Social program size is less important than its details

David MoonBlog

Those concerned about the potential inflationary effects of President Biden’s proposed social spending package are focusing on the wrong thing. If $3.5 trillion in additional deficit spending would place a higher inflationary burden on (mostly middle class) voters, how can a $1.5 trillion package be palatable? Or why is $6 trillion better than $3.5 trillion?

Either these politicians don’t understand very basic economics, or they don’t believe we do. The most important issue isn’t the size of the package, but rather on how the money is spent or invested.

And it is important to realize there is a difference between an expense and an investment.

When the government borrows additional money to pay current expenses, it devalues future economic activity by accelerating it into the present. That is inflation. When the government borrows additional money to invest in an asset, the inflationary result depends on whether the asset produces an increase in the country’s overall economic output.

If increased deficits fund assets that result in economic output increases that exceed the cost of the asset, real GDP increases, and no inflation ensues. These types of assets might include better roads, better schools and bridges that don’t collapse. If a large portion of either the infrastructure bill or the social programs package is directed to expenses rather than public assets that increase productivity, increased inflation will result.

Politicians are either dishonest, incompetent or condescending when they improperly describe the nature of an expenditure. A current period expense – even one that accomplishes a laudable goal – is not an investment or asset.

One does not go to a grocery store or restaurant to make an investment in food. That is an expense. A farmer purchasing a more efficient harvester or irrigation system is an investment. There are moral, political and practical reasons a government might choose to borrow money to buy groceries for people, but that is not an investment.

If government creates a new program that requires ongoing deficit funding, the new baseline deficit creates permanent inflation. It is a practical political impossibility to uncreate a constituency. Once people begin receiving stuff, no politician wants to be the one to take it away.

The president’s $3.5 trillion proposal includes expanded child tax credits and medical insurance subsidies for families making up to $400,000 a year. I don’t even know how to “cost” those programs because they would almost certainly become permanent. There may be a defensible political, social or moral reason to expand those programs. That’s the topic on which our elected representatives should be debating, not convenient headline numbers that tell us little about the true inflationary cost of the bill.

David Moon is president of Moon Capital Management. A version of this piece originally appeared in the USA TODAY NETWORK.