Greg Ip has an insightful piece in the Wall Street Journal this morning about Build Back Better and inflation. He writes that both Joe Manchin and Joe Biden are approaching the question incorrectly:
Unfortunately, neither side in this debate gets the impact right. Democratic Sen. Joe Manchin of West Virginia, who opposes the current legislative package, conflates the effect of past and future spending on today’s inflation. The Biden administration credits the plan with anti-inflationary effects that independent research doesn’t support.
Ip writes that if we’re going to blame any legislation for inflation, it would be the American Rescue Plan. That’s a short-term burst in government spending that disburses almost all of its funds within two years. Build Back Better is more of a slow burn of government largesse, which has its own set of problems but would likely have little impact on inflation.
“Little impact” also means that it wouldn’t reduce inflation, either, which is what the Biden administration is trying to claim. Those claims come down to very long-term chain reactions where each link in the chain is suspect (e.g., universal pre-K invests in the human capital of children, who will then grow up to be more productive employees, which will allow more economic growth without inflation 20 years from now). Ip points out that forecasts of the effects of the legislation show no such improvements:
In fact, Moody’s shows inflation would be 0.2 percentage point higher in 2022 through 2024 with Build Back Better. The Penn Wharton Budget Model, also cited by the White House, sees inflation 0.1 to 0.2 point higher over the next two years.
(This is not the first time that President Biden has claimed that Moody’s said something it didn’t actually say.)
Ip concludes:
In the near term, inflation’s path will largely depend on whether Covid-related bottlenecks and labor shortages ease or get worse because of the Omicron variant. In the long run, it depends on the Fed.
In other words, it doesn’t depend on whether Build Back Better passes.
In a piece from earlier this month, Ip wrote that our present inflation comes from the interaction between strong demand and weak supply. It wouldn’t exist without both conditions. It’s similar to the point I made from a quantity-theory-of-money perspective, that we’re looking at inflation caused by too much M and not enough Y. We face challenges with respect to inflation, but Build Back Better would neither add to them nor ameliorate them in any direct way.
There is no shortage of reasons to oppose Build Back Better. Though it may not cause a general increase in the price level, it would cause the unsubsidized price of child care to increase. Its renewable-energy policies would likely cause energy prices to increase and send us on a path to Europe’s current energy mess. Manchin is right to be concerned about the deficit implications and the Democrats’ never-ending shell games and gimmicks on the true debt impact of the bill. And even if Biden were telling the truth that the bill is paid for, the federal government doesn’t need any more spending obligations right now.
Build Back Better is a bad idea because it’s a massive expansion of the federal government into new areas of American life. Just because that debate is happening at the same time as a surge in inflation does not mean that the two are causally related.