The Build Back Better Act (BBBA), now on its way to the Senate, is often described by proponents as a fully paid for, transformational investment in our nation’s future. Its success, however, in either being fully paid for or transformational critically depends upon assumptions that are far from certain. To a large degree, the BBBA is building back on bets.
The two most prominent bets are that the bill won’t fuel inflation in the near term and that over the long term, future lawmakers will find a way to extend key provisions that are scheduled to expire in a few years. There is also an implicit bet that the pre-existing path of growing debt we are already on is of little consequence and in need of no remedial action.
From an economic perspective, the biggest bet is that injecting a major new spending plan into an economy that is already running hot will not further fuel the inflationary spike that has seen prices accelerate by six percent over the past year.
Biden administration officials have recently taken note of inflationary pressures, but remain confident that inflation will subside as supply chain bottlenecks are resolved and pent-up demand following the COVID-19 pandemic dissipates.
Even if this is eventually true, these things will take some time to evolve. In the uncertain interim, wary voters facing higher prices on everyday necessities may begin to wonder just when the promised relief will arrive. If it does not arrive soon, enactment of another major spending bill, on top of the COVID-19 relief plan passed in March and the bipartisan infrastructure bill passed earlier this month, might not be as well-received as public polling would indicate.
And it’s not just voters they have to worry about. If the Federal Reserve Board is forced to combat an inflationary spiral by raising interest rates sooner and higher than currently anticipated, this would have a dampening effect on the economy and undercut the case that the BBBA’s policies are pro-growth.
One argument used against inflation fears is that the BBBA is fully paid for and would not, therefore, pump further stimulus into the economy. That claim suffered a setback last Friday when the Congressional Budget Office (CBO) estimated that the bill would add $160 billion to federal budget deficits over the next 10 years. In other words, the bill is not “fully paid for.”
More problematic from an inflationary standpoint is CBO’s estimate that the BBBA would increase deficits by nearly $750 billion over the next five years. That’s because the BBBA uses 10 years of revenues to pay for new spending that in some cases expires in less than 10 years. This includes supposedly transformational items such as expanded Child Tax Credits (expiring after 2022), expanded Premium Tax Credits under the Affordable Care Act (expiring after 2025), universal preschool (expiring after 2027), and child care subsidies (expiring after 2027). If one assumes that all the new spending in the current version of the BBBA is eventually made permanent, the total cost of the bill, and its impact on the debt, would grow substantially.
The CBO has not estimated what the numbers would look like under this scenario, but independent assessments by the Penn Wharton Budget Model and the Committee for a Responsible Federal Budget show that making the spending provisions permanent without new offsets would add more than $2 trillion to the debt over 10 years.
That, in turn, highlights the biggest bet of all, which is that future lawmakers will either raise new money to pay for extending these provisions — something this Congress tried and failed to do — or allow them to expire as scheduled, which would turn the bill from transformational to transitory. Even in the best of circumstances, what’s “fully paid for” is only a downpayment on an expansion of government services with much larger potential costs.
The magnitude of what’s being proposed in the BBBA and the risk of having these bets go bad should not be understated. We went into the COVID pandemic with the debt already on an unsustainable path. We must not make that situation worse. Now that the economy is showing signs of a solid recovery, deficit-financed initiatives are no longer in order. They risk fueling an inflationary spiral and adding appreciably to the debt burden.
If we want to build back better in a truly transformational way, we need to nip inflation in the bud, make sure that new policies, however laudable in their aims, are credibly paid for over the long term and find a way to close the pre-existing budget shortfall.
The House-passed version of the BBBA falls short of these goals, but there is still time for the Senate to make improvements, starting with the relatively easy lift of closing the $160 billion gap in CBO’s score of the bill and doing so in a way that approves only as much new spending as they can summon the will to pay for on a permanent basis.
Building back should not be built on bets.
Robert L. Bixby is executive director of The Concord Coalition.