It’s called the American Rescue Plan! By now everyone has heard about the $1.9 trillion bill which includes a $15 national minimum wage and $1,400 stimulus checks. CNN captures the essence of the rescue package quite well:
Bigger stimulus checks. More aid for the unemployed, the hungry and those facing eviction. Additional support for small businesses, states and local governments. Increased funding for vaccinations and testing.
There’s a lot in the plan, yet it amounts to nothing more than the government allocating resources on our behalf. It requires either central planning for millions of businesses, as is the case with the minimum wage, or giving money to certain people or sectors in society, as we see with stimulus checks. Very few people in charge appear concerned about the rising debt and money supply these actions create.
Start with the idea of the government setting a national minimum wage. When this happens, it forces the entrepreneur to make a decision: they must either choose to do nothing and accept a lower profit margin and/or inevitable bankruptcy, or make changes to increase profitability. This may include cutting staff or raising prices with the hope consumers will accept the higher prices. It is the instance of “raising prices,” we should take note of.
In 2021, consider who should take credit if the Fed reaches or overshoots its desired price inflation target. How can anyone tell whether it was the result of the Fed’s actions (such as low interest rates) or if it was due to the government’s action of increasing minimum wage laws? Those are just two reasons why prices change, but there are actually countless. The Fed cannot reasonably say they are managing price inflation. They have no idea what actions have contributed to the rise of prices of goods or services.
The other economic fallacy is the idea that money creation will alleviate financial hardship. We saw Trump give $600 last month and Biden wants to give $1,400 this month. This is supposed to help “the hungry,” those in need, etc. Yet very few people have addressed how this adds to the national debt level, debases the US dollar, makes life less affordable for the masses and ultimately makes them poorer. “The poor,” much like the nation itself, will continually require greater amounts of debt to survive. This vicious cycle seems to be of little concern to our planners.
As for how the $1,400 was decided instead of doubling it to $2,800 for twice the potency, no one has explained why. However, we do know where this money comes from. Given that in fiscal year 2020 the US treasury received only $3.42 trillion in tax revenue but spent over $6.5 trillion, it’s apparent the money is not in the Treasury’s bank account. Since the money is not with the Treasury, and tax dollars are not enough to cover government spending, the only place left is the debt market.
Many will still lend to the US government. But the issue is at what cost? If the Fed was not going to buy a substantial amount of debt, price discovery would occur and interest rates on US debt would rise. As of today, and for the foreseeable future, this is not the world we live in; as CNBC cited Jerome Powell on Thursday:
The Fed’s benchmark short-term borrowing rate is anchored near zero and it is continuing to buy at least $120 billion in bonds each month.
If the American Rescue Plan is a sign of things to come, we’ll soon learn a lot more about the effects of national minimum wage laws, continuous stimulus checks, government debt, and perpetual increases to the money supply. And this is just the beginning.
