To Curb Inflation, Stop the Spending
A Washington Post symposium on combating inflation
(Originally appeared in the Washington Post)
2. Stop the spending
‘This surge in spending is a key driver of higher prices’
A year ago, the Federal Reserve forecast that inflation would increase by 1.8 percent in 2021. Instead, consumer prices jumped 7 percent — the highest rate since 1982. Some of this unanticipated inflation was driven by knotty issues such as supply chain disruptions, rising energy prices, and shifts in demand to sectors with less capacity to maintain low prices.
Yet Washington poured gasoline on this fire by enacting the $1.9 trillion American Rescue Plan in March. This surge in spending is a key driver of higher prices faced by consumers. To combat it, lawmakers should begin paring back portions of the remaining $500 billion in scheduled spending from the rescue plan, put Biden’s Build Back Better legislation on the back burner and resist new spending sprees.
The critics of Biden’s rescue plan were ignored, mocked — and ultimately vindicated. A year ago, the Congressional Budget Office estimated that the baseline economy would operate $420 billion below capacity in 2021, and then gradually close that output gap by 2025. Biden and congressional Democrats — believing that the Great Recession had been unnecessarily lengthened by insufficient stimulus — overlearned their lesson and decided to shoot a $1.9 trillion bazooka at a $420 billion output gap.
The problem is that once America’s output capacity taps out, any additional stimulus will simply bring inflation rather than additional production — especially when financed in part by Federal Reserve bond purchases. Economists on the left and right warned lawmakers that ARP would accelerate inflation, with top Clinton and Obama White House economist Lawrence Summers leading the charge.
With the word “trillion” becoming commonplace, it is easy to downplay the sheer size of the American Rescue Plan. It is the most expensive spending law of the past 50 years, including the Cares Act approved under President Donald Trump. In its first seven months, ARP spent $1.2 trillion — which exceeds the entire cost of the 2017 tax cuts from their enactment through the same late 2021 date. All this spending is on top of the December 2020 stimulus bill that poured in $900 billion.
The inflation damage created by Biden’s stimulus would be more justifiable if it was necessary to end the pandemic. However, just 1 percent of its cost went toward vaccines and 5 percent had any direct relation to health care. Instead, the law gave state and local governments $350 billion for budget deficits that did not exist. Schools received $129 billion even as they sat on $50 billion in unused relief funds from earlier emergency bills. The unemployment bonuses were so large and self-defeating that 26 states took the rare step of refusing federal assistance and canceling the bonuses before they expired. Even the popular relief checks — which, combined with earlier checks, amounted to $11,400 for a typical family of four — contributed to the very inflation that ultimately eroded their value.
Moving forward, combating inflation requires addressing supply chains, reducing tariffs and gradually tightening Federal Reserve policy. Yet it makes no sense to push one foot on the gas and one foot on the brake. Lawmakers should explore options to pare back the $500 billion in scheduled ARP spending, such as rescinding extraneous assistance to K-12 education, businesses and private pension bailouts. They should also reject BBB legislation that would spend trillions more upfront, yet delays many of its disinflationary taxes until later years. BBB’s subsidies and regulations would also drive drastic price increases in child care, and thus should be rejected.