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.
The bill is nearing a vote in the House. The current version, which may be changed in the Senate even if it passes the House, would spend $1.75 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.
White House press secretary Jen Psaki went a step further during the Nov. 15 press briefing when 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.”
Is it really true that there’s not a single economist who thinks the bill will boost inflation? No.
Many economists have stated for the record that they think the inflationary impact of the bill will be small and brief. But we found lots of economists who say they expect modest inflationary pressure, at least initially.
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.
What economists have said
“I’m an economist, and I disagree,” Douglas Holtz-Eakin, president of the center-right American Action Forum, told PolitiFact.
“We know there’s lots of spending in the bill, and that it’s front-loaded” into the earlier years, he said. “If you cut taxes and increase spending, financed by debt, that will put upward pressure on inflation.”
Other economists have expressed the same view.
- Ethan Harris, head of global economics research at Bank of America: “You should wind up with primarily a deficit-financed spending bill that is going to be rolled out in an economy near full employment … . It will make the labor market even hotter and create even more price pressure.’’
- Michael Feroli, chief U.S. economist for JPMorgan Chase: “Right now, anything that expands aggregate demand is not warranted, not advisable. … The economy seems to be operating pretty close to its capacity constraints.”
Some economists have said the inflationary effects will be modest and manageable, but that they will exist.
For instance, Noah Smith, a former Bloomberg opinion columnist and a former assistant professor of finance at Stony Brook University, wrote, “I expect Biden’s bills to push upward on inflation, rather than downward. That said, the inflationary impact will be very small.”
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.”
A closer look at the bill’s inflationary, and anti-inflationary, features
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.
Timing also matters. “Some have argued that the impact on demand should be small since the spending and the taxes are spread over 10 years,” Leahy said.
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-the-envelope 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.”
Finally, what the Federal Reserve does will ultimately determine how much the bill increases inflation. One of the Fed’s core duties is to keep inflation within a reasonable band, usually in the range of 2% per year, and “over the medium to long term, the consensus is strong that the Fed will step in to prevent higher inflation,” Goldwein said.
The bill is not in its final form, so its potential impact on inflation could change. And while economists base their projections on textbook economics, there’s always a chance that households will react in unexpected ways to the bill’s economic incentives.
Psaki said, “No economist out there is projecting that (the Build Back Better bill) will have a negative impact on inflation.”
She’s wrong to say that no economist foresees inflation as a result of the bill’s passage. Numerous economists, including some allies of the White House, have gone on the record saying there probably will be inflationary effects, especially in the near term, if the bill is passed.
However, the broad consensus among analysts has been that the bill’s inflationary impact will be modest and brief.
We rate the statement False.
This fact check was originally published by PolitiFact, which is part of the Poynter Institute. It is republished here with permission. See the sources for this fact check here and more of their fact checks here.