President Biden doubles down on statism
After a disastrous first year pursuing an agenda that became increasingly unpopular, President Biden had an opportunity to reset his administration in a centrist direction as part of his first State of the Union Address. But he didn’t. On every domestic issue, he catered to the Democratic Party’s hardcore left-wing activists, thus jettisoning any chance of reconnecting with independent voters and disaffected moderate Democrats.
His speech started well. Almost all Americans agree with Biden’s strong rhetoric against Putin’s invasion of Ukraine. The United States and its allies, including Canada, have initiated economic sanctions including halting the certification of the Nord Stream 2 gas pipeline, excluding many Russian banks from the SWIFT system of international payments, and targeting assets of Putin and oligarchs outside of Russia.
But his speech suffered from three significant shortcomings, particularly for those interested in domestic policy.
The first problem is actually related to Putin and Ukraine. Biden refused to prohibit purchases of oil and natural gas from Russia, which would have been the most powerful sanction the U.S. and its allies could impose. Russia earned US$489.8 billion from oil and natural gas exports in 2021, about half of which comes from Europe. These earnings fuel Putin’s war machine. If the U.S. and its allies stopped importing Russian oil and natural gas, Russia’s hard currency earnings would plummet. Over time, Russia could replace its lost customers with others, mainly China. But this switch would require massive investment in new pipeline infrastructure that would take years.
The reason for Biden’s refusal was simple—foregoing Russian oil and natural gas would require the U.S. to expand domestic production of oil and natural gas to replace the loss from Russia or require even higher domestic prices. Following the dictates of his party’s left wing and environmental extremists, Biden has scuttled the Keystone XL pipeline and used regulatory tools to suppress domestic drilling and production of oil and natural gas. And these policies are having an effect. U.S. oil production fell 11.5 per cent since its peak in 2020. After achieving the status of a net oil exporter under President Trump, the U.S. has once again become a net oil importer. Eliminating Russian oil and natural gas imports would require Biden to change course, expanding domestic oil and natural production, achieving independence and exporting the surplus to Europe. Biden chose to adhere to the left’s dogmatic approach on climate issues rather than serve the needs of U.S. national security and the economy.
The U.S. economy is suffering from the highest price inflation in four decades. The consumer price index has climbed 7.5 per cent over the past 12 months, swamping wage increases and reducing the real income of working Americans. In a number of recent polls, inflation is by far the number one concern of voters.
Inflation, as Nobel laureate Milton Friedman observed, is always and everywhere a monetary phenomenon. And that’s definitely what has happened in the U.S. The Federal Reserve overreacted to the brief COVID recession (February 2020 to April 2020) with extraordinarily low interest rates and massive quantitative easing. The Fed kept overly accommodative monetary policy long after economic recovery began. Put simply, the Fed pumped too much money into an economy that faced lingering supply-side constraints.
In his speech, Biden ignored the true cause of inflation. Instead, he offered a grab bag of statist ideas such as aggressive antitrust enforcement, price controls on prescription drugs, and tax credits for energy conservation and green energy—policies that, whatever their merits, have little or nothing to do with inflation. Moreover, he has been pushing three controversial nominees to the Federal Reserve Board—Sarah Bloom Raskin, Lisa Cook and Philip Jefferson—who lack monetary expertise and are generally regarded as inflation doves. Raskin’s primary “qualification” is her support for using the Fed’s regulatory powers to divert credit away from oil and natural gas production.
Cook and Jefferson have primarily written about poverty and race, which are outside of the Fed’s legislative mandate.
Expanding the welfare state
While Biden did not mention Build Back Better by name, he regurgitated his support for the major items in his stalled agenda to dramatically increase the size and scope of redistribution programs. These include massive new government subsidies for childcare, combined with new regulations that would limit the supply of childcare and raise its cost to working Americans, higher taxes on personal and corporate income, raising the federal minimum wage to $15 per hour, and the PRO Act, which would intervene in labour markets and make unionization easier.
Ironically, Biden’s proposals would restrict labour supply and increase production costs, policies that arguably will push prices even higher. But the larger problem with his fiscal agenda is that it’s a triumph of hope over experience to think that higher tax rates and a bigger burden of government spending will generate good economic results.
In a study last year for the Club for Growth Foundation, we found that Biden’s plan would reduce economic output by $3 trillion over the next decade and reduce worker compensation by an average of more than $10,000 over the same period. Other studies have found even larger economic losses.
So what’s the bottom line? Other than supporting Ukraine, Biden’s speech reflected a president out of touch with working Americans and entirely beholden to the Bernie Sanders/Alexandria Ocasio-Cortez wing of his party.