Date: 2024-04-19 Page is: DBtxt003.php txt00021244
US ECONOMY
INFLATION
No, Senator Manchin, Build Back Better Won’t Create Runaway Inflation ...
Covid created this inflation spike. Ending Covid will curb it.
INFLATION
No, Senator Manchin, Build Back Better Won’t Create Runaway Inflation ...
Covid created this inflation spike. Ending Covid will curb it.
Senator Joe Manchin shoots a glance offstage as he talks to reporters at the U.S. Capitol. CHIP SOMODEVILLA/GETTY IMAGES
Original article: https://newrepublic.com/article/164368/manchin-build-back-better-inflation
Burgess COMMENTARY
Politicians use this 'talking point' all the time. It is easy and convenient, but quite often fundamentally wrong.
My own understanding of the economic data about prices is that there is very little cost push pressure, but demand pull. Consumer prices ... that is product end use prices ... have gone up because market conditions are allowing profit maximization pricing which is very different from loss mimimizing pricing that is a characteristic of cost push inflation.
One of the most telling economic statistics is the record profits of many corporations and the related stock market prices. At the present time there is a huge amount of embedded profit in prices, and this goes deep into the supply chain.
Some of this embedded profit is going to show up as a 'cost push' problem at some choke points in supply chains ... but this is a manifestation of the weakness of the profit metric as almost the only metric that matters in high level business decision making.
ADDED COMMENTARY ... December 2022
Several media commentators have started to blame Biden policies as the cause of inflation in the past 18 months. I do not think this is much of an argument, and it shows how little these commentators understand of reality. There were some decisions made at the beginning of the Biden administration to help reduce the risk of the country going into a rapid deep Covid induced recession. The Federal Reserve also acted quite vigorously as well to reduce the risk of significant recession.
The good news that the combination of legislative (Biden) action and Fed (Powell) action worked, and in fact worked rather well.
The bad news is that the business community was preparing for a recession and they called it wrong. The business community had already gone into a lower GDP mode and were completely caught off guard when demand flatlined rather than crashed. Business usually gets more profitable when demand exceeds supply ... and their misstep in cutting back on their costs and their production created the opposite of a perfect storm ... they were in a position to raise prices and profit margins faster and more aggressively than they had been able to do for years if not decades.
This explains why even though inflation is hurting the consumer, the inflation is not hurting companies that produce for the consumers and these companies are reporting record profits and getting record high stock valuations.
The good news is that consumers and workers are starting to see through all of this and are not at all happy about it. Consumer facing businesses are getting more and more angry feedback, and workers are starting to flex their muscles a little bit with some quite modest industrial action ... strike threats and unions organization.
I have started to talk about the political divide as being less about 'right' and left' but more about the 'top' and the 'rest of us'. Policies that are good for the 'rest of us' are not easy to legislate, but those that are good for the 'top' go through like a hot knife through butter. Money in politics is a problem ... and it is unclear to me how much political behavior is responding to money that comes from the rich 'right' or the rich 'left' but the end result is the same ... most legislation is more valuable for the 'top' and not so valuable for the 'bottom'.
Peter Burgess
Covid created this inflation spike. Ending Covid will curb it.
Timothy Noah
November 11, 2021
Senator Joe Manchin talks to reporters at the U.S. Capitol.
Inflation is lasting longer than we expected it would, rising 6.2 percent in the 12 months that preceded October 2021. It is therefore reasonable for Senator Joe Manchin of West Virginia to ask whether the $1.75 trillion Build Back Better bill would contribute to inflation. What isn’t reasonable is for Manchin to ignore the very obvious answer to that question. It would not, to any meaningful extent.
“By all accounts,” Manchin tweeted Wednesday, “the threat posed by record inflation to the American people is not ‘transitory’ and is instead getting worse.” The second part of that statement is true; inflation is getting worse. The Consumer Price Index was 5.4 percent in September and 5.3 percent in August.
But there’s no consensus that inflation “is not transitory.” To the extent any consensus exists, it’s that the main driver of all economic indicators remains the Covid pandemic and the stop-and-start economic recovery from same.
There are two prevailing economic theories about what’s causing inflation. Some people say it’s the more than $2 trillion pumped into the economy through Covid recovery spending. That was more than what was necessary, this theory goes, and it overheated the economy. Other people say inflation was brought on by fouled-up supply chains struggling to meet material demand because whatever money people didn’t want to spend on travel or other in-person experiences they spent on goods instead.
Both of these theories trace the inflation spurt to Covid-19.
Harvard economist Jason Furman pointed out to me that Manchin’s inflation worry is focused on a reconciliation bill that will provide a smaller stimulus to the economy over 10 years than the Covid recovery bills supplied over a single year. The vast majority of Build Back Better money won’t likely be spent until after the current inflation spurt is over. “The inflation we’re talking about is a short-run phenomenon” of about six to 18 months, University of Chicago economist Austan Goolsbee told me. “The fiscal impulse from the reconciliation bill in the next six to 18 months wouldn’t be that big.”
If inflation feels permanent, that’s only because the Covid crisis is lasting much longer than anybody expected. It seemed the pandemic was winding down in early July. Then the delta variant increased new cases more than tenfold during the following two months. Then, from mid-September through October, new cases dropped and employment and wages surged. That isn’t a bad thing; it’s a good thing. But it probably drove inflation higher. The Covid nightmare feels like it will never end, but it will.
How much Build Back Better spending is too much? Manchin wrote an op-ed in September that said he wouldn’t support a $3.5 trillion reconciliation bill because it’s inflationary. Last week he said he wouldn’t support a $1.75 trillion reconciliation bill because it’s inflationary. That suggests Manchin’s inflation anxiety isn’t about the top-line number. So let’s look at what’s in the bill.
Hearing aids. The reconciliation bill expands Medicare coverage by roughly $30 billion to treat hearing loss, including hearing aids. (In the absence of a Congressional Budget Office score, I rely on the Committee for a Responsible Federal Budget’s November 8 calculations for this and all estimates that follow.) Hearing aids cost a fortune, up to about $6,000. If past experience is any guide, turning the bulk of that market over to Medicare will slow price increases, not accelerate them, because Medicare is better than the private market at keeping costs down (provided Congress doesn’t tie its hands by barring it from negotiating prices, as it does with drugs). The new market in over-the-counter hearing aids created last month by the Food and Drug Administration should push prices down further.
Taxes.
Taxes don’t increase inflation; they dampen it by reducing deficit spending. “Something that you raise taxes to pay for,” Goolsbee said, “doesn’t really have that strong a stimulative effect.” Granted, the tax hikes in the reconciliation bill fall short of spending by $200 billion over 10 years. But if Manchin is so desperately worried about that $200 billion, he shouldn’t oppose Senator Ron Wyden’s proposed tax on billionaires’ unrealized capital gains, which would raise an estimated $557 billion over 10 years. (In fairness to Manchin, the bigger obstacle to hiking taxes has been Senator Kyrsten Sinema, who says she worries about the reconciliation bill’s inflationary impact, too.)
The House bill doesn’t include Wyden’s tax on billionaires, but it does increase corporate taxes by $830 billion and personal taxes on very high incomes by about $640 billion. It also allows mostly wealthy taxpayers to deduct more of their state and local taxes from their federal returns ($300 billion). This last is regressive and a revenue-loser, but it isn’t particularly inflationary because wealthy people are less likely to spend more when given a tax cut. They’ve already got their wants covered; that’s what being rich means. The only potentially inflationary tax change is expansion of the Child Tax Credit ($185 billion). But Furman said whatever inflationary impact that had would largely be outweighed by the bill’s tax increases.
Universal pre-K and paid family leave. These have been scaled back drastically in the House bill. Universal pre-K is now funded only six years, and family leave is now four weeks rather than 12, at a combined cost of $585 billion. That’s a shame, because these parts of the infrastructure bill would reduce inflation, Furman pointed out, by increasing productive capacity. Greater availability of childcare and paid family leave would enable more people to work. And by improving educational outcomes, increased availability of preschool for young children would increase productive capacity over the longer term.
Subsidies to fight climate change. Manchin dislikes these, not because they’re inflationary but because they accelerate the transition away from West Virginia’s coal industry. Manchin already tossed out some stronger measures in the climate package, which now totals $555 billion in tax breaks and investments. But what’s left will, to the extent that it spurs innovation, increase productivity rather than inflation.
In recent history, the public hasn’t looked to Congress or the White House to control inflation. “That’s the Fed’s job,” Furman told me. With advance notice of what future spending will be, as the reconciliation bill would provide, the Fed would be well situated to anticipate whatever minor inflationary effects the legislation brought on and alter its monetary policy accordingly. Blocking Build Back Better is not a very serious inflation-fighting strategy. For inflation hawks, a better path would be to press hard for strong public health measures like vaccine mandates to end this pandemic as quickly as possible. Nothing in this economy will be right until that happens.
Timothy Noah @TimothyNoah1 ... Timothy Noah is a New Republic staff writer and author of The Great Divergence: America’s Growing Inequality Crisis and What We Can Do About It.