Inflation is lasting longer than we expected it would, rising 6.2 percent in the 12 months that preceded October 2021. It is therefore reasonable for Senator Joe Manchin of West Virginia to ask whether the $1.75 trillion Build Back Better bill would contribute to inflation. What isn’t reasonable is for Manchin to ignore the very obvious answer to that question. It would not, to any meaningful extent.
“By all accounts,” Manchin tweeted Wednesday, “the threat posed by record inflation to the American people is not ‘transitory’ and is instead getting worse.” The second part of that statement is true; inflation is getting worse. The Consumer Price Index was 5.4 percent in September and 5.3 percent in August.
But there’s no consensus that inflation “is not transitory.” To the extent any consensus exists, it’s that the main driver of all economic indicators remains the Covid pandemic and the stop-and-start economic recovery from same.
There are two prevailing economic theories about what’s causing inflation. Some people say it’s the more than $2 trillion pumped into the economy through Covid recovery spending. That was more than what was necessary, this theory goes, and it overheated the economy. Other people say inflation was brought on by fouled-up supply chains struggling to meet material demand because whatever money people didn’t want to spend on travel or other in-person experiences they spent on goods instead. Both of these theories trace the inflation spurt to Covid-19.
Harvard economist Jason Furman pointed out to me that Manchin’s inflation worry is focused on a reconciliation bill that will provide a smaller stimulus to the economy over 10 years than the Covid recovery bills supplied over a single year. The vast majority of Build Back Better money won’t likely be spent until after the current inflation spurt is over. “The inflation we’re talking about is a short-run phenomenon” of about six to 18 months, University of Chicago economist Austan Goolsbee told me. “The fiscal impulse from the reconciliation bill in the next six to 18 months wouldn’t be that big.”
If inflation feels permanent, that’s only because the Covid crisis is lasting much longer than anybody expected. It seemed the pandemic was winding down in early July. Then the delta variant increased new cases more than tenfold during the following two months. Then, from mid-September through October, new cases dropped and employment and wages surged. That isn’t a bad thing; it’s a good thing. But it probably drove inflation higher. The Covid nightmare feels like it will never end, but it will.
How much Build Back Better spending is too much? Manchin wrote an op-ed in September that said he wouldn’t support a $3.5 trillion reconciliation bill because it’s inflationary. Last week he said he wouldn’t support a $1.75 trillion reconciliation bill because it’s inflationary. That suggests Manchin’s inflation anxiety isn’t about the top-line number. So let’s look at what’s in the bill.
Hearing aids. The reconciliation bill expands Medicare coverage by roughly $30 billion to treat hearing loss, including hearing aids. (In the absence of a Congressional Budget Office score, I rely on the Committee for a Responsible Federal Budget’s November 8 calculations for this and all estimates that follow.) Hearing aids cost a fortune, up to about $6,000. If past experience is any guide, turning the bulk of that market over to Medicare will slow price increases, not accelerate them, because Medicare is better than the private market at keeping costs down (provided Congress doesn’t tie its hands by barring it from negotiating prices, as it does with drugs). The new market in over-the-counter hearing aids created last month by the Food and Drug Administration should push prices down further.
Taxes. Taxes don’t increase inflation; they dampen it by reducing deficit spending. “Something that you raise taxes to pay for,” Goolsbee said, “doesn’t really have that strong a stimulative effect.” Granted, the tax hikes in the reconciliation bill fall short of spending by $200 billion over 10 years. But if Manchin is so desperately worried about that $200 billion, he shouldn’t oppose Senator Ron Wyden’s proposed tax on billionaires’ unrealized capital gains, which would raise an estimated $557 billion over 10 years. (In fairness to Manchin, the bigger obstacle to hiking taxes has been Senator Kyrsten Sinema, who says she worries about the reconciliation bill’s inflationary impact, too.)
The House bill doesn’t include Wyden’s tax on billionaires, but it does increase corporate taxes by $830 billion and personal taxes on very high incomes by about $640 billion. It also allows mostly wealthy taxpayers to deduct more of their state and local taxes from their federal returns ($300 billion). This last is regressive and a revenue-loser, but it isn’t particularly inflationary because wealthy people are less likely to spend more when given a tax cut. They’ve already got their wants covered; that’s what being rich means. The only potentially inflationary tax change is expansion of the Child Tax Credit ($185 billion). But Furman said whatever inflationary impact that had would largely be outweighed by the bill’s tax increases.
Universal pre-K and paid family leave. These have been scaled back drastically in the House bill. Universal pre-K is now funded only six years, and family leave is now four weeks rather than 12, at a combined cost of $585 billion. That’s a shame, because these parts of the infrastructure bill would reduce inflation, Furman pointed out, by increasing productive capacity. Greater availability of childcare and paid family leave would enable more people to work. And by improving educational outcomes, increased availability of preschool for young children would increase productive capacity over the longer term.
Subsidies to fight climate change. Manchin dislikes these, not because they’re inflationary but because they accelerate the transition away from West Virginia’s coal industry. Manchin already tossed out some stronger measures in the climate package, which now totals $555 billion in tax breaks and investments. But what’s left will, to the extent that it spurs innovation, increase productivity rather than inflation.
In recent history, the public hasn’t looked to Congress or the White House to control inflation. “That’s the Fed’s job,” Furman told me. With advance notice of what future spending will be, as the reconciliation bill would provide, the Fed would be well situated to anticipate whatever minor inflationary effects the legislation brought on and alter its monetary policy accordingly. Blocking Build Back Better is not a very serious inflation-fighting strategy. For inflation hawks, a better path would be to press hard for strong public health measures like vaccine mandates to end this pandemic as quickly as possible. Nothing in this economy will be right until that happens.