December 7, 2021

Will Biden’s ‘Build Back Better’ Plan Really Reduce Inflation?

Not according to these two top monetary economists.

Inflation is hitting home for millions of Americans. In large part thanks to runaway money-printing, consumer prices have risen and are costing the average American family $175/month. This has become a large political concern for President Biden, with voters ranking inflation a top priority. In the president’s desperation to make the issue go away, he is now arguing that passing his multi-trillion-dollar spending agenda will actually reduce—not further fuel—inflation. 

If your number one issue is the cost of living, the number one priority should be seeing Congress pass these bills,” Biden said. “Seventeen Nobel Prize winners in economics have said — spontaneously wrote to me, together, and said this will lower inflationary pressure on the economy when we pass my bills.” 

The president referenced a letter from some notable economists which referred not to his current legislative proposals, but earlier, broad frameworks he unveiled. In it, a coalition of accomplished, left-leaning economists wrote that “because this agenda invests in long-term economic capacity and will enhance the ability of more Americans to participate productively in the economy, it will ease longer-term inflationary pressures.” 

So, is Biden right? Will spending trillions more really reduce inflation? Not so fast.  

Free-market economists interviewed by FEE argued that Biden’s spending agenda won’t make much of a difference either way—because the root cause of current price inflation is not spending policy, but the Federal Reserve’s money-printing.   

Fiscal policy, meaning government spending, doesn’t much affect inflation,” Texas Tech University Assistant Professor of Economics Alex Salter told FEE. “Conventional wisdom once held deficits were inflationary, and surpluses deflationary. Subsequent experience showed the government’s budget balance just doesn’t have a big effect. Inflation ultimately comes down to the interactions of monetary policy with supply-side production conditions.”  

“President Biden’s claim has little merit, given what we now know about how the economy works,” Salter concluded. “It’s another instance—unfortunately all too common—of politicians disregarding scientific economic knowledge when doing so comes with partisan advantage.” 

Florida Atlantic University economist William J. Luther offered a similar analysis.  

“While the rate of inflation might differ from year to year due to aggregate supply or demand shocks, the long run trend rate of inflation is ultimately determined by monetary policy,” Luther said. “Claiming that Build Back Better spending will reduce inflation is a wise political move. Inflation will likely fall in the coming years and the administration will want to take credit for the lower inflation when it happens, regardless of whether such credit is warranted. But one should not confuse good politics with good economics.”

“Debating whether Build Back Better spending will raise or lower inflation is a distraction,” Luther concluded. “The [Federal Reserve] can control inflation. The question one should be asking is whether the expenditures in the Build Back Better plan are productive.”

It’s not exactly surprising that the president wants to dodge this more fundamental question, given the ample evidence showing that Biden’s spending plan is way more expensive than advertised and likely to accomplish few of its goals. Yet we shouldn’t fall for his political misdirections. Biden’s spending agenda won’t reduce inflation—but it will waste trillions of taxpayer dollars.

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This article, Will Biden's 'Build Back Better' Plan Really Reduce Inflation?, was originally published by the Foundation for Economic Education and appears here with permission.  Please support their mission.