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Manchin killed Build Back Better over inflation concerns – an economist explains why the $2 trillion bill would be unlikely to drive up prices

Manchin withdrew his support for Build Back Better. (AP Photo/J. Scott Applewhite)

One of Sen. Joe Manchin’s main concerns in deciding to pull his support for President Joe Biden’s Build Back Better plan is that it would drive up inflation, which is currently rising at the fastest pace in four decades.

On Dec. 19, 2021, the West Virginia Democrat said in an interview that he couldn’t support the bill in its current form because of the impact he says it would have on increasing consumer prices and the national debt. The decision effectively killed one of Biden’s top economic priorities.

The Senate had been considering the roughly US$2 trillion bill passed by the House that would spend money on health care, education, fighting climate change and much else over the next decade. Senate Majority Leader Chuck Schumer says he still plans to bring it to the floor for a vote.

Manchin and Republicans have argued the risk that more spending could push inflation even higher is too great.

As an economist, I believe Manchin’s concerns are misguided. Here’s why.

Putting $2 trillion in context

High inflation is clearly a problem at the moment – as the Federal Reserve’s Dec. 15, 2021, decision to accelerate its withdrawal of economic stimulus signals.

The most recent statistics show inflation, as measured by the annual increase in the Consumer Price Index, was 6.8% in November 2021. This is the highest level since 1982 – yet still a long way from the double-digit inflation experienced back then.

The question, then, is: Could an additional large spending increase cause inflation to accelerate further?

To answer this, it’s useful to put the numbers in some context.

The price tag of the Build Back Better plan passed by the House of Representatives is about $2 trillion, to be spent over a 10-year period. If the spending is spread out evenly, that would amount to about $200 billion a year. That’s only about 3% of how much the government planned to spend in 2021.

Another comparison is to gross domestic product, which is the value of all goods and services produced in a country. U.S. GDP is projected to be $22.3 trillion in 2022. This means that the first year of the bill’s spending would be about 0.8% of the GDP.

While that doesn’t sound like much either, it’s not insignificant. Goldman Sachs had estimated U.S. economic growth at 3.8% in 2022. If the increased spending translated into economic activity on a dollar-for-dollar basis, that could lift growth by over one-fifth.

But what really matters here is how much the bill would spend in excess of any taxes raised to pay for the program. The higher taxes on the wealthy and corporations that the House version of the bill calls for would reduce economic activity – by taking money out of the economy – offsetting some of the impact of the spending that would stimulate it.

The Congressional Budget Office estimates that the bill would increase the deficit by $150.7 billion over a decade, or about $15 billion a year. Again assuming this is spread evenly over the 10 years, it would amount to less than one-tenth of 1% of GDP. Even if elements of the bill are front-loaded, it does not seem that this increase in the government debt would contribute much to inflation.

In other words, the proposed spending would make a barely noticeable macroeconomic effect even if it had an unusually disproportionate impact on the economy.

But it won’t reduce inflation either

Some proponents of the bill – including the White House and some economists – have gone further. They have argued that the proposed spending package would actually reduce inflation by increasing the productive capacity of the economy – or its maximum potential output.

This seems implausible to me, at least given the current level of inflation. Historical evidence shows a more productive economy can grow more quickly with relatively little upward pressure on prices. That’s what happened in the U.S. in the 1990s, when the economy grew strongly with little inflation. But it takes time for investments like those in the bill to translate into gains in productivity and economic growth – meaning many of these impacts will be slow to materialize.

And current inflation is likely an acute problem reflecting supply chain disruptions and pent-up demand, challenges that won’t be resolved by expanding the economy’s productive capacity five or more years down the road.

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At the same time, what’s in the bill would make a big difference to improving the lives of average Americans by providing more of them with affordable child and health care and reducing child poverty – areas where the U.S. seriously lags behind other rich countries. And it would help the U.S. fight the ever-worsening effects of climate change.

While the $2 trillion in spending would be unlikely to worsen inflation if it were to become law, I believe it could do a lot to materially address these challenges America faces.

This is an updated version of an article published on Dec. 16, 2021.The Conversation

Michael Klein, Professor of International Economic Affairs at The Fletcher School, Tufts University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

9 comments

John O'Neill December 21, 2021 at 7:00 am

This is a bunch of crap. The Dems hid the true cost of BBB from the American people. Every Sunsetting program in the Bill would never “Sunset” and they knew it. Any Congressmen who signed up for this literally lied to their districts.

Niz December 21, 2021 at 9:52 am

So o think we all know It’s OVER HALF the Senate who opposes the Build Back bill.
Not just one guy. Lol these headliners are so dishonest.

Piberman December 21, 2021 at 11:17 am

If a few trillion would not drive up prices why not $20 trillion ? Not paid for by taxes. Just printing Treasury notes and bonds.

Why haven’t other countries drawn up trillion dollar spending programs secure that prices wouldn’t rise ? Printing money is pretty cheap.

Do we have any historical examples of huge increases in Federal spending w/o sharply rising prices. What did the Fed Gov’t do when WWII began ? Instituted price controls !
Why did they do that ?

After WWI the German Federal Republic sharply boosted spending ? What happened ?
Surging inflation leading to government collapse and eventual rise of the Nazis.

Economics is a serious subject. And ought be treated as such. We have 250 years of recorded history demonstrating inflation is always and everywhere a monetary phenomenon. Our Federal Reserve is printing money at an unprecedented rate. Hence the pretty impressive inflation or rise in prices.

Is a 4 x8 sheet of plywood we used to buy for about $10 now priced at nearly $100 because of “supply constraints” of ships waiting out at sea when the stuff is made here in the US ? Of course not. Ditto the sharp rise in gas at the pump.

Just because some political leaders give us lectures on economics doesn’t mean they have the story right. They didn’t write the textbooks. And maybe didn’t read them either.

The current Administration, Progressives included, is giving us the largest transfer of wealth we’ve seen in our lifetimes. Houses, most folks largest asset, are rising sharply everywhere. Even many used cars are now priced more than at new. And just wait until our tens of millions of public Unions demand new contracts with inflation adjustments. Ain’t seen nothing yet !

Best I’m aware of no economist with a major reputation has ever been invited before either House of the US Congress to testify that trillion dollar increases in Govt spending during a growing economy will not seriously increase prices. The only place one hears that is on cable news TV. Best not to name names.

Seve December 21, 2021 at 11:41 am

This is why the average doorman has a better handle on economics than a Brookings Institution affiliated economist. The “build back broke” bill was a veritable pork-fest. There are spending programs in the bill that are will take on a life of their own and grow massively. Tax payer funded abortions, amnesty for illegals, expansion of the IRS, expansion of Medicare, Obamacare all are programs that really cannot be sustained given the fact the the US is already massively in debt. Why do you think they have to continuously expand the debt limit.

What really causes Weimar Republic-like inflation is not so much the printing of money, but it is when citizens lose faith in their government. People have already lost faith in this abysmal regime and further bankrupting the country will destroy the middle class, create more dependency on government (which probably is the plan), and tank the US dollar that will spike interest rates ultimately causing a default. This will be the end of the American way of life.

Piberman December 21, 2021 at 3:44 pm

The ones hurt most by sharply rising inflation are the lower incomes comprising most of our population. Virtually every item they normally purchase rises noticeably during a general inflation. Causing pain. And the ones who benefit are those who already own major assets like homes, businesses, land, etc. Inflation has long been viewed as the “cruel tax on the poor”. And yet we don’t see much nationwide protest. Maybe the public sees this time as “different”. Not likely. Sharply rising prices during a devastating Pandemic killing hundreds of thousands is just cruel.

Peter Franz December 21, 2021 at 7:10 pm

People who erroneously refer to investing in the USA as “redistribution of wealth” were amazingly silent when the top 1% were given massive tax breaks by the prior administration. THAT is actual “redistribution of wealth.” Investing in our nation is desperately needed to provide jobs, restore infrastructure, and restore a badly beaten up middle class. The US is amazingly 39th in infrastructure investment per GDP against all other nations. It looks it. Some would like to see us ranked even lower. Question why.

M Murray December 22, 2021 at 6:22 am

A tax break is not a “redistribution of wealth” or “giving money to the rich”. Remember, tax breaks are merely letting people KEEP THEIR OWN MONEY THAT THEY ALREADY HAVE!

Mike Lyons December 22, 2021 at 4:53 pm

To anyone who actually believes the argument in this article – which is rejected by Obama’s Treasury Secretary, by the way – I have some ocean-front land to sell you in Utah.

Also, if you’re worried about ‘massive tax breaks to the rich’, you should oppose BBB. Almost half its cost is a restoration of SALT tax breaks for the rich (although in this case its the ‘good rich’, i.e., limousine liberals in blue states).

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