If these policies work then ‘Argentina, Mexico and Zimbabwe would be the richest countries in the world’
Senate Democrats are currently drafting the human infrastructure package that they hope to ram through via budget reconciliation, a process that would allow them to pass the legislation with a simple majority rather than the 60 votes needed to avoid a Republican filibuster.
The $3.5 trillion in spending would add to the almost $6 trillion that has already been approved to support the economy through the COVID-19 pandemic. The package potentially will be paid for with tax increases on corporations and wealthy Americans.
“Government spending doesn’t stimulate the economy, it de-stimulates the economy and causes inflation,” said Stephen Moore, an economist at FreedomWorks who served as an economic adviser to former President Donald Trump. “We should be aggressively cutting government spending right now, not raising it.”
Core personal consumption expenditures, the Federal Reserve’s preferred inflation measure, rose 3.4% annually in May, the fastest since April 1992. Prices were up 0.5% on a monthly basis.
The annual reading has been skewed by “base effects” that were a result of prices falling at the onset of the pandemic.
The Federal Reserve, which will hold its July meeting on Wednesday, has called the price increases temporary, saying prices will at some point fall as supply chain issues caused by COVID-19 are resolved. Fed Chairman Jerome Powell has pointed to the price of lumber, which is now down 62% from its May 7 high, as evidence.
However, inflation pressures have already caused a number of U.S. companies, including Kimberly-Clark. Corp., Whirlpool Corp. and PepsiCo Inc. to raise prices.
Those companies expect to see inflation pressures last at least into year-end, if not longer.
“The expectations are that the commodities will reach peak in the third quarter and then start to ease a bit as we get into the fourth quarter,” Kimberly-Clark CFO Maria Henry said on the company’s second-quarter conference call on Friday.
Whirlpool CEO Marc Bitzer was a bit more cautious, warning “there will be a carryover of inflation to next year” if the current trend persists.
Biden, speaking at a CNN Town Hall on Wednesday, referenced a Moody’s Analytics report as evidence that his spending plans will “reduce inflation.”
A report authored by Mark Zandi, chief economist at Moody’s Analytics, said worries that Biden’s $3.5 trillion spending plan will ignite “undesirably high inflation” are “overdone.”
Zandi told FOX Business there are three reasons inflation fears are misplaced.
First, there is still slack in the economy and that labor force participation is still low.
Secondly, the package would raise productivity growth and labor force growth, particularly among lower-income workers due to child care, paid family leave and elder care benefits, leading to stronger underlying growth that will “take the edge off inflation.”
Finally, he said programs proposed as part of the package address inflation in the cost of living. For instance, increasing the supply of affordable housing – especially in parts of the country where supply is lacking. Housing costs are the largest component of inflation.
Zandi says the package would boost U.S. gross domestic product to 5.4% in 2022, more than a percentage more than if the already approved American Rescue Plan were the only legislation passed into law. He believes the plan would create 2 million more jobs by the middle of the decade and result in the unemployment rate falling by an additional 0.5 percentage points or more.
FreedomWorks’ Moore pushed back against the idea that a massive spending package is what the U.S. economy needs.
“The one thing we learned from Milton Friedman is government spending doesn’t stimulate anything except government,” Moore said. Friedman was awarded a Nobel Prize in economics while teaching at the University of Chicago and was a champion of free markets.
If these policies work then “Argentina, Mexico and Zimbabwe would be the richest countries in the world,” Moore added.