Fiscal policy and Main Street: problems?

In simple terms, fiscal policy is about government spending (primarily at the federal level), tax policy, and government financing (deficits). With a presidential election looming, small business owners will be paying particular attention to tax policy proposals. Taxes always rank high in any survey on small business issues. Each month, the NFIB asks a sample of its member companies to choose their most important issue from a list of 10 items (including “fill in the blank”). Chart 1 shows the outcome of the vote on taxes and government regulation (the cost of compliance and lost revenue is a “tax”).

Since 2022, inflation and labor quality have been battling for the biggest pain point. The price level (CPI) has risen by 20% (cumulative) since 2020, destroying the value of savings accounts (every dollar buys less) and wiping out wage growth, so that real wages have fallen by 2% between 2020 and 2023. That's a tax! An investment project that cost $1,000 in 2020 now costs $1,200 and must be financed at twice the interest rate of 2020. The funds set aside to cover depreciation are also depreciated.

Chart 2 suggests that it would take a slowdown or recession to stop inflation and possibly lower prices. This would increase/restore the purchasing power of money saved and earned. Federal Reserve policy is focused on reducing spending, but since interest rates are the main policy tool, the adjustment falls primarily on interest rate-sensitive sectors such as housing and construction, rather than on services spending. Congress holds the key to government spending, the main cause of recent inflation.

The cost of complying with government regulations is a constant problem. The current administration is rushing to finalize thousands of new regulations before the election. The cost of compliance is passed on in the form of higher prices for goods and services. The Office of Management and Budget (OMB) estimates the cost of existing regulations at about $300 billion per year. All of this is funded by the prices we pay for goods and services.

All of that is uncertain now, with the November election looming. A new Congress will address taxes, and new agency heads will be appointed to issue regulations. Courts will address disagreements, and the Fed will address inflation. And small businesses will continue to be the heart of the U.S. economy.