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That’s why spending $ 2 doesn’t make inflation worse than it used to be.opinion

Michael Klein

One of the main concerns of US Senator Joe Manchin The decision to withdraw President Joe Biden’s support for the “Joe Biden administration” is that it will boost inflation. Currently rising at the fastest pace in 40 years..

Democratic Party of West Virginia, December 19, 2021 Said in an interview He said he couldn’t support the bill in its current form because he said it would affect consumer prices and rising government bonds. This decision effectively killed one of Biden’s top economic priorities.

Senate was considering Bill of about $ 2 trillion Passed by the house It will spend a lot of money on medical care, education, fighting climate change and more over the next decade. Senate leader Chuck Schumer, DN.Y.He says Still planning to bring it to the floor for voting..

Manchin and Republicans Claim That risk More spending could boost inflation even further..

As economistI think Manchin’s concerns are irrelevant. This is the reason.

Put $ 2 trillion in context

High inflation Obviously a problem at this point – As of December 15, 2021 of the Federal Reserve System Decision to accelerate its withdrawal Of economic stimulus signals.

The latest statistics show inflation as measured by the annual rise in the consumer price index. It was 6.8% in November 2021.. This is the highest level since 1982, but it’s still a long way from double-digit inflation at the time.

So the problem is: Is it possible that inflation will accelerate further due to the additional significant increase in spending?

To answer this, it is useful to enter numbers in some context.

Price tag for the Build Back Better plan passed by the House of Representatives About $ 2 trillion, Used for 10 years. If spending were evenly distributed, it would be about $ 200 billion annually.That’s only about 3% How much the government was planning to spend in 2021..

Another comparison gross domestic product, This is the value of all goods and services produced in the country.US GDP Is expected to be It will be $ 22.3 trillion in 2022. This means that the first year of bill spending will be about 0.8% of GDP.

It doesn’t sound too much, but it doesn’t matter.Goldman Sachs U.S. economic growth was estimated at 3.8% In 2022. If the increase in spending is transformed into dollar-based economic activity, it could boost growth by more than a fifth.

But what really matters here is how much the bill will spend beyond the taxes raised to pay for the program. The Higher taxes on wealthy people and businesses required by the house version of the bill It reduces economic activity by robbing it of money and offsets some of the impact of spending that stimulates it.

The Parliamentary Budget Office Estimate The bill will increase the deficit by $ 150.7 billion over a decade, or about $ 15 billion a year. This is also less than one-tenth of 1% of GDP, assuming it is evenly distributed over 10 years. Even if the elements of the bill are moved forward, this increase in government debt does not seem to contribute significantly to inflation.

In other words, the proposed spending, if any, will have a macroeconomic effect that is barely noticeable. Anomalous imbalanced impact on the economy..

But it also doesn’t reduce inflation

Some supporters of the bill – Including White House When Some economists – Going further. They argued that the proposed spending package would actually reduce inflation by increasing the economy’s capacity, or its maximum potential output.

This seems unbelievable to me, at least given the current level of inflation.Historical evidence shows A more productive economy can grow faster There is relatively little upward pressure on prices. That’s what happened in the United States in the 1990s, When the economy grew strongly with little inflation. However, it will take time for investments like the bill to improve productivity and economic growth. So many of these effects will take time to realize.

And current inflation is probably a serious problem Reflects supply chain disruption And the problems that cannot be solved by the stagnation of demand and the expansion of the production capacity of the economy more than 5 years from now.

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At the same time, the content of the bill Will make a big difference To improve the lives of the average American Providing Affordable Children to More People And Healthcare and Child Poverty Reduction – The United States Terrible late Behind other rich countries..And that Will help the US fight The ever-increasing impact of climate change.

While $ 2 trillion spending If it becomes a law, it is unlikely to exacerbate inflation, but I believe there is much that can be done to substantially tackle these challenges facing the United States.

This is an updated version of The article has been published December 16, 2021.

Michael Klein is a professor of international economics at the Fletcher School at Tufts University.He wrote this work conversation, The place where it first appeared.
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That’s why spending $ 2 doesn’t make inflation worse than it used to be.opinion

Source link That’s why spending $ 2 doesn’t make inflation worse than it used to be.opinion

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