Larry Kudlow explains how government spending brings government regulation

Here we are on Friday night and let me say— go woke, go broke. 

According to the Congressional Budget Office, through June, total federal debt in the hands of the public is $21.7 trillion dollars. 

Total debt itself, which includes intergovernmental transfers (like social security, trust funds), comes to $28.5 trillion dollars.

So, call it 100% of GDP. It's a nice round number and easy to remember. Under current law, the CBO estimates federal debt in public hands will be $35.8 trillion by 2031 in their 10-year forecast.

That is not including any of the new Biden spending proposals, which could be $3.5 trillion (or maybe $4 trillion or maybe $5 trillion) — or maybe more if they really crank up the woke. 

The CBO also estimates that the government will spend more than $60 trillion dollars over the next 10 years. Again, that's current law or what's called "current services." It does not include any new Biden proposals.

I'm impressed with the $60 trillion— call it 6 trillion a year— because it was only a few years ago we were spending about 3 trillion a year so that's a double in just a couple years. Impressive, isn't it?

Now, to my way of thinking, the most troublesome aspect of this is two-fold.

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First, government spending brings government regulation. These massive thousand-page bills (hardly anyone knows what's inside them before or after they're passed) have many strings attached to them.

Strings are regulations and this regulatory avalanche will choke off business activity of all kinds. In other words, it's a supply side obstacle.

What happens is that even the same amount of money creation by the Fed will be chasing fewer goods because the production of goods and services will be blocked by the new massive spending regulatory state.

Second point— so much of the new spending we've already had in these COVID relief packages and virtually all of the new spending proposed by Team Biden and the progressive woke Left are cash payments, transfer payments and entitlement payments. None of these have work requirements or employment incentives.

Overly generous unemployment benefits, causing a massive wave of small business complaints because they can't find enough people to fill job openings, is just the tip of the iceberg. 

Plug in another $3 trillion or so of new cash benefits and assorted entitlements and you will have a larger number of able-bodied people who will stay home because it will not pay to work and that weakens the economy.

We need faster employment growth plus more rapid productivity growth in order to boost our potential to grow from less than 2% to back over 3%— where it was for 50 years up until the year 2000.

I haven't even gotten to the negative effects of across-the-board tax hikes on investment, business, the blue-collar middle class, death, foreign profits, etc. All of that creates massive obstacles to growth. 

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Companies will pull back as they must. Blue-collar living standards will decline and so will average family incomes. That's another hindrance to growth.

Now, a lot of my conservative pals are arguing that out-of-control federal spending is causing the rise of inflation. Well, not exactly, but not wrong, either. 

Let’s say a third to half of the CPI inflation spike to 5.5% over the past year comes from one-off shocks related to pandemic recovery, supply chains shortages and non-recurring commodity increases. 

We have learned that federal spending multipliers are very weak in terms of their economic impact. In fact, they're probably negative.

Massive spending actually reduces the economy over time, but as I said a few moments ago, along with the jump in spending comes the jump in regulations and the employment dropout rate— all of which means the economy is producing less output, which when matched against the existing money supply, leads to more inflation. 

Call it an indirect negative supply side effect. That's the single biggest problem we face — more than deficits and debt. 

It's the rapid increase in spending and the massive expansion of the regulatory state and, of course, tax hikes make it all worse.

So, it's good to know that at least some Republicans are calling for some spending reforms. House Budget Committee Republicans are looking at spending caps, which I think would be a terrific idea. We've had them before and they worked.

When I was a toddler working in the Reagan Administration, we had the famous Gramm-Rudman Bill.

Former senators Phil Gramm and Warren Rudman (two Republicans) and former Senator Fritz Hollings (a South Carolina Democrat) in 1986 actually got legislation to put caps on spending whereby if those caps were violated the budget would suffer across the board spending cuts known as sequestration. 

Real spending cuts from the actual level of spending — not the rate of increase— and it worked. 

Similar budget caps were put in place in the mid-90s with the Gingrich Congress.

Unfortunately, in recent years, we've had budget deals with spending caps that were violated and just for good measure. They were violated on a recurring basis. So the caps drifted higher along with the actual spending (which is to say there were no caps).

I don't know if this Congress is constitutionally capable of budget caps and sequestration, but it sure is worth a try because woke budgeting is more than an abject fiscal failure. It's a comic book denigration of the finances of the greatest economy in the world and we can’t have that.

"Go woke, go broke" is a bad slogan, and it needs to be fixed.