Bill likely to raise inflation initially
The claim: “No economist out there is projecting that this will have a negative impact on inflation … and the Build Back Better Agenda will help reduce inflation, will help cut costs for the American people over the long term.” — Jen Psaki, White House press secretary.
The White House is running into turbulence over concerns that President Joe Biden’s Build Back Better safety net bill could drive up inflation, which has already soared to its highest level in three decades. Psaki made the statement Nov. 15, before the legislation passed in the House. It has moved to the more evenly divided Senate.
Politifact rating: False. Many economists have stated for the record that they think the inflationary impact of the bill will be small and brief. But lots of economists say they expect modest inflationary pressure, at least initially.
Discussion
The current version of the bill, which may be changed in the Senate, would spend over $2 trillion over 10 years on clean energy initiatives, child care subsidies, extended child tax credits, paid family leave and hearing aids for Medicare beneficiaries. It would be partially paid for through additional taxes primarily aimed at wealthy taxpayers and by letting the government negotiate certain drug prices.
The White House has argued that the bill would reduce inflation, citing a letter signed by 17 Nobel laureates in economics suggesting it would “ease longer-term inflationary pressures.”
White House press secretary Jen Psaki went a step further. She was asked, “Why should Americans not be concerned that injecting another $1.75 trillion or more would further raise inflation?”
She answered, “Because no economist out there is projecting that this will have a negative impact on inflation. And actually, what it will help do is it will help increase economic productivity. It will help economic
growth in this country. That, and the Build Back Better Agenda will help reduce inflation, will help cut costs for the American people over the long term.”
Skeptics of the White House’s argument, including the Washington Post Fact Checker, have said the White House is glossing over the fact that the economists it cited were focusing on the measure’s ability to curb inflation in the medium to longer terms, rather than the short term when inflation is already unusually high.
The White House did not respond to inquiries for this article.
“We know there’s lots of spending in the bill, and that it’s front-loaded” said Douglas Holtz-eakin, president of the centerright American Action Forum. “If you cut taxes and increase spending, financed by debt, that will put upward pressure on inflation.”
Jason Furman, who chaired the Council of Economic Advisers under President Barack Obama, told the New York Times that “it’s more likely a small positive for inflation in 2022, because it’s preventing a big reduction in spending that would otherwise have happened that year.”
However, Furman has also written that “over the medium and long term,” the bill would “have a minuscule impact on inflation.”
Larry Summers, the former Treasury secretary under President Bill Clinton who was more aggressive in his inflation worries than other Democrats earlier this year, recently wrote that the bill would have a “negligible” impact on inflation.
“I do think there will be an inflation risk, because we’re in a bad situation already,” said Marc Goldwein, senior vice president of the Committee for a Responsible Federal Budget. “It could be the last-log-on-the-fire syndrome. But my guess is that the inflationary impact will be pretty small, and I think that’s the consensus.”
Why would the Build Back Better bill be expected to lead to more inflation? It’s textbook economics.
“Inflation is the result of too much demand chasing too little supply,” said John Leahy, a professor of macroeconomics and public policy at the University of Michigan. “Anyone arguing that the bill is inflationary can point to any standard economic textbook: An increase in government spending should increase demand and thereby increase inflation. This will happen even if the spending is fully paid for through taxes, since the government spending increases demand one for one and the taxes reduce demand only to the extent that firms or consumers reduce their spending as a result, and this reduction is typically less than one for one.”
Some of the bill’s inflationary elements include the extension of the child tax credit and the expansion of the state and local tax deduction, which was capped in 2017. The bill also includes provisions that would raise wages for union members and child care providers, Goldwein said.
Meanwhile, the tax hikes that could theoretically temper inflation are largely targeted at the wealthiest taxpayers. This would tend to weaken the anti-inflationary impact since tax increases may not do much to dampen spending by wealthier households.
That said, the bill does include some provisions that would counter inflation, such as the investments in infrastructure, which would bring supply into closer alignment with demand, and the child care subsidies, which could push people back into the labor force and, in so doing, increase the supply of goods and services.
And in the context of the U.S. economy, the bill isn’t enormous, especially compared with the coronavirus relief packages that passed as recently as early this year, which were both large and designed to be implemented quickly.
Leahy’s back-of-theenvelope calculation suggests that the bill will boost demand by $660 billion over 10 years, a period in which overall gross domestic product will be roughly $200 trillion. “By this calculation, the increase in demand is on the order of one-third of a percent of GDP,” he said. “This seems small to me.”