The Morning Dispatch: Can the Build Back Better Act Curb Inflation?

Happy Tuesday! For those of you worried about an awkward Duterte family Thanksgiving dinner after we noted that father and incumbent Philippine President Rodrigo appeared ready to run against daughter Sara for vice president, have no fear. Rodrigo officially decided on Monday to run for the country’s Senate.

Quick Hits: Today’s Top Stories

• In a ceremony at the White House Monday, President Joe Biden formally signed the $1.2 trillion bipartisan infrastructure deal into law. “The bill I’m about to sign into law is proof that despite the cynics, Democrats and Republicans can come together and deliver results,” he said.

• Defense Secretary Lloyd Austin has ordered a briefing from ​​Gen. Kenneth F. McKenzie, head of U.S. Central Command, on a March 2019 U.S. airstrike conducted against ISIS in Syria that, according to a recent New York Times report, killed dozens of women and children.

• The United Kingdom increased its national terrorist threat level from “substantial” to “severe” on Monday, one day after a taxi exploded outside a women’s hospital in Liverpool in what authorities have determined to be a terrorist attack.

• The Biden administration is urging Americans in Ethiopia to evacuate the country before the region’s civil war spreads to the capital of Addis Ababa, saying the military will not conduct an airlift like it did in Afghanistan over the summer.

• The Japanese economy shrank 3 percent on an annualized basis in the third quarter of this year as the country—which boasts the third-highest gross domestic product in the world—dealt with supply chain issues and falling consumer spending.

• Former Rep. Beto O’Rourke announced Monday he is running for governor of Texas in 2022. If he wins the Democratic primary, he will likely face off against two-term Republican incumbent Greg Abbott.

• Democratic Sen. Patrick Leahy of Vermont—currently the longest-serving member in Congress’ upper chamber—announced Monday he will not run for a ninth term in 2022.

• Steve Bannon—longtime adviser to former President Donald Trump—turned himself in to the FBI yesterday, days after he was indicted on two counts of contempt of Congress. He did not enter a plea, and was granted a conditions-based release in advance of his trial.

• A Connecticut judge ruled Monday that right-wing broadcaster Alex Jones was liable by default in the defamation case brought against him by the families of Sandy Hook shooting victims after he neglected to turn over relevant documents. A Texas judge made a similar ruling in two comparable cases against Jones last month.

• The Women’s Tennis Association over the weekend called on Chinese government officials to investigate allegations of sexual assault levied against former vice premier of China Zhang Gaoli by tennis star Peng Shuai. Peng has not been seen in public since coming forth with the allegation on November 2, and her post on Chinese social media describing the assault was taken down within 30 minutes.

Will the Build Back Better Act Really Stem Inflation?

Over the past several months, the Biden administration has attempted to walk a tightrope with its messaging on inflation: It’s “transitory” and not that big of a deal, but we have a plan to address it if need be.

“Some folks have raised worries that [price increases] could be a sign of persistent inflation,” Biden said in July. “But that’s not our view. Our experts believe—and the data shows—that most of the price increases we’ve seen were expected, and expected to be temporary.”

“Now, I want to be clear,” he continued. “My administration understands that if we were to ever experience unchecked inflation over the long term that would pose real challenges to our economy. So while we’re confident that isn’t what we are seeing today, we’re going to remain vigilant about any response that is needed.”

With last Wednesday’s Bureau of Labor Statistics report showing the consumer price index (CPI) increased in October at its fastest annual rate in more than 30 years—and many of the remaining “transitory” holdouts having been disabused of their thesis—the White House is facing heightened scrutiny from the public.

Thus far, Biden has paid lip service to October’s  6.2 percent annual inflation figure, but his policy prescriptions remain essentially unchanged. “Inflation hurts Americans [sic] pocketbooks, and reversing this trend is a top priority for me,” he said in a statement shortly after the CPI data was released. His solution? Signing into law an infrastructure package that adds $250 billion dollars to the deficit over the next 10 years, and passing his multitrillion dollar Build Back Better plan to the social safety net and address climate change.

If that seems counterintuitive to you, you’re not alone. At the risk of oversimplifying somewhat, inflation occurs when the amount of money circulating in an economy grows fast enough that economic output can’t keep up. Biden himself acknowledged the phenomenon during a speech in Baltimore last week.

“The irony is, people have more money now because of the first major piece of legislation I passed,” he said, referencing the deficit-financed American Rescue Plan. “You all got checks for $1,400. You got checks for a whole range of things. … But what happens if there’s nothing to buy and you got more money? You compete for getting it there. It creates a real problem.”

Wouldn’t the bipartisan infrastructure package and Build Back Better (BBB) Act, therefore, create similar pressures? The former adds hundreds of billions of dollars to the deficit, and—although Democrats claim BBB will be fully paid for—the latter likely will as well (the Congressional Budget Office said Monday it will release its full cost estimate for BBB by Friday). 

“There is virtually no economic theory that would suggest us spending $4 trillion is disinflationary,” Manhattan Institute senior fellow Brian Riedl told The Dispatch. “Unless they can show that it would drastically increase supply in productivity, which is a stretch to say the least.”

Biden administration officials are banking on that stretch. “What we’re doing is making smart long-term investments but offsetting those with tax increases,” Brian Deese—director of Biden’s National Economic Council—told ABC News over the weekend, claiming the social spending package will lower the cost of both childcare and prescription drugs while also reducing home prices. “When you do that, fully paid for, you actually reduce the deficit over the long term. You don’t impact inflation. What you do is you actually increase the productive capacity of our economy. You get more people to work by providing affordable childcare and affordable care for an elderly parent.”

Riedl, who worked as GOP Sen. Rob Portman’s chief economist for several years, is skeptical of the administration’s “fully paid for” claims, arguing Democrats are adding artificial expiration dates to the BBB for accounting purposes while fully intending for the entitlement programs it establishes to become permanent. “To suggest that this bill is paid for is to insult the intelligence of voters,” he said. “This is $4 trillion in spending and $2 trillion in taxes. They’re designing the bill in a certain way in which the Congressional Budget Office won’t count $2 trillion of the spending. That doesn’t mean it’s not going to happen.”

Economists say there are a handful of things the federal government can do to marginally rein inflation in over the next few months: cut regulations artificially hampering supply chain efficiency, incentivize increased oil production (or tap into the Strategic Petroleum Reserve), and dramatically pare back tariffs implemented during the Trump administration—particularly on China. But ultimately, reducing inflation in a more meaningful way will hinge on the market settling into a post-pandemic equilibrium and the Federal Reserve raising interest rates.

That won’t stop Biden from touting his economic agenda as a potential cure. In the coming days and weeks—with congressional Democrats continuing to negotiate the spending package and the inflation story gaining steam—expect to hear the president repeatedly reference an open letter signed by 17 Nobel Prize-winning economists that argues his plan will “ease inflationary pressures.” He’s brought it up, by The Dispatch’s count, at least 13 times since mid-September.

The letter itself is legitimate. “The President’s Build Back Better agenda employs a broader conception of infrastructure by making critical investments in human capital, the care economy, research and development, public education, and more, which will reduce families’ costs,” it reads. “Because this agenda invests in long-term economic capacity and will enhance the ability of more Americans to participate productively in the economy, it will ease longer-term inflationary pressures.”

But when pressed for comment, several of these economists clarified that “easing longer-term inflationary pressures” does not necessarily translate into “reducing inflation today”—and that Biden’s agenda could actually have the opposite effect in the short to medium term. “If you mean that inflation will go down in the period after the bills are passed, that is not an implication of these slow-working effects,” MIT’s Peter Diamond told the Washington Post.

UC-Berkeley’s Daniel McFadden went a step further. “The Nobel letter talks about long-run pressure on inflation, and opines that improving the nation’s infrastructure, both physical and human capital, will reduce this pressure. This is sound and uncontroversial economics—increasing supply and capacity reduces the bottlenecks that fuel inflationary surges,” he said. “There is a risk, however, that the current surge [of inflation] will morph into more general inflationary expectations. Increasing current government deficits by a shakily financed BBB could add to this. The responsible public policy is to push forward with the infrastructure bill and BBB program, but tie initiation of investments authorized in these bills to financing that is consistent with managing current inflationary pressure.”

The final BBB legislation is still in flux, but according to Moody’s Analytics, the package’s disbursements are frontloaded relative to its tax increases. Jason Furman—an economist who chaired former President Barack Obama’s Council of Economic Advisers—told the New York Times that although he believes the BBB’s climate change and opportunity provisions will outweigh its inflationary effects, it will likely increase inflation in 2022 “because it’s preventing a big reduction in spending that would otherwise have happened that year.”

With just one Democratic senator holding the power to tank BBB, this whole debate could, ultimately, end up moot. “The threat posed by record inflation to the American people is not ‘transitory’ and is instead getting worse,” Sen. Joe Manchin tweeted last Wednesday. “From the grocery store to the gas pump, Americans know the inflation tax is real and DC can no longer ignore the economic pain Americans feel every day.” Later that day, “people familiar with the matter” told Axios that Manchin may want to delay passing BBB until next year, when inflation has hopefully cooled off.

The Kremlin Eyes Ukraine

Over the weekend, Russia conducted two anti-satellite weapons exercises, destroying its own satellites in what the U.S. government referred to  Monday as a “dangerous and irresponsible behavior.” Even though China, India, and the United States have conducted similar tests in the past, Russia’s successful tests drew international condemnation for posing an immediate danger to the international space station and other orbital bodies.

A little closer to home, Russian President Vladimir Putin is under fire for stoking tensions with neighbor states. Back in April, Putin made a spectacle of deploying tens of thousands of troops to the Russian-occupied Crimean Peninsula and near Ukraine’s eastern border. The highly publicized military exercises, which Moscow claimed were routine, spurred international fear of a repeat of Russia’s illegal takeover of Crimea in 2014.

In recent days, Moscow has undertaken a “large and unusual” concentration of forces along various points of its border with Ukraine, per Ukrainian defense officials. More than 100,000 soldiers—including ground troops and air and sea personnel—pose the threat of further escalation in an ongoing conflict. But unlike April’s buildup, Putin has thus far refrained from calling attention to the troop movements, which is probably not a good sign.

“It’s been a lot more discreet. In the spring, there was a sense that Russia wanted us to see. There was stuff that was being done very publicly, there were announcements, it was done in broad daylight,” Peter Dickinson, editor of the Atlantic Council’s UkraineAlert, told The Dispatch. “This time that’s not happening. What we’re seeing actually looks more like a genuine build-up.”

NATO Secretary General Jens Stoltenberg appeared alongside Ukraine’s foreign minister, Dmytro Kuleba, to condemn Russian encroachment. “NATO stands with Ukraine. We do not and will not accept Russia’s illegal and illegitimate annexation of Crimea. I would call on Russia to end its support for militants in the Donbas,” Stoltenberg said. “All NATO allies are united in their condemnation of Russia’s behavior.”

But Putin, who has long warned that extending NATO membership to Kyiv would cross a red line, has punted blame for recent provocations to the defensive alliance for simply maintaining a presence in Ukraine. On Russian state television Sunday, Putin criticized recent military exercises by NATO in the Black Sea off Crimea. Stoltenberg told reporters the drills were “defensive” and “transparent.”

Moscow has also condemned Kyiv’s recent deployment of Turkish-made armed drones in the eastern Donbass region, where fighting between Ukrainian forces and Russian-backed separatists has cost thousands of lives in recent years. Ukrainian officials last week announced plans to begin joint production of the unmanned aerial vehicles (UAVs) with Ankara—a particularly concerning prospect for Russia, which has been unable to counter the technology in the past.

But according to Dickinson, Putin’s public outrage over the drone strike and NATO exercises may just be pretense for additional Russian offensives. “There’s no real sign of Ukraine escalating or doing anything that might justify Russian intervention, so they’re having to be creative. And there’s always the danger that Russia will fabricate some sort of incident to justify an escalation,” Dickinson said. “The ultimate goal is to regain control over Ukraine—to have some sort of puppet regime in Kyiv and to have Ukraine firmly within the Russian orbit.”

Worth Your Time

• In the Washington Post, former Republican National Committee communications director Doug Heye argues the GOP is not adequately prepared for all the Trump-style “fraud” claims that will inevitably pop up in next year’s primary elections. “As Dr. Frankenstein learned, creating the monster and controlling it are decidedly different things,” he writes. “By giving up on the central premise that everyone plays by the rules, and playing along every time Trump claimed a vote was rigged — whether before a possible loss or after — the GOP kept its monster very much alive. In this case, Trump’s impulses threaten to make the party implode. So much of the audits’ ‘stop the steal’ rhetoric has been fun and games so far for a disorganized, amateur-hour band of loyalists. But that doesn’t change the real and negative repercussions it has caused. And if a political version of the Three Stooges can yield this much chaos, imagine the impact should seasoned, credible political professionals get in the act. It could get worse before it gets better. Is the GOP prepared? Is the country?”

• “If the 20th century was the story of slow, uneven progress toward the victory of liberal democracy over other ideologies—communism, fascism, virulent nationalism—the 21st century is, so far, a story of the reverse,” Anne Applebaum writes in this tour de force for The Atlantic. From Venezuela, to Belarus, to Russia, to China, she details the myriad ways in which the “bad guys” are winning. “If America removes the promotion of democracy from its foreign policy, if America ceases to interest itself in the fate of other democracies and democratic movements, then autocracies will quickly take our place as sources of influence, funding, and ideas,” she concludes. “If Americans, together with our allies, fail to fight the habits and practices of autocracy abroad, we will encounter them at home; indeed, they are already here. If Americans don’t help to hold murderous regimes to account, those regimes will retain their sense of impunity. They will continue to steal, blackmail, torture, and intimidate, inside their countries—and inside ours.”

Presented Without Comment

Also Presented Without Comment

Toeing the Company Line

• On Monday’s Advisory Opinions, David and Sarah dive into vaccine mandates, religious exemptions, and the Civil War.

• On the site today, Yuval Levin looks at a new report that shows a decline in marriage and childbearing and what it says about “obstacles to human flourishing in our time.”

Let Us Know

How have today’s inflationary pressures affected your life? Have you cut out certain goods or services or otherwise altered your habits?

Reporting by Declan Garvey (@declanpgarvey), Andrew Egger (@EggerDC), Charlotte Lawson (@lawsonreports), Audrey Fahlberg (@AudreyFahlberg), Ryan Brown (@RyanP_Brown), Harvest Prude (@HarvestPrude), and Steve Hayes (@stephenfhayes).