Raising The Capital Gains Tax Rate Will Contribute To The Biden Stagflation

Reducing capital formation will lead to less growth and higher prices.

Recently economists have begun to worry about stagflation. That is a condition where the economy is not growing (stagnant) while prices are rising rapidly (inflation). The US hasn’t seen this problem since the late 1970s. Recent proposals supported by President Biden will, however, lead the US to stagflation.

Stagflation is a result of having increases in demand in the economy at a time when business cannot increase output to meet the new demand. That means business raises prices. Since they can’t expand output and they are forced to raise prices, the result is stagflation.

Some economists disagree. They argue that conditions are much different today than they were forty or fifty years ago so that Biden can carry out his agenda without this fear. They note that there was a huge increase in demand just after the 2008–2009 recession. This was brought about by the massive increase in the money supply, the reduction of interest rates to near-zero and massive increases in government spending.

Those Monetary and Fiscal Policy actions pumped up total demand in the economy. Yet prices did not significantly increase. Output also didn’t increase. We had a slow-growth economy with little inflation. The point is that government policy did not cause stagflation then and similar policies won’t cause stagflation now.

Logically this position doesn’t seem to be well supported today. The reason is that we are currently close to facing a capital shortage. Ten years ago, that wasn’t a problem.

In 2010, the public debt, which is the total of all deficits, was $13.5 trillion. Annual GDP was $15 trillion. Assuming another stimulus package is passed by the Biden administration this year, the public debt will be $29 trillion, while GDP will be $21 trillion. Economists generally say that if the debt is less than one year’s GDP, it will not cause problems.

The real problem is the federal government has no plan to ever repay this debt. When the bonds sold to finance the deficit mature, the government simply rolls over the debt by selling new bonds to repay the maturing bonds. Hence the public debt just…