Build, Back, Better – On the Brink
- As if we needed more evidence that Congressional mathematics is generally faulty, the CBO analysis of the Build Back Batter plan has a $376 billion gap between costs and revenue. To be fair, the official analysis excludes revenue from increased IRS enforcement. CBO estimated that increased enforcement could produce $200 billion, reducing the revenue shortfall to ‘only’ $167 billion. Also to be fair, these estimates only hold if the temporary programs in the bill are truly temporary and some future Congress allows them to expire. Historically, there are very few examples of government transfer programs being allowed to expire.
- The bill was passed by the House on Friday and now goes to the primary battleground – the Senate. At last look, Senators Manchin and Sinema were only on board if the bill was fully paid for, as per the CBO. The question now is whether the plan is close enough for them to alter that stance. The pressure is building on these two Senators as they need to balance their popularity at home with the desires of their party.
- The politics may be unpredictable, but in our view the economics of Build, Back, Better are more clear – It is likely to be inflationary. As 2021 closes, we are in the middle of an inflationary surge brought on by massive fiscal spending (read: giving money to America) colliding with reduced productive capacity due to the pandemic. We don’t argue the need for a dramatic fiscal stimulus to offset the pandemic, but it appears we went too far. That is not a criticism. No one had any clue how much was really needed. This bill, right now, pours more money on the inflationary fire.
- Unlike the infrastructure bill, which is spread out over 10 years, the roughly $1.63 trillion (CBO estimate) Build Back Better bill is more front loaded as many aspects of the bill are set to expire within a few years, but paid for over 10 years. Much of Build, Back, Better increases transfer payments (read: puts money directly in the hands of the public) and if this is passed right now, it stands to make the current inflationary spiral worse. Creating more demand at a time when productive capacity is already inadequate and COVID shut downs are continuing will only make inflation worse in the short term. There are many admirable aspects of Build, Back, Better, but passage right now is only stimulating additional demand that cannot be met. Too much money chasing too few goods causes higher prices. If passed, we would expect faster economic growth and more rapid inflation. Logically, that would push the Fed towards raising rates sooner.
Don’t Look Now
- The hope was that the last wave of COVID would mark its demise. That hope appears unfounded as the U.S. is beginning another rise in cases, mostly in northern states. Europe, and particularly Germany and Austria, are hitting new record highs in reported cases. Parts of Asia are experiencing a similar rise. Why is this important? A critical element in repairing the supply demand imbalance is for COVID to recede, allowing production to fully recover. The charts below tell the story, with the exception of China, where data is scarce, but recent news stories are focusing on Delta outbreaks. Getting supply back to normal may take longer than expected. (All charts are from the NY Times.)
What We’re Reading
More Americans are quitting their jobs than ever before, and many of them don’t plan to come back to the workplace, even though their finances may suffer as a result.
Three versions of the Act have attempted to make significant changes to current gift, estate, and trust income tax law.
Some are 100% juice, while others are filled with additional sweeteners.
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