by Gary Alexander

June 8, 2021

This will be a year of almost-unprecedented peacetime GDP growth. Not since the opening years of the Korean War has America seen what we will likely see in 2021 – 7% or greater Gross Domestic Product (GDP) growth. As we enter the final month of the second quarter, the Atlanta Federal Reserve says the current quarterly GDP growth is humming along at an annual rate of 10.3%, and it shows no signs of slowing in the second half. If we can keep the supply chains going, we may see record-high growth rates.

However, President Biden’s own economists tell us that his high-fructose spending plans are contributing to this “sugar high,” and I must agree. In presenting his $6 trillion budget package on Friday, May 28, just before a 3-day holiday break – perhaps to avoid close press coverage – White House economists said that this year’s sugar high will disappear right after the mid-term elections. GDP growth will slow to 2.2% in 2023, they said, and then it will average below 1.9% for the next eight years! (See “A Future of Secular Stagnation” Wall Street Journal, June 2, 2021) Wow! They essentially gave up on the entirety of the next decade, with no chance of a rerun of “The Roaring 20s,” Part 2. They’re telling us we can’t possibly be like Ronnie Reagan and grow our way out of this debt. We must tax ourselves out of it. Forget “Morning in America.” We are the setting sun. We are Japan. Get over it! Where’s Biden’s “build back better”?

Biden's Projections and Proposals Bar Charts

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The President also surrendered on budget deficits, which will be well over $1 trillion per year… forever. Even assuming that the corporate tax rate will rise to 28% (now unlikely), his current budget plan projects a 2022 budget deficit of $1.8 trillion, falling to $1.4 trillion in 2023 and staying at that level through 2031.

And that’s without seeing any significant inflation – or interest rate increases! The Biden team’s crystal ball does not see the rate of inflation rising higher than 2.3% over the next 10 years, even after creating unprecedented trillions of crisp new dollars. Interest rates are also expected to remain historically low, creating a “free lunch” of low-cost debt service. Unemployment will remain at a very low 3.8% rate for the rest of the decade, they say, with amazing predictive powers. (According to Jared Bernstein of the president’s Council of Economic Advisers, on CNBC’s Closing Bell on Friday, May 28, one reason for these rosy predictions is that they were compiled back in February, when inflation rates were far lower.)

“But Sir, How Are We to Pay for All These Dreams?”

After this budget came out, Louis Navellier, Tim Hope, and I had a conference call last Tuesday with our favorite economist, Ed Yardeni. By the end of the hour, we were all singing from the same hymnal, but we were singing more blues than the Hallelujah Chorus. At one point, Ed wondered if we were funding our own destruction with Modern Monetary Theory, including this latest $6 trillion budget for FY 2022.

United States Federal Government Outlay and Receipts Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In the 12 months ending March 31, federal outlays were $7.6 trillion. receipts were $3.5t., for a deficit of $4.1t.

Yardeni covered options on how to pay for Biden’s two infrastructure bills of roughly $2 trillion each…

  1. The corporate “pay for.” Raising corporate taxes.
  2. Wealthy “pay for.” Raising taxes on the wealthy.
  3. Capital-gains “pay for.” Raising the capital gains tax rate.
  4. Shareholder “pay for.” Taxing buy-backs and/or dividends.
  5. The SALT “pay for.” State And Local tax reconciliations.

There are some advantages and drawbacks to each, but not even all five combined can meet the demands of Mr. Biden’s spending appetites. What the bean counters in Washington don’t see is that real people respond to policy changes. Punish something and you get less of it. Reward something and you get more of it. Raise taxes and people work less. It’s simple logic, but many economists and lawyers don’t get it.

Take the first example, for instance, raising corporate taxes – including Treasury Secretary Janet Yellen’s idea for setting an international minimum corporate tax rate. Ireland was a very poor nation for a very long time. England helped to make them poor. Britain’s “Corn Laws” in the early 1800s made all grains (not just corn) prohibitively expensive, making Ireland totally dependent on potatoes, so a potato blight in 1845 caused a famine which killed over a million and forced a major migration to America after 1845.

There was great hatred and bloodshed between Ireland and England for centuries. But that doesn’t exist anymore, because some onerous laws were repealed, and Ireland was free to make money by tariff and tax reduction. Ireland has shown the world how consistently low corporate tax rates create good-paying jobs, economic growth, and rising tax revenues. Ireland’s consistently low 12.5% corporate tax rate has generated far more revenue for their government than before. Tax revenue from corporations now account for 13% of their tax revenues and 3% of GDP, up from 5% of revenue and 2% of GDP before the lower 12.5% rate became law. (Source: “Ireland’s Tax Lesson for Biden,” Wall Street Journal, May 28, 2021.)

After these tax cuts, between 1986 and 2006, Irish employment nearly doubled and their “brain drain” was reversed:  Ireland became a magnet for global capital. As the Journal put it, “Even Sinn Fein, the furthest left major party in Ireland, declares it won’t change the corporate rate. Irish politicians know that businesses value certainty, and that Ireland’s low-tax policy has become emblematic of a commitment to consistency.” That’s why Ireland is rejecting Treasury Secretary Yellen’s bid for raising its tax rate.

All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.

Please see important disclosures below.

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About The Author

Gary Alexander
SENIOR EDITOR

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander

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