According to the recent 8-hour long speech by Kevin McCarthy, “Americans just have to spend $28 before the I.R.S. knocks on their door”. But is this the truth? Well, today, we’re going to get this fact check. So, continue reading if you’re also intrigued by the latest tax reforms.
Here’s What’s Going On
Despite rising inflation, the White House is experiencing turbulence over fears that President Joe Biden’s Build Back Better safety net bill could push it higher. This is the highest inflation rate in three decades.
The House is about to vote on the bill. In its current form, which may be altered in the Senate even if it passes the House, the bill aims to spend 1.75 trillion over ten years on things like clean energy, child care subsidies, extended child tax credits, paid leave, and hearing aids for seniors. Part of the costs would be covered by additional taxes primarily aimed at wealthy taxpayers and via government-negotiated drug prices.
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In a letter signed by 17 Nobel laureates in economics, the White House argues that the bill will reduce inflation.
During the Nov. 15 press briefing, White House press secretary Jen Psaki went a step further by answering the question, “Why shouldn’t Americans be concerned that injecting $1.75 trillion or more would further raise inflation?”
According to her, no economist projects that it will cause inflation to spike. Instead, it will actually help increase economic productivity, which will lead to increased economic growth. That, along with the Build Back Better Agenda, will help reduce inflation, which in turn will reduce costs for the American people long-term.
But are her claims really valid?
Are there really no economists who believe this bill will boost inflation? Unfortunately, no.
A number of economists have written on the record that they are concerned about the bill’s inflationary impact. Many economists, however, expect modest inflationary pressure, at least at first.
Skeptics of the White House’s argument, such as the Washington Post Fact Checker, say the White House neglects to mention that the economists it cited were focused on inflation rather than Earnings. This measure’s ability to curb inflation in the medium to long term, not just in the short term when inflation is already excessive.
However, for this article, the White House did not respond to inquiries.
Fact Check: The Economist’s Perspective
As an economist, I’m afraid I have to disagree,” says Douglas Holtz-Eakin, president of the center-right American Action Forum.
“We know there is a lot of spending in the bill and that it is front-loaded into the earlier years,” he said. By cutting taxes and increasing spending, financed by debt, inflation will rise.”
The same view has been expressed by other economists
Bank of America’s global economics head, Ethan Harris: “I think you’ll end up with mainly a deficit-financed spending bill that will be rolled out while the economy is near full employment. It will heat up the labor market further and put pressure on prices.”
Mr. Feroli, chief U.S. economist at JPMorgan Chase: “Right now, anything that expands aggregate demand is not warranted, not advisable. The economy seems to be operating fairly close to its capacity limits.”
The inflationary effects, said some economists, will be modest and manageable, but they will still occur.
Noah Smith, an opinion columnist for Bloomberg and assistant professor of finance at Stony Brook University, wrote, “I expect Biden’s bills to push inflation upward, not downward.”
According to Jason Furman, who headed the Council of Economic Advisers under President Barack Obama. Says that “it’s less likely that it will prevent a huge cut in spending that would have happened in 2022.”
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Nevertheless, Furman writes that the bill would “have only a minuscule impact on inflation in the medium and long term.”
Bill Clinton’s former Treasury secretary, Larry Summers, was more concerned about inflation than other Democrats earlier this year, so he recently wrote that the bill would have a “negligible” impact on inflation.
“I do believe that inflation will be a threat since we are already in a bad situation,” said Marc Goldwein, senior vice president of the Committee for a Responsible Federal Budget. This could be the last-log-on-the-fire syndrome. However, I think the inflationary impact is pretty small, and that is the consensus.
Taking a closer look at the bill’s inflationary and anti-inflationary features, how would the Build Back Better bill create inflation? Basic economics.
How will the bill impact inflation?
According to John Leahy, a professor of macroeconomics and public policy at the University of Michigan, inflation results from too much demand and insufficient supply. Any standard economic textbook easily refutes the argument that the bill will lead to inflation.
A rise in government spending would increase demand, which would increase inflation. It will still happen even if all of the spending are financed by taxes since government spending increases demand one for one, and taxes reduce demand only to the extent that firms or consumers reduce their spending, which is typically less than one.”
Among the bill’s inflationary elements are the extension of the child tax credit and increasing the limits on state and local taxes in 2017. Goldwein said that members of unions and child care providers would have a raise in wages as part of the bill.
The tax hikes that could theoretically temper inflation are primarily targeted at the wealthiest taxpayers. Since tax increases do not dampen spending by wealthy households much, this would tend to weaken the anti-inflationary impact.
Despite this, the bill has some provisions that might counter inflation, such as investments in infrastructure, which would align supply with demand, and child care subsidies, which could motivate people to return to work and, in turn, increase the supply of goods and services.
It is also important to consider the timing. “Some have argued that the effects on demand will be minimal since spending and taxes will occur over a long period of time,” Leahy said.
The bill isn’t massive in the context of the U.S. economy. Especially when you compare it with the recent Coronavirus relief packages, they were both large requiring quick implementation.
As calculated by Leahy, the bill will boost demand by $660 billion over 10 years, a period when the overall gross domestic product will be about $200 trillion. According to the calculation, the increase in demand amounts to one-third of a percent of GDP. It seems insignificant.
Position of the Federal Reserve
In the end, the Federal Reserve’s actions will ultimately determine the level of inflation caused by the bill. According to Goldwein, one of the Fed’s core responsibilities is keeping inflation within a reasonable range, usually around 2%/year. And “over the medium to long term, there’s a strong consensus that the Fed will step-in to prevent higher inflation.”
Since the bill is not in its final form, its impact on inflation may change. Moreover, although economists base their projections on textbook economics. There’s always the possibility that households could react unexpectedly to the bill’s economic incentives.
Despite what Psaki said. That no economist projects (the Build Back Better bill) will negatively affect inflation.”
It’s wrong to claim that no economist predicts inflation as a result of the bill’s passage. If the bill passes, many economists, including some allies of the White House, expect inflation. At least in the short run.
Most analysts agree, however, that the bill would have a modest and brief impact on inflation.
So, in place of the proven facts, we believe Psaki’s statement to be false.