an “issue optimist.” He believed that good ideas were persuasive and that the way to win elections was to describe to people the good that your ideas would do.
Current Republicans, overwhelmingly issue pessimists, despair on debating global warming despite robust evidence that Americans are ready and eager to hear some good news about the future.
Well, I do have some good news.
George tells me the date for the next COSM conference has been set. It will be November 9-11 at the Hyatt Regency in Bellevue, WA.
I’m excited because the last COSM conference was the best conference of any sort I have ever attended. I loved the optimism and above all the faith. Some of the greatest engineering and entrepreneurial minds of the century shared both their vision of the abundance to come and their conviction in God’s providence. It was as inspiring as any conference could be and left me convinced that we can and should have a Next American Century.
The keynote this year will be given by Peter Thiel. Carver Mead, recent winner of the Kyoto Prize for Advanced Technology will close. In between, we will be focusing on launching a new information theory of economics heralded by George’s new book. I’ve worked on almost every book George has written for the past 35 years and this is by far the most exciting ever. It will change the way people talk about capitalism as radically as did Wealth and Poverty 42 years ago.
I wouldn’t miss it for anything. Neither should you. Register at the early adopter price here.