In mid-November, the House of Representatives passed the largest expansion of the U.S.’ social safety net in decades: the Build Back Better Act, a $1.75 trillion bill that funds many of President Joe Biden’s campaign priorities, including universal pre-K, Medicare expansion, renewable energy credits, affordable housing, a year of expanded Child Tax Credits, and Affordable Care Act subsidies. The Senate will vote on the bill in 2022; however, criticisms from Republicans and moderate Democrat Joe Manchin over the size of the bill and how much it would contribute to federal debt have created gridlock for the bill’s passage. If passed, the bill would likely require the U.S. to take on debt to fund many of the programs it promises, contributing to the U.S.’ annual deficit.
While some measure of deficit spending is healthy for an economy, given the U.S.’ current economic conditions of low interest rates, high inflation, and an already increasing federal debt, passing the Build Back Better Act right now could be harmful to the American economy. To prevent economic harm from the Build Back Better Act, Congress should ensure that government revenues will cover the expense of the bill and aim to minimize the amount of debt incurred.
The Congressional Budget Office estimates that the Build Back Better Act will result in a net increase in federal debt totaling $367 billion from 2022 to 2031. Deficit spending can be good, as it allows the government to invest in Social Security and healthcare and minimize the shock that businesses and individuals feel during recessions such as the COVID-19 pandemic. However, given that the government posted a deficit of $3.1 trillion and $2.7 trillion in 2020 and 2021 respectively, and Congress passed a $1 trillion infrastructure bill in Nov. 2021, it is worth questioning whether adding to the federal debt is economically beneficial for the U.S.
One main issue with increasing debt is that interest payments are required to repay the debt increase as well. When the government borrows money, it does so through the Treasury Department, which issues different bonds and notes. These bonds and notes require that the government pay back its lenders the principal investment and added interest. The U.S. national debt currently hovers around $29 trillion, and the expected amount of interest it owes to all its lenders for 2021 is around $413 billion. As the amount of debt increases, the interest payments increase as well, even if the interest rate is fixed. However, the fact that interest rates are expected to rise in the near future further compounds this issue.
Currently, the U.S. is in a low-interest-rate environment, meaning that the interest payments required to pay off U.S. debt are relatively low. However, interest rates are expected to rise for a variety of reasons, the main one being inflation. In Nov. 2021, annual inflation hit 6.8%, the highest since June 1982, marking the ninth consecutive month the inflation rate stayed above the Fed’s 2% target. Inflation rose due to the pandemic, which constricted the ability of producers to acquire materials, forcing suppliers to increase sale prices to account for increasing costs. Additionally, fewer people returned to work, meaning that firms have had to raise wages in order to attract labor. Firms have had to increase the price of their goods to compensate for these rising wages.
A key policy tool available to the Federal Reserve to curb inflation is its power to raise interest rates, which would increase the cost of borrowing by making it more expensive for the U.S. to pay off its debt. When interest rates are higher, people are less willing to borrow money to purchase homes and cars and are more likely to save. By making it more difficult to spend, fewer people are willing to purchase goods, and thus, suppliers cannot raise their prices as quickly. Inflation is typically the primary cause of interest rate hikes, and another main criticism of the Build Back Better Act is that it is likely to cause inflation. The programs the Build Back Better Act funds are meant to put more money in the hands of American families through tax relief programs, creating more disposable income and driving spending, which drives inflation.
As stated before, as interest rates rise, so do interest payments. In 2022, it is estimated that interest payments will comprise 5% of the total US budget; however, this number is very likely to increase as interest rates increase. In 2030, it is estimated that interest payments will comprise 11.1% of the budget, amounting to an absolute value of $829 billion. When a high percentage of a government’s budget is needed to service interest payments, it needs to either reduce spending in other areas of its budget or raise taxes.
Though there are many drawbacks of the Build Back Better Act, including increasing the U.S. federal debt, inflation, and interest payments, there are still many crucial aspects of the Build Back Better Act that strengthen the U.S.’ social safety net and combat climate change. Therefore, Congress should still try and pass this bill to address these issues, but it should make sure the bill is fully paid for so that the government will not have to take out debt in order to finance the bill’s programs.
The Committee for a Responsible Federal Budget has proposed numerous ways to make the bill less inflationary, including spreading out the tax credits over a longer period of time and reducing the amount families can deduct from their state and local taxes. These changes would help to increase federal revenue and prevent surges in demand that would increase inflation. Joe Manchin and Republicans opposing the bill are concerned for future generations in the U.S., believing that they will likely be confronted with higher taxes to pay the debt burden. However, if the Build Back Better Act is fully paid for by limiting its spending to its tax revenue, it has a chance of passing the Senate and becoming law.
Image by Mathieu Turle is licensed under the Unsplash License.
