President Biden’s gambit to spend $2 trillion to reshape the U.S. economy won’t do much to aggravate the worst bout of inflation in 31 years, analysts say, but it also won’t give Americans any relief from higher prices.
The inflationary effect of the so-called Build Back Better plan has become the focus of a fierce battle in Washington as Democrats push to get their hotly contested spending bill over the finish line against stiff Republican opposition. The House passed the bill on Friday morning, but Senate approval is no sure thing.
Economists say there’s little doubt massive fiscal stimulus during the pandemic helped spawn the 6.2% spike in consumer prices in the 12 months ending in October. The Trump and Biden administrations pumped some $5 trillion into the economy in a year and a half.
The money spent in the Build Back Better plan, by contrast, would be spread out over 10 years. That would limit its impact on inflation in the short run, they say.
“Most of this spending is going to kick in a couple of years down the road,” said chief economist Gus Faucher of PNC Financial Services.
Amid growing public worries about inflation, Republicans have blamed Biden for the rapidly rising cost of living. They contend his plan will further raise prices and hurt families that are already paying more for gas, food, rent and many other things.
Democrats have repackaged their spending bonanza as an anti-inflation tool to drum up public support.
They cite a letter by 17 Nobel prize winners in economics — almost all prominent liberals — saying the plan will ease price pressures in the long run. The president’s press secretary even accused Republicans of favoring high inflation.
inflation forecasters — people who get paid to make the call — aren’t buying it. They don’t see the Democratic spending plan as having much impact on current inflation one way or the other.
“It is not going to hurt inflation anymore than we have already seen, but it is not going to provide any relief, either,” said chief economist Aneta Markowska of Jefferies Group. She was among the first on Wall Street to warn about about a steep rise in prices earlier this year due to Washington’s spending policies.
The fate of the bill ultimately rests not on what economists say, of course, but on public perceptions and the mindset of a key Democratic senator, Joe Manchin of West Virginia.
The conservative Democrat, who is often at odds with his own party, worries another flood of federal spending will drive up the record U.S. fiscal deficit and push inflation even higher. He has not committed to approving the bill in a 50-50 Senate.
Role of stimulus
Washington is not blameless in the runup in prices. Economists say there’s little doubt the seeds of the current spike in inflation were planted by government actions during the pandemic.
The Federal Reserve got the ball rolling by slashing interest rates to record lows and making it cheap for businesses to take out a loan or for consumers to buy a car or house.
Then the Trump and Biden administrations jumped in with multi-trillion dollar stimulus packages that dumped huge amounts of money into the economy all at once.
All the stimulus put lots of money in people’s pockets and boosted consumer spending well above precrisis levels. U.S. households are also sitting on some $2 trillion-plus in extra savings that will eventually get spent.
The surge in pentup demand caught businesses by surprise in the spring. They cut production early in the pandemic and were unprepared to cope with the sudden flush of consumer spending , especially with the coronavirus still disrupting global trade and making it harder to obtain supplies.
Nor could businesses find and retain enough workers to produce all the goods and services that customers wanted with so many people still too worried about the coronavirus to go back to work. Stimulus money helped allow them to stay home.
The resulting shortages of labor and supplies have triggered the biggest surge in inflation since 1990. Prices are rising three to four times faster than they were before the pandemic.
All the stimulus “has created a boom in spending that has contributed to the supply chain issues and the inability of production to keep up,” said chief economist Steve Blitz of TS Lombard.
The last major government stimulus in March might have been overkill, some economists say.
The Biden administration approved a $1.9 trillion plan — -with no Republican support — that sent a $1,400 check to most families and included other major spending.
“The legislation in March fueled a lot of this,” Markowska said. At the time, the yearly rate of inflation was 2.6% — and rising.
The surge in inflation doesn’t necessarily mean the March stimulus was all a waste, though. The economy was still in a tough spot, millions were out of work and it was unclear when the pandemic would fade.
“It is easy in retrospect to say we should have had less stimulus. Hindsight is perfect,” Faucher said. “But the economy is probably much better off with the stimulus than it would have been without.”
End of high inflation
What will have the biggest influence on inflation in the next two years is not government spending, economists say, but the ability of businesses to obtain the labor and supplies they need.
Most Wall Street forecasters predict inflation will fade below 3% by next year as labor and supply shortages ease and federal spending returns closer to historic trends. Federal outlays soared as much as 50% above pre-crisis levels in the past two years.
“This inflation is ‘transitory’ because the surge in demand is ‘transitory,’ ” said Blitz, referring to how the Fed has characterized the current spike in prices.
“Eventually a lot of this backlog of [household] savings gets spent, demand softens, production catches up and price increases reverse,” he said.
The Build Back Better plan, economists say, wouldn’t do much to alter the path of inflation. While the amount of money spent could equal the March stimulus, there is one big difference: The money would be spread out over a decade.
Seen from that perspective, it would add just a few hundred billion dollars to government spending each year. Or about 5% of the pre-crisis level of federal outlays.
The Build Back Better plan also includes some large tax increases unlike the previous Trump and Biden stimulus. That would limit its impact on demand and inflation.
“If it boosts demand in one place, it takes demand from someone else,” Markowska noted.