Milton Friedman and "Zero Cost" Expanded Government
President Joe Biden has declared that his proposed $3.5 (or is it $5.5?) trillion “Build Back Better” social agenda will have a “zero” cost—as in $0.00! Why? Because the added expenditures will be covered by increased revenues drawn from businesses and the “rich.”
The President and other progressive Democrats, who have parroted the Biden claim, should reflect on the wisdom of the late Milton Friedman, who had a knack for crystallizing stark economic truths.
During the early 1980s, when supply-side economics was the rage, Reagan Republicans promoted tax-rate cuts as a means of reviving the economy (because the cuts would increase people’s incentives to work, save, and invest), which Friedman believed distracted them from concern about what was happening to government outlays, which continued to rise throughout the decade.
Friedman framed the fiscal issues of the day differently, and with far greater clarity than anyone else. He admonished everyone (including President Reagan’s advisors), to “Keep your eye on one thing and one thing only: how much government is spending, because that’s the true tax. . . If you’re not paying for it in the form of explicit taxes, you’re paying for it indirectly in the form of inflation or in the form of borrowing.”
And make no mistake, government outlays have risen substantially, especially lately, increasing from $3.9 trillion in 2016 to $6.6 trillion in 2020 (including Covid outlays). Even without passage of the reconciliation bill, the White House estimates that federal outlays will continue their upward march through 2026.
Friedman understood that the real taxes on the economy ultimately come in the form of government outlays siphoning off resources for public purposes that would otherwise be used in the private sector. If the government chooses to build a bridge or road, the concrete and steel could have been used to produce houses and office buildings.
How the added government outlays are financed—through taxes, newly printed dollars and inflation, or debt—is of secondary importance, perhaps only marginally affecting people’s incentives. The costs of expanded government outlays will be incurred through the shift of resources from private-directed uses to public-directed uses.
By declaring that his “Build Back Better” agenda has no costs, President Biden must be confused—if he truly means what he has been saying. He may think that the dollars expended for an expanded array of welfare recipients will come only at the expense of the “rich.” Not so at all. Those transferred dollars will enable the recipients to buy goods they could not otherwise buy, which means they can pull resources away from the production of the variety of goods that ordinary Walmart (and Home Depot and Kroger) shoppers, many with far less-than-privileged means, would have bought.
Richard McKenzie is an economics professor (emeritus) in the Merage Business School at the University of California, Irvine. His latest book is The Selfish Brain: A Layman’s Guide to a New Way of Economic Thinking (2021).