Does the Biden Agenda Really Help Reduce Inflation?

The United States has serious problems to address at the present time such as the Ukraine War and Climate Change.  But, as I have recently discussed, the most serious and urgent problem of all is inflation.

Our enormous national debt of $30 trillion, plus the trillions of dollars in bond holdings by the Federal Reserve (Quantitative Easing) have created far too many trillions of dollars sloshing around in the U.S. monetary system.  It is not surprising that another $5 trillion in Covid stimulus spending in 2020 and 2021, especially the last $1.9 trillion after Joe Biden became president, has now tripped off a sharp increase in inflation.

The current issue of Barron’s warns that inflation is worse than it looks and harder to solve.  This is because of three shortages: labor, energy, and trust in government which have resulted in structurally higher inflation than most people realize. The U.S. workforce has shrunk 12% since the beginning of the pandemic and the transition to green energy means consuming more resources for similar output.  Furthermore, inflation is inversely proportional to the level of public trust held by a country’s citizens, with trust in institutions scarce in high-inflation countries.

The Biden Administration’s Inflation Reduction Act (IRA) purports to address inflation by reducing the deficit by $300 billion over ten years.  But, as pointed out by the Concord Coalition, the deficit reduction is back-end loaded and so may never actually occur.

But more generally, as pointed out by Greg IP in the Wall Street Journal, the IRA is only one of several major pieces of legislation signed by Mr. Biden in the past year.  For example, he signed a bill that vastly expands benefits to veterans exposed to toxic burn pits which adds an estimated $278 billion to deficits over the coming decade.  The infrastructure law from late last year adds $257 billion over a decade and the semiconductor manufacturing and scientific research law adds $79 billion.  This all adds up to a net increase in the deficit by $300 billion, not a $300 billion deficit decrease.

Mr. Biden is thus clearly not giving priority to deficit reduction. His priorities are expanding the social safety net, narrowing social and racial inequities, and combatting climate change.

The deficit reduction in the IRA (see chart) mostly takes place from 2027 – 2031.  But the time to help the Federal Reserve is now, with inflation running above 8%.  The immediate spending on the Internal Revenue Service and healthcare subsidies increases the deficit in the short term.  Again, incentives to invest in green energy, domestic semiconductor manufacturing, and public infrastructure only boost the economy’s supply side in the long run.  In the short term, such investment adds to demand.

Conclusion.  Helping veterans, lowering the cost of healthcare, and encouraging domestic semiconductor manufacturing are worthy goals but they increase deficits, and therefore inflation, in the short run.  The Federal Reserve will have a difficult time reducing inflation on its own. It needs help now!  The Biden Administration should be putting far more emphasis on immediate deficit reduction.

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2 thoughts on “Does the Biden Agenda Really Help Reduce Inflation?

  1. The most basic problem we face from both inflation and the national deficit is an administration that seeks economic advice from a very small section of economists who seem to exist only to mimic administration goals. I understand that economists can be as far apart on national issues as members elected to Congress. But there still has to be some basic and natural laws of economics that would allow for some general consensus as to how to solve national economic problems. Yellen and Powell, for example, who are admired in many quarters, seem bent on first having Biden’s back even though that might make them look silly in the face of the economic realities of their words and actions.

    • Natural Law of Economics: too much government spending causes inflation. And yes, this is now exactly what has happened. I do think that Jerome Powell is serious about wanting to fix our current inflation. But will the Fed be aggressive enough in raising interest rates fast enough to get the job done before inflation gets way out of control? Let’s hope so!

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