Zandi and Yaros write that inflation fears given all the new spending, including the $1.9 trillion pandemic relief package in March on top of additional support last year, shouldn’t be dismissed. However, they write such concerns are nonetheless “likely misplaced” since unemployment remains uncomfortably high and labor force participation “well below where it was pre-pandemic.”
The report points out economic growth is not expected to take off spectacularly as a result of the forthcoming spending packages — less than 1 percentage point higher combined in 2022, and an added 2 points in 2023 through 2025. In addition, they wrote, some of the provisions under discussion like building more rental housing supply and curbing prescription drug subsidies should “ease inflation pressures.”
Nonetheless, recent inflation readings — the highest in many years under different gauges preferred by the Labor Department and the Federal Reserve — have Republicans on the offensive over what they believe is a winning issue for them with voters.
If Democrats enact a $3.5 trillion spending package on top of everything else, “it will take an inflation problem we have today and pour jet fuel on it,” Senate Budget ranking member Lindsey Graham, R-S.C., said Wednesday.
Zandi and Yaros wrote that “execution risk” is a major challenge to their generally positive assessment; namely, that the programs aren’t well-designed and the private sector has trouble making them work. They also cited a risk that programs don’t expire and add more to deficits than advertised, because it’s much harder to let benefits lapse than it is to continue them. They also said it was possible some of the “pay-fors,” like bulked-up IRS tax collection efforts or a new border-adjusted carbon tariff, don’t bring in the revenue that’s expected. In the long term, higher deficits and debt could become problematic, Moody’s said.
(Jennifer Shutt contributed to this report.)
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