04:19 - Source: CNN
Will inflation doom passage of 'Build Back Better'?
Washington CNN  — 

Soaring inflation has become a political problem for President Joe Biden’s Build Back Better bill, with critics pointing to the rise in prices as a reason why it’s the wrong time for Congress to authorize some $1.75 trillion in new spending.

Many Republicans argue that injecting more federal money into the economy will add fuel to the fire, while the White House and some Democrats say that the bill will reduce the cost of living for many low-income families and ease inflation over the long run.

But a key Democratic holdout, Sen. Joe Manchin of West Virginia, is also concerned about the potential impact the bill would have on inflation. That’s a problem for Biden, who needs all 50 Democratic votes in the Senate for the legislation to move forward. If passed, the spending plan aims to transform the nation’s social safety net and combat climate change.

The prices of everything from gas at the pump to food at the grocery store have been on the rise for months, driven in part by pandemic-induced supply chain bottlenecks. Consumer price inflation rose by 6.8% in November, a level not seen in 39 years.

No one knows for sure exactly how the spending could affect inflation. But many policy analysts agree that the impact will be relatively small. Here’s what some experts expect.

The plan would add ‘modestly’ to inflation over the next few years

The Build Back Better bill, which passed the House in November, currently contains a variety of tax cuts and new federal spending provisions. It also includes tax increases on corporations and wealthy households that are meant to raise revenue that pays for the new benefits.

Over 10 years, the Congressional Budget Office estimates, most of the legislation will be paid for, but it will still add $367 billion to the deficit. The White House disagrees and has worked to make the case that the bill will be fully paid for when accounting for a proposal to enhance tax enforcement, which the CBO excluded.

Two big tax relief programs would be implemented immediately – the expanded child tax credit and the earned income tax credit – while some of the tax increases would not go into effect until later.

That means the federal government would spend more than it takes in at first, which explains why many economists say there will be a modest increase to inflation in the short term. Analysts from the Tax Foundation, Tax Policy Center, Committee for a Responsible Federal Budget and Moody’s Analytics all agree on that point.

“It is our assessment that on net the Build Back Better Act is likely to modestly boost near-term inflation relative to what it would otherwise be,” analysts at the Committee for a Responsible Federal Budget wrote in a blog post last week.

Why experts don’t think the increase will be large

The increase in federal spending could drive up consumer demand, adding to inflation, but it’s unclear how much of an impact that would have.

“The directional effect is pretty clear that it would raise inflation, holding all else equal. But we don’t know by how much,” said Alex Muresianu, a federal policy analyst at the Tax Foundation.

Benjamin Page, a senior fellow at the Tax Policy Center, puts the possible inflation increase in the near term at about a few tenths of a percent, which would be a small bump compared with the 6.8% jump in prices last month.

To put the Build Back Better bill in context, it helps to look at the American Rescue Plan – a $1.9 trillion spending package that passed in March. It raised annual inflation in 2021 by 0.3 percentage point, and could raise inflation in 2022 by another 0.2 percentage point, according to an estimate from the Federal Reserve Bank of San Francisco.

While roughly the same size as the Build Back Better bill, the American Rescue Plan is different because it delivered emergency relief to Americans quickly and did not provide any revenue offsets. Build Back Better, on the other hand, aims to spend the money over several years and provides tax increases and other measures to help pay for the new spending.

What would a small increase in inflation mean?

Analysts are in less agreement about whether even a small, short-term increase to inflation is a good idea at this time.

“It would be unwise for policymakers to take these risks at a time when inflation is so high already,” wrote analysts at the Committee for a Responsible Federal Budget. While they believe the effect on inflation would be small and temporary, it could increase the economic cost of bringing inflation back under control.

But other experts are not as concerned about the potential boost to inflation.

“I don’t think it’s helpful, but I think the increase will be modest enough that it shouldn’t be a main concern about the bill – it should be pretty far down the list,” said Page.

If prices start rising too quickly, the Federal Reserve can tap the brakes on the economy. One of the central bank’s primary jobs is to keep prices stable, and it can do so by gradually tightening economic policy to keep inflation in check.

The bill aims to lower costs for some families

Many provisions in the Build Back Better bill are aimed at reducing the cost of living for low- and middle-income households. Qualifying families would receive help paying for child care, and states would get money to create a free pre-K system for 3- and 4-year-olds.

Some families would also continue receiving the beefed-up child tax credit, and those without children would continue to get the expanded earned income tax credit – both through 2022. The bill also contains a number of provisions aimed at reducing the cost of health care.

Those provisions would mean that in the short run, the bill “likely will reduce the inflation that lower-income and even lower-middle-income households will face,” said Mark Zandi, chief economist of Moody’s Analytics.

Build Back Better could ease inflation in the long term

The White House argues that over time, the Build Back Better bill will help ease inflation because its investments will increase productivity and growth, which in turn can reduce price levels.

While that may be true, Zandi believes that even over the long run, the bill will have a marginal impact on inflation.

“It will lift long-term economic growth and by so doing, all else being equal, will take the edge off of inflation long run,” Zandi said. “But again that’s pretty small potatoes, because it’s very much on the margin and a lot of the programs expire, so they would presumably have no effect later in the decade.”

“Maybe on the margin it adds a bit to inflation next year, the year after,” Zandi said. “Maybe on the margin it reduces inflation in the longer run, but taking a step back it does not have a meaningful impact on inflation.”