It’s official. The $4 trillion spending plans of Joe Biden will not — repeat, will not — raise inflation by even a teeny, tiny, teensy bit.
That’s the word from Wall Street rating agencies, anyway. But given the fact that their prognostication abilities have been called into question several times over the previous decade, perhaps we should take whatever predictions they make about the future economic activity with a grain of salt.
“The two pieces of legislation “should not have any real material impact on inflation”, William Foster, vice president and senior credit officer (Sovereign Risk) at Moody’s Investors Service, told Reuters.
The impact of the spending packages on the fiscal deficit will be rather small because they will be spread over a relatively long time horizon, Foster added.
That’s a relief — until you realize the “two pieces of legislation” — $4 trillion — equal the total federal budget of 2018.
Senator Joe Manchin, a centrist Democrat, has previously raised inflationary concerns in relation to Biden’s social spending plan, with a report earlier this month suggesting he may delay the passage of the Build Back Better legislation.
“The bills do not add to inflation pressures, as the policies help to lift long-term economic growth via stronger productivity and labor force growth, and thus take the edge off of inflation,” said Mark Zandi, chief economist at Moody’s Analytics, which operates independently from the parent company’s ratings business.
Mr. Zandi is, I’m sure. a very smart fellow. But he obviously doesn’t read the newspapers very much. “The bills are largely paid for through higher taxes on multinational corporations and well-to-do households, and more than paid for if the benefit of the added growth and the resulting impact on the government’s fiscal situation is considered,” Zandi said.
In fact, Congress has ditched the increase in corporate taxes, and taxes on the wealthy are causing several Democrats, not just Manchin, to wobble.
In short, the corporate rating analysts are whistling in the dark. In truth, they just don’t know what the impact of dumping $4 trillion on the economy over the next few years will mean to the macroeconomic picture.
What’s certain is that the psychological impact of that much spending will drive inflationary pressures forward.
“Feeling” is the core problem. Policymakers can point to the backlogged supply chains and pandemic-related purchasing surges that are likely driving inflation. But what’s resonating right now is as much emotional as intellectual — maybe more so: People find sudden price increases distressing, and they look to punish those they think are responsible. And that’s usually the political party in the White House.
A 1997 survey by economist Robert Shiller is still a must-read for policymakers trying to make sense of attitudes toward inflation. Shiller surveyed people in the United States, Germany and Brazil and found that people so disliked unexpected prices increases that many would “choose low inflation even if it mean that millions more people would be unemployed.” Nice!
When the “value” of currency is based on nothing more than faith in the government issuing the paper, inflation tears those assumptions to tatters. The government is breaking the compact with the citizens by failing to maintain the integrity of the dollar. Citizens become desperate to regain that faith and will usually turn to the opposing party to save them.
Predictions that everything is going to be fine from people who have been so wrong so often can be accepted with the appropriate caveats. But you’d probably get a more accurate take on inflation by talking to your neighbor. They — and you — are the ones who have to live with the consequences of Joe Biden’s reckless spending adventure.