The most recent statistics show inflation, as measured by the annual increase in the Consumer Price Index, was 6.8% in November 2021. This is the highest level since 1982—yet still a long way from the double-digit inflation experienced back then.
The question, then, is: Could an additional large spending increase cause inflation to accelerate further?
To answer this, it’s useful to put the numbers in some context.
The price tag of the Build Back Better plan passed by the House of Representatives is about $2 trillion, to be spent over a 10-year period. If the spending is spread out evenly, that would amount to about $200 billion a year. That’s only about 3% of how much the government planned to spend in 2021.
Another comparison is to the gross domestic product (GDP), which is the value of all goods and services produced in a country. U.S. GDP is projected to be $22.3 trillion in 2022. This means that the first year of the bill’s spending would be about 0.8% of the GDP.
While that doesn’t sound like much either, it’s not insignificant. Goldman Sachs estimates U.S. economic growth at 3.8% in 2022. If the increased spending translated into economic activity on a dollar-for-dollar basis, that could lift growth by over one-fifth.
But it won’t reduce inflation either
Some proponents of the bill—including the White House and some economists—have gone further. They have argued that the proposed spending package would actually reduce inflation by increasing the productive capacity of the economy—or its maximum potential output.
This seems implausible to me, at least given the current level of inflation. Historical evidence shows a more productive economy can grow more quickly with relatively little upward pressure on prices. That’s what happened in the U.S. in the 1990s, when the economy grew strongly with little inflation.
In addition, it takes time for investments like those in the bill to translate into gains in productivity and economic growth—meaning many of these impacts will be slow to materialize.
Current inflation is likely an acute problem reflecting supply chain disruptions and pent-up demand, challenges that won’t be resolved by expanding the economy’s productive capacity five or more years down the road. But again, neither would inflation likely get any worse by spending $2 trillion to improve access to affordable childcare, fight climate change, and increase health care coverage.
Whatever the arguments for or against passage of the bill, I don’t believe its potential impact on inflation should be one of them.
Michael Klein is professor of international economic affairs at The Fletcher School, Tufts University.