The Congressional Budget Office (CBO) just calculated that the Build Back Better bill currently before the Senate, will add $3 trillion to the public debt over the next 10 years. President Biden claims the bill will not increase the deficit and will reduce inflation. Which assessment is correct?
Biden says the bill will result in government spending increasing by about $1.75 trillion over the next decade. He says that all of the spending will be financed by raising taxes on the wealthy. Therefore, it will not add to the deficit.
He also says that the massive increase in government spending on top of his $1.9 trillion stimulus bill passed in May and the $1.2 trillion infrastructure bill passed in November will actually reduce inflation.
In its original assessment, the CBO calculated the 10-year cost of the bill, exactly as it is written, to be $1.635 trillion and the increase in tax revenue to be $1.268 trillion. That means the deficit would increase by $367 billion. Recently, the CBO re-calculated those numbers using different assumptions.
Assuming the programs that are only funded for two or three years became permanent, the spending would increase to $4.2 trillion, meaning the deficit would be about $3 trillion. That $3 trillion would be added to the already high expected annual deficits over the next decade.
A $43 Trillion Price Tag
In fact, before Biden was elected and before he could pass his massive spending bills, the CBO estimated that the U.S. budget deficit would be $1 trillion each year for the next decade. That means already approved spending plus Biden’s additions will add more than $13 trillion to the current nearly $30 trillion public debt. By the end of the decade, the debt will be $43 trillion.
As interest rates rise and Treasury bond rates approach the historical average of 2.5% to 3%, the annual interest expense on that debt will exceed $1 trillion. That’s $1 trillion, paid every year, that can’t be used annually for more productive government spending.
Which CBO analysis is correct?
Historically it is extremely difficult, often impossible, to defund a social program once the program has been implemented and funds disbursed. In fact, Congress is currently discussing a one-year program that is set to expire.
Biden wanted to help households with children afford day care and other child-related expenses. Last July, Congress passed a bill that would provide monthly advance checks for up to $300 per child. This was meant to be a temporary one-time program.
But some members of Congress want to extend the payments into next year and beyond. Democrats, who hold the majority in both houses of Congress, say these payments are critical to reducing child poverty. “We are not going to have a lapse in payments. That’s too important,” said Sen. Sherrod Brown (D-Ohio).
This is exactly what would happen to all the “short term” programs in BBB bill. The bill has “temporary” programs for child tax credits, funding for universal pre-K, expansion of the Affordable Care Act and an increase in state and local tax (SALT) deductions.
Pure Inflationary Pressures
As each of these programs would sunset, members of Congress would not let them expire, meaning the programs would be in effect for the entire 10 years and probably longer. This would help to ensure that budget deficits could be over $1.3 trillion annually.
That would place such a heavy burden on future generations that it could lead to a very precarious financial position, since the public debt will be more than one a half times annual GDP.
The excess demand from Biden’s massive spending will cause an increase in inflation. He says his spending plans, which he claims are supported by 17 Nobel Prize-winning economists, will reduce inflation. That is simply flat-out wrong.
Adding excess demand to an already much overheated economy will lead to pure inflation. Frankly, I find it difficult to believe that any unbiased economist would disagree with that assessment.
Members of the Biden administration are also incorrect when they explain that if they raise taxes by the same amount as government spending, there will be no impact on inflation. Government spending increases demand. There will, however, be almost no offsetting decrease in demand. That’s because the tax increases fall on the upper-income earners.
Those households will still consume the same amount to maintain their lavish lifestyles. They simply will have less to invest. Since there will be no offsetting decrease in demand, the increased government spending leads to more excess demand and more inflation not less.
Let’s hope Build Back Better bill does not pass.
Michael Busler is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in Finance and Economics. He has written op-ed columns in major newspapers for more than 35 years.
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