Biden’s Curious Talking Point: Lower Deficits Offer Inflation Relief

When Americans deal with the highest inflation in decades, President Biden will not be able to fight rising costs priority For his control. Recently, he cited one policy specifically as a means of combating inflation: reducing the country’s budget deficit.

“Eliminating the deficit is one way to ease inflationary pressures in the economy,” Biden said. this month.. “We will reduce federal borrowing and help fight inflation.”

The federal budget deficit, the gap between what the government spends and the tax revenues it receives, remains large. However, Biden points out that it will shrink by $ 350 billion in his first year in office and is expected to fall by more than $ 1 trillion by October, the end of the federal budget year.

The reduction in deficits, not due to recent budgetary measures by his administration or Congress, primarily reflects increased tax revenues due to the end of emergency programs in the pandemic era, such as strong economic growth and the expansion of unemployment insurance. .. And for many experts, it-and the reality that deficits have a complex relationship with inflation-makes budget gaps a surprising issue.

“Maybe they shouldn’t be credible,” said Dan White, director of government consulting and fiscal policy research at Moody’s Analytics, about the Biden team’s focus on reducing deficits. The expiration of the program almost “doesn’t make things worse,” he said.

The Biden administration’s March 2021 spending package helped the economy recover, but it also meant that the deficit did not shrink from last year.In fact, a $ 1.9 trillion relief plan Probably added to inflationBecause when the labor market began to recover and businesses reopened, it sent money to the economy.

However, the White House explained that from a timing perspective, it has a new focus on deficit reduction and fiscal easing. Government officials claim that in March 2021 the world was uncertain, vaccines were still in their infancy, and it was an insurance policy to spend a lot of money on support programs. Now that the labor market is booming and consumer demand remains high, the government says it wants to avoid increasing spending in ways that could encourage further inflation.

Heather Bowshey, a member of the White House Economic Advisory Board, said: “What he’s trying to say is that the plan is moving forward, responsible, and not aimed at increasing demand.”

Moody’s Analytics predicts that inflation will be about 1 percentage point lower this year than if the government continued to spend at last year’s levels.

However, few expected these programs to continue. Like Moody’s, it is possible to roughly estimate how much the decline in fiscal support has helped inflation, but various economists say it is difficult to know exactly how important it is to inflation.

The relationship between budget deficits and inflation is also more complicated than Mr. Biden’s remarks suggest.

The deficit covered by government borrowing is not essentially inflation. Whether to push up prices depends on the economic environment and the nature of spending or revenue cuts that have caused budget shortages.

For example, policies to reduce deficits can lead to inflation. Large, widespread stimulus measures that provide direct cash assistance to low- and middle-income households can go beyond being offset within budget by income from significant tax increases for the wealthy. But if you shuffle much of that money to people who may spend it quickly, demand can outpace supply and lead to inflation. Alternatively, spending that expands the deficit, such as debt-financing investment in energy infrastructure, will inflate over time if the program improves efficiency, increases capacity, or reduces production. May be reduced.

“I rely on the typical economist’s answer: it depends,” said Andrew Patterson, senior international economist at Vanguard.

The last time the federal government made a budget surplus was in 2001. Since 1970, only four years have imposed more taxes than the US government has spent. In the meantime, there were periods of both high and low inflation.

Glenn Hubbard, a professor of financial economics at Columbia University, who heads the Economic Advisory Board, said: Under President George W. Bush. The presence or absence of high inflation is more related to the imbalance of the real economy than to complicated budget calculations. “If aggregate demand grows much faster than aggregate supply, we see inflation,” he said.

Although complicating the matter in the current situation, the stimulus measures of the past few years are still pervasive in the economy, as they are accumulating stockpiles of savings that consumers are spending. State and local government Continue to use the undeveloped relief fund.

And stimulating demand is far from the only reason prices are rising. Over the past year, due to factory closures and overloaded transportation routes, companies have struggled to expand their supply to meet fast-growing demand. Shortages of cars, sofas, construction materials and raw materials are driving costs up.

Recent global developments are exacerbating the situation. The recent blockade of the Chinese government to contain the coronavirus could shake factory production and shipments, and the war in Ukraine raised fuel and food prices.

I also raise my employer wage They scramble to hire in a vibrant employment market, and their increased labor costs are encouraging some companies to raise prices to protect their profit levels. Some companies are increasing their profits by discovering that they can charge more in times of high demand.

Demand resistance due to the decline in pandemic mitigation did not appear to be large enough to substantially offset these other forces. To date, price increases for various products and services have almost accelerated.

Consumer prices 8.3 percent up In the year to April 2022, it was slightly below the March highs, the fastest rate of increase since 1981. Carefully monitored inflation indicators, excluding the volatile food and fuel costs that actually rose from the previous month to April, are a sign of price pressure. It remains strong.

What happens next with inflation can depend on the reaction from the Federal Reserve Board. Central banks are raising interest rates to make their borrowing more expensive. This can help supply catch up with demand throughout the economy and help mitigate price increases.

However, that process can be an unpleasant process that can rank the market, boost unemployment and even cause a recession.

Given that moody background, the White House can help Americans struggling to finance groceries, housing, and transportation, while admitting that the Fed is primarily responsible for managing inflation. It also emphasizes that you are doing.

The government has implemented several concrete price cuts, including the release of oil from strategic petroleum reserves to reduce gas costs and efforts to improve the domestic supply of semiconductors to mitigate shortages. However, many of these efforts are either short-term moves or changes that take a long time to provide meaningful relief.

Sarah Binder, a political scientist at George Washington University, said: Still, she said she found the administration’s new focus on deficits to be extraordinary.

“In some respects, it’s a bit surprising. Most voters don’t pay much attention to the deficit,” Binder said. Polling from Gallup Shows that 17% of Americans say inflation is the biggest problem facing the country and 1% are in the red.

Anyway, the government may have a hard time keeping the deficit shrinking in the next few years. Bipartisan agreements to raise taxes significantly and reduce certain spending have proven elusive. Since the pandemic spending program has expired significantly, its expiration will not have much impact on future deficits, and large government obligations such as social security benefits are set to increase over time. increase.

The Office of Management and Budget expects the deficit to begin to grow again on a dollar basis in 2025, which could increase again as a share of GDP in 2026.

Recently, the president Have Promote another idea To combat inflation: “Make sure the wealthiest companies pay their fair share.” Since the 2020 campaign, he has been pushing to raise the corporate tax rate from 21% to 28%. rice field.

Some researchers say that such changes may help mitigate inflation at the margins, but taxation and spending tweaks should not be the first line of defense against sudden rises in prices. say.

Louise Schener, Head of Policy at the Brookings Institution’s Hutchins Fiscal and Monetary Policy Center, said: “Most of the inflation is up to the Fed.”