WASHINGTON — Inflation by one key measure just hit a three-decade high. Now, after Congress approved a $1.2 trillion infrastructure bill, President Biden and Democrats are pushing to pass legislation to spend an additional $1.75 trillion to expand the social safety net and fight climate change.
Won’t that avalanche of government money — nearly $3 trillion in total — fuel even higher prices, adding to what Republicans already are labeling “Bidenflation”?
It’s not that simple.
Biden and his allies note that the spending would be spread over a decade and largely offset by increased revenue from tax hikes and other provisions. They contend the bills’ investments actually would ease inflationary pressures over the long term by improving the now-snarled supply chain and making workers more productive.
It’s not that simple, either.
The reality lies somewhere between the partisan talking points, economists said, and that creates an additional risk for the economy and hurdle for Biden.
His sweeping Build Back Better agenda, which includes the infrastructure and social spending bills, probably would add somewhat to inflation in the short term, mostly because some of the spending is front-loaded and the offsetting revenue increases are spread over a decade. But the legislation also has provisions that could ease inflationary pressures over the long term, like billions of dollars in federal aid for child care that would allow more people to join the workforce and boost the nation’s economic capacity.
In the short and long term, economists said, it’s hard to be sure of the impact. The dynamics of inflation — the rate that prices are rising — are complicated even in normal times, involving broader economic forces that pre-date Biden’s policies and, particularly in the case of gas prices, global markets.
Mix in a worldwide pandemic, which caused an unprecedented shutdown and reopening of the economy, and forecasting becomes even more difficult.
“We think markets are really agile. It turns out they’re agile in normal circumstances,” said Joseph Stiglitz, an economics professor at Columbia University and former chair of the Council of Economic Advisers under President Clinton. “But this was a bigger event than we normally deal with.”
The White House is acutely aware of the problems caused by inflation for the economy and Biden’s political fortunes. And right now, administration officials are dealing with a credibility gap on the issue.
Last spring, they said that the $1.9 trillion pandemic relief plan enacted in March, which included $1,400 relief checks for most people, monthly expanded child tax credit payments for families, and extended enhanced unemployment benefits — would not lead to sustained high inflation. Their position was countered by warnings from some economists, most notably former Treasury secretary Larry Summers, that the large influx of money, pumped out of Washington immediately and not offset by revenue increases, risked triggering a sharp inflation increase.
In the administration’s defense, many economists along with top Federal Reserve officials agreed that inflation would rise in the spring and summer as the economy reopened and bottlenecks arose in supply chains but high prices levels would be “transitory.”
The 12-month inflation rate was still relatively tame at 2.6 percent in March after it had risen from the rock-bottom levels hit during the pandemic shutdowns. By June, the rate had more than doubled. After a slight decline in August, inflation accelerated again this fall. On Wednesday, the Labor Department reported the Consumer Price Index, a key inflation barometer, was up 6.2 percent in October compared to a year earlier. That was the highest since 1990.
Republicans pounced on the news, blaming Biden’s policies for the jump even though inflation is running high in many countries as their economies deal with pandemic distortions and supply chain disruptions.
“Inflation keeps breaking records. It’s hurting American families,” Senate minority leader Mitch McConnell tweeted Wednesday. “It is absurd and wrong that Democrats are considering trillions more in reckless taxing and spending.”
High inflation could cause Biden problems as he tries to get the rest of his legislative agenda enacted. West Virginia Senator Joe Manchin, a moderate Democrat who has balked at the size of the $1.75 trillion social spending and climate change bill, poked the White House on Wednesday by saying the latest inflation data showed “the threat posed by record inflation to the American people is not ‘transitory’ and is instead getting worse.”
Although the White House said the bill will not add to the federal budget deficit, Manchin and other moderates are waiting for the nonpartisan Congressional Budget Office to issue its findings. The CBO already said the infrastructure bill would add $256 billion to the federal budget deficit over the next 10 years.
The Committee for a Responsible Federal Budget, a fiscal watchdog group, estimates the infrastructure bill will add $400 billion to the deficit and that the social spending and climate change bill would add about $200 billion. The latter is not a huge mismatch given the overall $1.75 trillion size of the bill but is exacerbated because some spending is concentrated in the first few years of the bill and probably would add to short-term inflation, said Marc Goldwein, the group’s senior director of policy.
“I believe it will be inflationary more likely than not. I’m not too worried it’s going to be inflationary to a large degree,” he said. Goldwein noted the spending is much more spread out than with the $1.9 trillion rescue plan enacted in March.
But given already high inflation, Goldwein said, he’s concerned even a small inflation increase could fuel a dreaded wage-price spiral, in which workers start to expect inflation and demand higher wages, which causes employers to raise their prices, fueling more wage demands. That’s what happened in the 1970s, causing annual inflation to spike to about 10 percent.
“At a time when we need to prevent a potential cycle from starting, it’s pushing in the wrong direction,” he said of the $1.75 trillion bill.
But Jared Bernstein, a member of Biden’s Council of Economic Advisers, said the legislation was needed to offset the “fiscal drag” on the still-recovering economy as the support from the rescue act fades. In a recent blog post, he likened that spring spending to “fast-acting medicine,” while the Build Back Better bills “are more like time-release capsules that make the economy healthier over time.”
“The president has said he very much recognizes that even a little bit of inflation can be tough on family budgets, so not only are we not dismissing such concerns, he’s leaning into doing everything we can about them,” Bernstein said in an interview, pointing to the administration’s effort to ease supply chain bottlenecks.
After Wednesday’s inflation report, Biden was quick to tell Americans that he feels their pain.
“Many people remain unsettled about the economy, and we all know why. They see higher prices,” he said that afternoon at the Port of Baltimore. Biden noted there are positive economic signs, including strong job creation and wage growth, and said his administration would tackle inflation “head on.”
The Build Back Better bills will help, he said. Biden’s backed up on that by 17 Nobel Prize-winning economists who issued a public letter in September saying that because his legislative agenda “invests in long-term economic capacity and will enhance the ability of more Americans to participate productively in the economy, it will ease longer-term inflationary pressures.”
Stiglitz, who was one of the signers, said in an interview that blaming the current high inflation on government spending is “just bad economics” and it would be a mistake to use that as a reason for not supporting the rest of Biden’s agenda.
“There is inflation from the supply side interruptions of COVID-19 and restarting the economy, and they’re just going to be there,” he said. Because the Build Back Better bills are mostly paid for with revenue increases, they shouldn’t jolt short-term inflation significantly even if the spending and revenue aren’t exactly offset in the first couple of years., he said.
In the longer term, the legislation would increase the supply side of the economy by getting more people into the workforce, and that would reduce inflationary pressures, Stiglitz said.
“Providing child care will allow more women to go back to work and that will increase the labor supply and that has a positive supply side effect,” he said. “A lot of the other provisions are supply side measures.”
In a Nov. 4 report, economics research and consulting firm Moody’s Analytics said concerns that the legislation would lead to “undesirably high inflation” were overblown. It estimated that enacting both bills would cause the Consumer Price Index to increase by an average of 0.35 percentage point next year and 2023 before the short-term impact fades. And the legislation would ease the inflationary burden on many Americans, said Mark Zandi, Moody’s chief economist.
“Lower- and middle-income households would face some higher prices like gas, but it’s offset by lower prices on other things, like child care, health care, education, and housing,” he said, adding that those investments would lower inflationary pressures in the long term.
Even Summers, who warned of high inflation from the $1.9 trillion rescue bill, doesn’t think Biden’s Build Back Better legislation will add to it because the spending is largely offset by revenue increases and will provide long-term investments.
“I think it would be a tragic error if, having made a mistake of spending too much at the beginning of this year, we spent too little now,” he said on MSNBC Thursday.
Correction: An earlier version of this article misstated the total combined amount of spending for the infrastructure and social spending bills. It is nearly $3 trillion.