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‘Crazy’ or ‘much ado about nothing’?u00a0How Joe Biden’s Build Back Better plan could affect inflation

'Crazy' or 'much ado about nothing'?u00a0How Joe Biden's Build Back Better plan could affect inflation


‘Crazy’ or ‘much ado about nothing’?u00a0How Joe Biden’s Build Back Better plan could affect inflation

Biden’s Build Back Better bill passes House, goes to SenateThe Biden administration’s Build Back Better social spending bill started at $3.5 trillion. It’s now down to less than $2 trillion.Staff video, USA TODAYPresident Joe Biden said this week he expects the $1.75 trillion bill to pass Congress by Thanksgiving, possibly along party lines with Vice President Kamala Harris breaking the tie.Inflation has surged to a 31-year high, up 6.2% in the last year, according to the Labor Department. Supply-chain snags and a labor shortage are among the contributors.The legislation, among other things, would provide universal pre-kindergarten schooling, affordable housing, paid family and medical leave, and reduced prescription drug costs.The White House says its sprawling Build Back Better legislation will create a new foundation for American households, a kind of social infrastructure for low- and middle-class families.Many Republicans and some moderate Democrats say it will toss more gasoline on the flames of soaring inflation.President Joe Biden said this week that he expects the $1.75 trillion bill to pass Congress by Thanksgiving, but analysts say concerns about its effect on inflation could delay approval and shrink its size.  The Congressional Budget Office has estimated the legislation would add $160 billion to the national debt over the next decade. But the White House said the bill would reduce the deficit by $100 billion over 10 years as a result of tax increases on the wealthy and corporations and IRS crackdowns on tax cheats.If moderate Democratic Sens. Joe Manchin of West Virginia and Kyrsten Sinema of Arizona accept the CBO’s projections, it could intensify their concerns that the bill would stoke inflation. A deficit-financed bill would be more likely to spur further price increases than a package that offsets the increased spending with tax increases that theoretically would restrain the outlays of rich people and companies.Want a politics roundup every night? Sign up for our OnPolitics newsletterWith the Senate split 50-50 along party lines, the votes of Manchin and Sinema are needed to pass the bill under a parliamentary maneuver called reconciliation that would let Vice President Kamala Harris break the tie and sidestep a Republican filibuster.Worries about inflation were amplified last week when the Labor Department said consumer prices jumped 0.9% in October and 6.2% over the past year, the largest 12-month increase in 31 years. Most economists chiefly attribute the higher prices to supply chain bottlenecks that have led to product shortages and worker deficits that have pushed up wages, all during a period when consumer demand has revived with the reopening economy.Brian Gardner, chief Washington policy strategist for Stifel, says he expects the bill to pass but it probably wouldn’t clear the Senate until after Thanksgiving and possibly not until early next year. He also predicts the legislation will be scaled back.Many leading economists, however, say the package’s impact on inflation will be modest, in part because the outlays will be financed by tax increases on the wealthy and is far outweighed by its benefits. The White House argues the plan will ultimately ease inflation pressures.Child care, paid family leave and moreAmong other things, the bill would provide universal pre-kindergarten schooling, large child care subsidies, affordable housing, paid family and medical leave, and reduced prescription drug costs. It also extends the expanded child tax credit and earned income tax credit, expands the Affordable Care Act, closes the Medicaid coverage gap and broadens access to a postsecondary education.Biden has described the sweeping package as a more significant social welfare law than the New Deal.Critics, however, say this is no time for Congress to pass yet another outsized spending bill. It would follow nearly $6 trillion in outlays to combat the economic effects of the COVID-19 pandemic, including $3,200 in stimulus checks to most households, and a $1.2 trillion bipartisan infrastructure bill that Biden signed earlier this week.What is inflation and how does it affect you? Increase in prices for gas, food, energy raise concernBiden has acknowledged that the $1.9 trillion American Rescue Plan, the stimulus bill enacted earlier this year, has contributed to inflation by putting more cash in Americans’ pockets as the economy reopened. And even economists and Republicans who oppose the Build Back Better package have refrained from criticizing the infrastructure bill, which is smaller and has drawn support from both parties.As a result, the Build Back Better blueprint has become the target of lawmakers and economists who are nervous about inflation and, in some cases, oppose the substance of the bill.Further stirring up inflation?“We’re continuing to see a tremendous amount of additional government spending that will add to inflation pressures,” says Joe LaVorgna, chief economist of the Americas for Natixis, a research firm. “It’s crazy.”To LaVorgna, chief economist of the National Economic Council under President Donald Trump, the $1.75 trillion in spending equates to that much economic activity, fueling demand when supply can’t keep up. The money will largely go to low- and middle-income households who will increase demand for day care, housing and other services, pushing up their costs.’No slam-dunk solution’: What can Joe Biden do to tame soaring inflation?It will also reduce their expenses for those items, leaving them extra cash to spend on other goods and services and propelling those prices higher, LaVorgna says. Lower-income earners generally spend most of their additional income.Although taxes will rise on the wealthy and corporations to offset the spending, wealthier people tend not to adjust their spending as much in the short term in response to changes to their income, says Mark Zandi, chief economist of Moody’s Analytics.Also, the spending will likely begin in about a year while the bulk of the tax increases won’t kick in for several years, adding to the deficit and inflation in the meantime. Over the next two years, for example, the legislation is set to spend $456 billion while raising about half as much in taxes and fees, according to Moody’s figures.Wayne Winegarden, senior fellow for the Pacific Research Institute, a free-market think tank, says the bill would also stoke inflation by adding to the nation’s money supply. The Fed has been buying hundreds of billions of dollars in Treasury bonds, effectively printing money. That keeps interest rates and government borrowing costs low. But Winegarden says it leaves banks with lots of extra cash that they’re more likely to lend out, fueling more economic activity.He also takes issue with the legislation broadly, saying it provides people incentives not to work in some cases.The Build Back Better impactZandi, however, dismisses both concerns. Not all government spending is the same, he says. The money in the package to curtail rising rents, cut prescription drug costs and help pay child care actually will reduce inflation for low- and middle-income Americans, he says.And skyrocketing prices, he says, are chiefly caused by the supply chains snags and worker shortages, both of which should ease by the second half of next year as the effects of the pandemic wane.He agrees that Build Back Better will add to the deficit and spur more inflation over the next few years until more of the tax increases kick in, but not by much. He predicts the consumer price index will rise 4% next year and 2.5% in 2023, compared with 3.8% and 2.2%, respectively, without the legislation.About 50 economists surveyed by Blue Chip Economic Indicators expect a different measure of inflation watched closely by the Fed to fall from 3.9% in the current quarter to 2.2% by the end of next year, just slightly above the Fed’s 2% target.“I don’t view (Build Back Better) as having any material impact on inflation,” Zandi says. “It will add a little bit to inflation in the near term,” but that’s not a reason to kill the legislation, he says.Where higher prices are pinching: Midwest faces some of the country’s worst price hikes on gas, electricity, food, carsThe bill is tiny compared to the $6 trillion in COVID-19-related stimulus funds – money that was spent in less than two years, says Joseph Gagnon, senior fellow at the Peterson Institute for international economics. Build Back Better, by contrast, would spend $1.75 trillion over 10 years.“It’s so small,” he says. “It’s like comparing a skyscraper to a hovel.”The American Rescue Plan will help generate inflation of 4.4% this year, compared with 3.2% if the bill had not been enacted, Zandi estimates.Former Treasury Secretary Larry Summers, a Democrat, who sharply criticized that bill as goosing inflation, supports the Build Back Better package.Rising inflation impacts the stock market and more. Here’s how.Rising prices are scaring investors. Here’s how inflation works, how it affects investments like stocks and funds and how to protect your money.USA TODAYConcerns about inflation expectationsLaVorgna argues that numbers may not tell the whole story. Adding to inflation when it’s already high could further raise the public’s inflation expectations for the longer term, causing workers to demand higher wages and companies to raise prices.And what happens, he asks, if the supply chain kinks aren’t resolved by the end of next year and sharp price increases linger?The White House, meanwhile, says the package ultimately will trim inflation by expanding child care, for example, so women can return to the workforce, easing wage pressures, and providing more educational opportunities to lower and middle-class households to boost productivity.Zandi, though, doesn’t believe the bill will noticeably ease inflation any more than it worsens it.“It’s much ado about nothing,” he says.Contributing: Savannah Behrmann and Ledyard King, USA TODAY

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