Friday, January 21

Leading economists see Biden’s spending plan driving inflation up

The roughly $ 2 trillion tax and spending bill championed by President Joe Biden will act to drive inflation next year if Congress passes it.

That’s according to three senior economists – Mark Zandi of Moody’s Analytics, Douglas Holtz-Eakin of the American Action Forum and Harvard University professor Doug Elmendorf – who appeared on a virtual panel sponsored by the National Association for Business Economics on Wednesday.

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While all agreed that the bill, as currently constituted, would add to short-term inflationary pressures, they differed on how worrisome it would be, with Zandi exhibiting the least concern and Holtz-Eakin the most.

Democratic lawmakers continue to discuss the details of the bill, with some moderates expressing concern about the impact it could have on inflation, raising questions about its final contours and even its fate. Republicans have also attacked the bill, calling it wasteful government spending.

The administration, for its part, has argued that the president’s so-called Build Back Better agenda will act to reduce inflation in the long run by increasing the size and productivity of the American workforce.

Rising inflation

Rising inflation has soured consumer confidence and helped lower Biden’s approval ratings in opinion polls. Consumer prices soared 6.2% in October compared to the previous year, led by cars, food, gasoline, electricity and fuel oil. Most economists see that it will decline sometime next year, but the debate centers on how soon and by how much.

Zandi, an advocate for the reconciliation bill whose analysis has often been cited by the White House and top Congressional Democrats, said he did not believe it would lead to significant price pressures.

But “it will add a bit to inflation,” adding a few tenths of a percentage point to gains in the consumer price index in 2022 and 2023, he said. The plan will also boost gross domestic product and accelerate the return to full employment, the chief economist at Moody’s Analytics said.

Holtz-Eakin, a Republican who served in former President George W. Bush’s administration, said he was slightly more concerned about short-term impact than Zandi.

Loaded to the front

Much of the spending on the package is charged upfront, he said. Combined with the bill’s tax cuts and tax breaks, that could end up pushing about $ 500 billion into an economy that doesn’t need it, according to the president of the American Action Forum.

“We may have some growth,” he said. “But we are not avoiding additional pressure on inflation.”

Elmendorf, who served in the administration of former Democratic President Bill Clinton, essentially split the difference between Zandi and Holtz-Eakin when it came to the bill’s short-term impact.

“This bill is going the wrong way in the short term, but I think it is not going very far down the wrong path,” he said.

The bill will likely increase demand in the coming years, Elmendorf said. “That will tend to boost GDP, employment and inflation, which is not the policy boost we need right now,” he added.

Elmendorf also said that he expects the Federal Reserve to significantly offset any inflationary impulse that arises through changes in monetary policy.

© 2021 Bloomberg

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