President Biden is urging the Senate to pass the Build Back Better (BBB) massive spending bill that has already passed in the House. Biden claims the bill will not increase the deficit and will reduce inflation. The Congressional Budget Office (CBO) disagrees.
Biden says the bill will result in government spending increasing by about $1.75 trillion over the next decade. He says that all the spending will be financed by raising taxes on the wealthy. Therefore, it will not add to the deficit.
He also says that the massive increase in government spending on top of his $1.9 trillion stimulus bill passed in May and the $1.2 trillion infrastructure bill passed in November will reduce inflation.
In its original assessment, the CBO calculated the ten-year cost of the bill, exactly as it is written to be $1.635 trillion and the increase in tax revenue to be $1.268 trillion. That means the deficit would increase by $367 billion. Recently the CBO recalculated those numbers using different assumptions.
Assuming the programs, which are only funded for two or three years, become permanent, the spending would increase to $4.2 trillion, meaning the deficit would be about $3 trillion. That $3 trillion would be added to the already high expected annual deficits over the next decade.
In fact, before Biden was elected and before he could pass his massive spending bills, the CBO estimated that the U.S. budget deficit would be $1 trillion each year for the next decade. That means already approved spending plus Biden’s additions will add more than $13 trillion to the current nearly $30 trillion public debt. By the end of the decade, the debt will be $43 trillion.
As interest rates rise and treasury bond rates approach the historical average of 2.5% to 3%, the annual interest expense on that debt will exceed $1 trillion. That’s $1 trillion, paid every year, that can’t be used annually for more productive government spending.
Which CBO analysis is correct?
Historically it is extremely difficult, often impossible, to defund a social program once the program has been implemented and funds disbursed. In fact, Congress is currently discussing a one-year program that is set to expire. Biden wanted to help households with children afford day care and other child related expenses. Last July, Congress passed a bill that would provide monthly advance checks for up to $300 per child. This was meant to be a temporary one-time program. But some members of Congress want to extend the payments into next year and beyond. Democrats, who hold the majority in both houses of Congress say these payments are critical to reducing child poverty. “We are not going to have a lapse in payments. That’s too important,” said Sen. Sherrod Brown (D-Ohio).
This is exactly what would happen to all the “short-term” programs in BBB bill. The bill has “temporary” programs for child tax credits, funding for universal pre-K, expansion of the Affordable Care Act and an increase in SALT deductions.
As each of these programs sunset, members of Congress will not let them expire, meaning the programs would be in effect for the entire ten years and probably longer. This would help to ensure that budget deficits could be over $1.3 trillion annually.
That would place such a heavy burden on future generations that it could lead to a very precarious financial position since the public debt will be more than one a half times annual GDP.
The excess demand from Biden’s massive spending will cause an increase in inflation. He says his spending plans, which he claims are supported by 17 Nobel Prize winning economists, will reduce inflation. That is simply flat-out wrong.
They are also incorrect when they explain that if they raise taxes by the same amount as government spending, there will be no impact on inflation. Government spending increases demand. There will, however, be almost no offsetting decrease in demand. That’s because the tax increases fall on the upper-income earners.
Those households will still consume the same amount to maintain their lavish lifestyles. They simply will have less to invest. Since there will be no offsetting decrease in demand, the increased government spending leads to more excess demand and more inflation, not less.
Let’s hope Build Back Better bill does not pass.