There has never been a problem paying for either of these Democrat-sponsored initiatives -- the one passed by the Senate today and the Reconciliation bill coming up. The critical issue is how do we do this without causing unacceptable inflation now, or in the future.
This can be done, but it requires taxing high incomes -- Biden has said > 400K -- and possibly Corporation profits to a small extent. The reason we need this additional tax revenue is not to pay for these initiatives, but to reduce the probability of future inflation.
When we spend in deficit we print money and spend it into the economy. This printed money is called "outside money". It's the seed money for credit money or "inside money", which accounts for the bulk of money in circulation. One cause of inflation is too much money circulating in the economy relative to the goods and services available for purchase in an economic climate of high demand.
Typically the Treasury issues securities in the amounts of it's deficit spending. This gives the impression of borrowing, and we call it borrowing, but of course it is not borrowing, since by the time we "borrow" we have already printed and spent into the economy the money we appear to be borrowing. What we are really doing is exchanging an interest paying form of money, a bond, for a non-interest paying, readily spendable form. This ersatz borrowing has two useful purposes : 1) it decreases the amount of money in bank reserve accounts, which are the accounts that day to day banking transactions clear through, and 2) It provides the bonds used by the Central Bank in carrying out monetary policy. We can summarize the overall role of the Treasury's ersatz borrowing as being one of temporarily "sidetracking" money in the form of securities that might otherwise circulate in the economy in the form of readily spendable money that could cause inflation if there is too much of it. We can summarize the Central banks method of carrying out its monetary policy as regulating the ratio of sidetracked money to money readily available for spending.
We know that the Central Bank is charged with preventing excessive inflation and fostering full employment -- a difficult task according to some mid Twentieth Century economic theory! The Central bank tries to do this, by increasing the amount of readily spendable money relative to sidetracked money when demand is lower and doing the opposite when demand is higher.
Unfortunately Treasury Bonds that result from deficit spending represent potential future inflation when they are in the hands of the private sector, and once the central bank has converted them back to bank reserves they represent potential current inflation. It's the equivalent of converting potential future inflation to potential current inflation. Therefore, to the extent we pay for the democrat initiatives by taxing in a way that reduces the amount of new, printed money spent into the economy and consequently the amount of new Treasuries issued, we should be both reducing the potential for both current and future inflation.
An equally important consideration is the rate of new spending into the economy. If it causes demand for resources -- labor, commodities, equipment, etc. -- to increase faster than the supply of resources can accommodate, inflation is sure to follow.
These considerations tell us that it would be best to pay for the Democrat initiatives with a combination of deficits and new taxes on high incomes, and that the rate of new spending into the economy needs to be synchronized with the availability of resources. It seems this is exactly what is planned. How well we carry this off will be measured by future inflation.
