Biden says the expense bill will slow inflation. But when?

Soaring inflation has become a headache for American consumers, and President Biden has an inescapable prescription. He says a key way to help ease the price hike is to pass a $ 1.85 trillion collection of spending programs and tax cuts that are currently languishing in the Senate.

A wide range of economists agree with the president – but only in part. They generally accept his argument that, in the long run, the bill and its infrastructure plan could make businesses and their workers more productive, which would help dampen inflation as more goods and services are available. products in the economy.

But many researchers, including a forecasting company Mr Biden often cites to support the economic benefits of his proposals, say the bill is structured to increase inflation next year, before prices have had time to cool down.

Some economists and lawmakers are worried about the timing, saying the risk of further fueling inflation when it hits record highs outweighs the potential benefits of passing a big spending bill that could help. to control prices while meeting other social objectives. Prices rose 6.2% over the past year, the fastest pace in 31 years and well above the Federal Reserve’s inflation target.

Others say any short-term effect on prices would be small enough and easy enough that the Fed would later be offset by interest rate hikes, which can dampen demand and cool a hot economy. They argue that potential inflationary risks are not a good reason for the Biden administration to limit its ambitions on priorities such as expanding access to child care and facilitating the transition to sources. cleaner energy.

“This is more likely a small positive factor for inflation in 2022, as it prevents a sharp cut in spending that would otherwise have occurred that year,” said Jason Furman, economist at Harvard and former chairman of the Board of Directors. White House economic advisers during the Obama administration. “The pros and cons of Build Back Better in terms of climate change improvements and opportunities dramatically eclipse the pros or cons of inflation. “

Republicans have criticized Mr Biden over inflation for months, seeking to derail his sprawling proposal to tackle climate change, secure universal preschool, expand access to health insurance, cap on childcare costs for the lower income and middle class and to extend a new lucrative tax break for parents. They argued that the bill’s spending, much of which spans several years, will drive up prices.

Some centrist Democrats have also expressed similar concerns. A key element, Senator Joe Manchin III of West Virginia, questioned whether high and rising prices should persuade lawmakers to moderate their ambitions.

“West Virginia is worried about rising inflation,” he said. said on twitter Last week. “We cannot dismiss caution and continue to accumulate debt that our country cannot afford. “

The bill remains in legislative limbo, with Democrats preparing to put it to a vote in the House as early as next week. But the timing is uncertain in the Senate, where a vote is likely to be changed or delayed in response to Mr Manchin’s concerns.

The extent to which Mr. Biden’s $ 1.85 trillion bill exacerbates inflation depends largely on how well it stimulates the economy and whether Americans are increasing spending because of the legislation – and when all of this is happening.

Many economists say this could create a short-term stimulus, as the plan is structured to raise funds gradually by taxing the wealthiest Americans, who are less likely to spend every extra dollar they have, and redistribute it quickly. to people who earn less and are more likely to spend the recovered money.

Due to the timing difference between when the government spends money and when it begins to generate more revenue, the Bill is expected to pump money into the economy in its early years. Moody’s Analytics – the company the White House typically cites when advocating for its legislation – estimates the government will spend $ 163 billion more on the package than it takes next year. And redistribution could make money more powerful as an economic stimulus.

“Spending is designed to go to people who are more likely to spend it than save it,” said Ben Ritz, director of the Center for Funding America’s Future at the Progressive Policy Institute. But more than any specific program, “the biggest inflationary problem is the math.”

White House economists countered these arguments. If the bill passes, they say, it would do relatively little to stimulate increased consumer spending next year and not enough to fully offset the loss of government stimulus to the economy as pandemic aid expires. The fact that the program spends more next year is a feature, they say, as it will partially ease the economic drag as budget support wears off. They note that the bill is intended to be fully offset by tax increases and other revenue savings.

And they argue that by increasing the economy’s capacity to produce goods and services, the president’s infrastructure plan and his broader agenda could both help keep costs down over time.

“On the contrary, these measures push back inflationary pressures,” said Jared Bernstein, member of Biden’s Council of Economic Advisers.

Lawrence H. Summers, the Harvard economist who has sharply criticized the $ 1.9 trillion economic aid legislation Mr. Biden signed this year, said he did not view the current plans as an inflationary threat . Infrastructure and broader spending programs are both spread over time and paid for, Summers argued.

There is less economic or political debate over Mr. Biden’s $ 1,000 billion infrastructure plan, which authorized Congress last week and which the president will sign on Monday. Economists – including conservatives – largely agree that it is likely to increase the capacity of the economy over time, and that it is small and spread out enough that it does not significantly fuel higher inflation. fast in the short term.

Among Democrats, there is broad support for the economic ambitions contained in the administration’s broader spending bill, which aims to create more fairness for the middle and lower classes and a stronger safety net for the poor. working parents. But the measure is the subject of more complicated scrutiny in terms of its immediate effect on inflation.

Moody’s economists found in a recent analysis that the administration’s full program would increase inflation slightly in 2022, although they did not expect the program to ultimately increase it due to benefits that would increase inflation. would later alleviate supply constraints. He estimates that with the infrastructure bill alone, inflation will hit an annual rate of 2.1% by the last quarter of next year. If the largest spending bill is also passed, this figure will rise to 2.5%.

But Moody’s benchmark that inflation will moderate by the end of next year is relatively optimistic. The Bank of America economics team said basic consumer prices will still rise at a rate of 3.2% by the end of next year, incorporating the assumption that Mr Biden’s plan passes.

Adding a few tenths of a percent to already high inflation might seem more meaningful, pushing price gains away from the Fed’s 2% target.

Some economists have argued that as companies scramble to find workers, prices rise, and supply chains struggle to keep pace with soaring demand, this is not the right place. time to hit the economy with extra juice.

“We don’t have a lot of available capacity,” said Kristin J. Forbes, an economist at the Massachusetts Institute of Technology. “We certainly don’t have a lot of spare workers today. “

Inflation looms more significantly in the short term because it is currently high, and if it remains so for an extended period of time, consumers could change their behaviors and expectations, thereby securing faster gains. People worried about the proposals say 2022 is not a good time to give households more money.

Maya MacGuineas, chair of the Committee for a Responsible Federal Budget, said she was unsure whether the package would fuel inflation. But given the current rate of price increases, “you have to be more careful than you would otherwise”.

The White House says provisions in the bill that put money in families’ pockets, such as childcare assistance, are not mere stimulus. They will allow caregivers to enter the workforce, they argue, an investment in the future of the economy that will allow it to produce more over time.

This makes the new program different from the spending adopted earlier this year. The Biden administration increasingly recognizes that sending checks to households and offering expanded unemployment insurance supplemented savings, and that as households had more money to spend, this helped to drive up prices.

“What if there is nothing to buy and you have more money, you are competing,” Biden said in Baltimore on Wednesday. But the White House maintains that this program is not the same as the previous package, and that it will make the price situation better, not worse.

“According to economic experts, this bill will ease inflationary pressures,” the president said on Wednesday.

Still, the 17 Nobel-winning economists the White House regularly cites have made it clear that capacity improvements will dampen inflation over time rather than imminently.

“Because this program invests in long-term economic capacity and will improve the ability of more Americans to participate productively in the economy,” they wrote, “it will ease inflationary pressures in the long run. term”.

About admin

Check Also

Backgrounder: Biden Administration Announces Americans Can Order Additional Free, Rapid COVID-19 Home Tests at

Today, the Biden administration announces that is now open for a third round of …

Leave a Reply

Your email address will not be published.