As the Build Back Better Act moves through Congress, economists disagree over its possible inflationary effects.
The $1.75 trillion legislation — which the House of Representatives passed on Friday — would expand various social programs, including universal preschool, childcare subsidies, and climate change initiatives. The Congressional Budget Office — the federal government’s nonpartisan fiscal scorekeeper — said that the bill would add $367 billion to the deficit by 2031, not considering a potential $207 billion windfall arising from enhanced tax enforcement efforts.
Some reports indicate that the Build Back Better Act would have a negligible impact on price levels; others note that the legislation in its current form would lend itself to extensions of key programs, thereby masking its true cost.
For one, Moody’s Analytics notes that the legislation will begin spending well after many economists expect high inflation to diminish.
“The additional federal spending would occur over 10 years, include significant revenue-raising offsets and would likely only start to flow into the economy later in 2022 at a time when inflationary pressures from disruptions to global supply chains and U.S. labor supply likely will have diminished,” said Moody’s senior analyst Rebecca Karnovitz.
“The timing is really important — that money will only start flowing into the economy maybe in the end of next year and in 2023 and on,” added Moody’s Investors Service vice president William Foster. “We think inflation will moderate by the middle of next year. By then, the supply-chain issues will work themselves out.”
However, an analysis from the Committee for a Responsible Federal Budget notes that the true cost of the bill may be $4.9 trillion due to a number of “arbitrary sunsets and expirations.”
“The Build Back Better Act relies on a number of arbitrary sunsets and expirations to lower the official cost of the bill,” the group explained. “These include extending the American Rescue Plan’s Child Tax Credit (CTC) increase and Earned Income Tax Credit (EITC) expansion for a year, setting universal pre-K and child care subsidies to expire after six years, making the Affordable Care Act (ACA) expansions available through 2025, delaying the requirement that businesses amortize research and experimentation (R&E) costs until 2026, and setting several other provisions — from targeted tax credits to school lunch programs — to expire prematurely.”
Accordingly, Lawrence Summers — who worked as Treasury Secretary under the Clinton administration and National Economic Council director under the Obama administration — said that any low inflationary impact would hinge upon the bill remaining at its current cost level.
“First, let’s not compound errors that have already been made with far too much fiscal stimulus and overly easy monetary policy by rejecting Build Back Better. The legislation would spend less over 10 years than was spent on stimulus in 2021,” he wrote in The Washington Post. “Because that spending is offset by revenue increases and because it includes measures such as child care that will increase the economy’s capacity, Build Back Better will have only a negligible impact on inflation. It will of course be imperative to ensure that various temporary measures, such as the child tax credit, will not be extended without new revenues to pay for them.”
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