Increasing government spending is the go-to solution for almost every problem in the modern world. So it was only a matter of time before Democrats tried to fix the current economic problems by bringing back the failed “Build Back Better” (BBB) program.
Obviously, if they are successful, the result will be a lot like what we’ve seen over the past 18 months: more debt and rising prices.
Just to remind you, the $2 trillion BBB bill came after a $2 trillion third COVID-19 relief bill and a $1 trillion infrastructure bill. Sens. Joe Manchin (D-W.Va.) and Kyrsten Sinema (D-Ariz.) joined all the Republican senators in voting against it, which killed it.
They were right to worry that spending more would make our debt grow and cause inflation. Now, though, their party is up and running again. In the middle of the biggest inflation in 40 years, they have been talking behind the scenes for weeks in order to pass a slimmer BBB.
Politico says that they plan to use the budget reconciliation process to pass the bill before September. The bill includes tax hikes, measures to reduce the deficit, changes to the way prescription drugs are regulated, and subsidies for renewable energy, but most of the details are still unclear. It would be terrible if we ended up with more of the spending and favoritism that have become so common.
First of all, and worst of all, these policies are doomed to fail. For example, giving subsidies to companies that make green energy drives up the price of that energy and slows down the kind of innovation that could make it more common. The Democrats’ plan for prescription drugs would be expensive and, in the long run, maybe even kill people.
As Brian Blase of the Paragon Institute wrote in a newsletter not long ago, “Tomas Philipson, who used to be the head of the Council of Economic Advisers, thinks that these proposals would mean that 135 fewer new drugs would be approved over the next 20 years. This decrease in innovation would mean a loss of life years that is many times bigger than the loss of life years from COVID-19.”
Second, as the money keeps moving through the economy, it will keep pushing up prices. Recent price increases are due to irresponsible fiscal and monetary policies during the pandemic and the failure to implement or even talk about policies to reduce the budget deficit and debt once the crisis was over.
In fact, one of the unspoken rules about money that politicians have followed up until now is that the government can spend a lot during a crisis, but it should cut back once the crisis is over. If you don’t do this, it could lead to the terrible fear that the government won’t be able to pay back its debt and will instead use inflation to cut it down.
Also, a big jump in spending costs a lot, especially if it is paid for with borrowed money. At a time when the Federal Reserve is raising interest rates to slow down inflation, it is especially expensive.
Within a year, 30% of the U.S. debt needs to be rolled over. If interest rates go up, we’ll have to pay more in interest on our debt, which will cost us more quickly.
Lastly, higher interest rates and the slowing down of the economy that comes with them could reduce inflation. However, this could be an expensive and short-lived win if Congress doesn’t act to cut spending.
Any initial success in taming inflation could backfire by temporarily increasing real wealth and interest payments from bond investments. In this case, more money and higher incomes lead to an increase in aggregate demand, which has been driving inflation.
By putting a fiscal consolidation plan into action, the wealth effect would be lessened and inflation would be kept in check. On the other hand, most Democrats want to spend more money, which would make the wealth effect worse and fuel demand-driven inflation.
John Cochrane of the Hoover Institution points out that this is what happened during the Great Inflation. He says: “In 1970 and 1974, the Fed raised interest rates more quickly and sharply than it does now. In 1970, rates went from 4% to 9%, and in 1974, they went from 3.5 to 13%. Each rise was followed by a rough recession. Each cut the rate of inflation.
Every time, inflation came back with a roar.” This is what will happen if the Biden administration doesn’t implement austerity or, even worse, if it uses fears of an upcoming recession as an excuse to spend more and add to the debt.
A soft landing has never been a real possibility. When inflation starts, it’s hard to stop. But there are many ways to make things even worse and hurt more. This is what will happen if the Democrats stick to their current plan for BBB.
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