The infrastructure/reconciliation bills will almost certainly have a negligible medium-to-long-term impact on inflation. It could be a very small positive or a very small negative. This chart is the most important reason why.
The fiscal support was huge in 2020 and even larger in 2021. But the infrastructure and reconciliation bills (or at least President Biden's versions, we don't have budget numbers for Congress' version) are *much* smaller in gross terms and essentially zero in net terms.
The ~$500b from the American Rescue Plan passed in March that is set to spend out next year will continue to put some upward pressure on inflation relative to pre-pandemic rates. But the new legislation is negligible (look at the diamonds).
To the degree it increases productivity it would reduce inflationary pressures a little as well.
And if all of this is wrong the Fed has lots and lots of time and tools to offset any inflationary pressures that might result.
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The reconciliation bill is a small change in the overall level of taxation but a large change in the composition of taxation. A brief🧵putting this in context.
(Note for this thread "reconciliation bill" = House Ways & Means version, will likely change somewhat.)
The reconciliation bill would raise revenue by about 1/2 percent of GDP annually. That is expected to bring revenue to ~18% of GDP. That is well within the historical range and well below previous peaks during periods of low unemployment rates like the one CBO is forecasting.
The bill has large gross changes ($2.1T in raisers & $1.2T in costers) for a much smaller net increase:
High-income & misc increases: $1.1T
Corporate increases: $1.0T
Infrastructure & community development: -$0.1T
Green energy: -$0.2T
Children/safety net: -$0.8T
Jeremy Rudd has a paper on inflation expectations that is well worth reading if you're interested in this topic. Takeaways: (1) don't be reassured by anchored expectations & (2) be worried if people start noticing actual inflation.
1. I agree with Jeremy that inflation expectations risk being a residual term that make models work perfectly, that much casual economic conversation has that feature, but they also can be effectively operationalized so wouldn't ditch them entirely.
2. His argument goes against relying on measures like the Index of Common Inflation Expectations (CIE) to argue that Flexible Average Inflation Targeting (FAIT) is working. It takes away the dovish argument, "sure inflation is up but don't worry, expectations are anchored."
FISCAL DOMINANCE is massively overstated as a motivation or risk for the Fed.
FINANCIAL DOMINANCE is greatly overstated as a motivation or risk for the Fed.
Understanding the actual Fed the issue is really about EMPLOYMENT DOMINANCE, and that is more good than bad. A 🧵:
1. Fiscal dominance says the Central Bank deliberately keeps interest rates lower than it would otherwise in order to prevent the government's debt from growing too fast. With debt much higher than in the past they have the motive, so the argument goes, to keep rates low.
Most serious people think we don't have fiscal dominance now but some worry that we'll have it in the future if there is a less responsible Fed Chair or President. I think this misunderstands both the White House's interests and the Fed's actual behavior.
The FOMC median inflation projections are likely, once again, underestimating future inflation. But less obviously true than their previous projections.
They expect PCE / core PCE inflation to be 4.2% / 3.7% this year. To hit that would require a large inflation slowdown.
In the first 8 months of the year (including a reasonable forecast for Aug based on the CPI & PPI), inflation rose at around a 5% annual rate. To hit their numbers for the full year will require it to slow to about a 1.5% annual rate. In other words, 0.12% monthly prints.
That could happen if either a lot of transitory level increases reverse themselves (e.g., used car prices will likely fall more) or if there are transitory falls due to spreading virus (e.g., further falls in travel/tourism prices).
Unsure whether @JayCShambaugh's arguments get to the actual number. I was focused on the $32b increase from 2020-H2 to 2021-H1. That is when we saw the massive divergence in US & world fiscal policy and also a divergence in growth, the opposite of the recession in his 1st point.
I would think if we used your estimates to calibrate the impact of fiscal stimulus we would have predicted a much larger current account move, almost certainly relative to last yr and likely for 2021 relative to 2019 too (the ~$280b annual rate you note). aeaweb.org/articles?id=10…
The House bill doubles cigarette taxes from $1/pack to $2/pack and raises other tobacco taxes. The direct effect of this is regressive but the indirect effects are much larger, more important and very progressive--conferring larger health gains for lower-income households. A 🧵.
I addressed this issue in a speech I gave when I was at CEA arguing that the tobacco taxes disproportionately benefit lower-income households.
To fully analyze it we need to understand four components:
1. The direct effect. This is regressive because lower-income people smoke more and thus end up paying more in taxes.
(Technical aside: The incidence of the tax is likely partly but not fully on consumers because contrary to conventional wisdom demand is not inelastic.)