Reviews | Inflation will hurt Biden’s spending plan
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Focused on demand, even most pessimists – myself included – missed an urgent problem. Supply chain bottlenecks have resulted in shortages of many products, a crisis that has been exacerbated by Americans’ reluctance to return to work. The labor shortage has also hurt the service sector. Many restaurants, for example, remain closed because they cannot find workers. Both also cause higher prices.
Now, between government payments and insufficient spending during the pandemic, American consumers are sitting on about $ 2.3 trillion more in their bank accounts than predicted by the prepandemic trend. As they emerge from isolation, Americans are eager to spend everything from postponed vacations to clothes. But the disruption of the supply chain has turned the mere act of spending money into a challenge.
For Democrats, the recent disappointing election results and the current legislative deadlock offer a dose of cold reality. The administration wanted to claim a big political victory ahead of the 2022 midterm elections. But inflation concerns are at the heart of voters’ concerns.
The administration should therefore be candid with voters about the impact of its spending plans on inflation. Rebuilding better can only be considered “paid off” if one adopts budget tricks, such as assuming that some of the more important initiatives will be allowed to expire in just a few years. The result: a program that accelerates spending while tax revenue only arrives over a decade. The Committee for a Responsible Federal Budget estimates the plan would likely add $ 800 billion or more to the deficit over the next five years, exacerbating inflationary pressures.
Mr Biden also insists that the much-leased infrastructure bill he just signed is fully paid, but it isn’t. Indeed, infrastructure figures show $ 550 billion in new spending and only $ 173 billion in additional compensation.
Of course, part of the blame for the overstimulation lies with the Federal Reserve, which responded correctly at the start of the pandemic by cutting interest rates and pumping money into the financial system. More recently, the Fed has been too slow to cut its debt buying program, sending more money to chase these few goods. And until recently, Fed officials echoed the White House line on “transient” inflation.
For the Fed, fighting inflation means raising interest rates, perhaps sooner than it deems necessary. The Fed is targeting average annual inflation of 2%. So if or when the pace of price increases gets stuck well above that level, the central bank will have to raise interest rates to resolve the issue. While the Fed believes that won’t happen until the end of next year, the bond market believes rates will be raised by the middle of the year.
Local News Today Headlines Reviews | Inflation will hurt Biden’s spending plan