President Joe Biden and the Congressional Democrats have made public their intentions to increase public spending to up to $3.5 trillion through their budget proposal, as the country worries about inflation rates. Senator leader Chuck Schumer (D-NY) and Sen. Bernie Sanders (I-VT) announced that Democratic lawmakers have reached an agreement on their budget proposal earlier this week, and Biden met with Schumer yesterday to discuss with Senate Democrats about the plan.
Although the details on this new plan have yet to be released in full, Politico reported that some of the policy projects funded by the proposal are: free school meals, tax breaks for renewable energies, an extension of the child tax credit, election spending, Medicaid and Medicare expansion, subsidies towards “green farming”, and giving a path to citizenship for “Dreamers”, Temporal Protected Status (TPS) holders, and a slew of other proposals.
Schumer, who is also trying to ensure his reelection campaign for 2022, just announced that he is setting a deadline for the much-touted $576 billion bipartisan infrastructure deal that was reached a few weeks ago. The Democratic leader said that there should be a final infrastructure deal by next Wednesday. GOP negotiators apparently were not informed about this deadline beforehand.
The Democrats ace a dizzy economic panorama as they try to pass this new spending proposal.
Inflation rises as Biden proposes more spending
Politics is not the only challenge that Democrats face with their budget proposal. The economic situation of the country would also play a role in the Democratic plan for getting their budget passed.
The American economy has recovered significantly from the downfall caused by the COVID pandemic. According to the Bureau of Economic Analysis (BEA), the third quarter of 2020 registered more than 25% GDP growth, and the first quarter of 2021 scored a 6% increase which has practically recovered GDP levels to pre-pandemic times. However, GDP growth is only part of the story.
While the national GDP has largely recovered from the economic shock of the pandemic, the economy has yet to get to pre-pandemic employment levels, with the Bureau of Labor Statistics (BLS) calculating the June unemployment rate was slightly above February 2020 levels at 5.9% today, compared with 3.5% last year. The number of people that are not in the labor force (those who are not actively looking for a job) is also slightly higher (1.2%) today than before the pandemic.
However, these numbers are not the biggest worry for the economy, that title would go for the growing inflation rates that the U.S economy has been experiencing during 2021. According to the BLS, June registered a 5.4% annual increase in inflation, with prices rising 0.9% in June alone. These numbers have been higher than expected, as economists forecasted a 5% increase in inflation during this same time period.
In fact, CEOs of various prestigious corporations have expressed their concerns about the rising inflation in the U.S. Axios reported that the CEO of JP Morgan Chase said that “The inflation could be worse than people think” and that it would “last longer than the Fed thinks”, while the BlackRock Ceo said he is worried that the government decisions to only prioritize job creation could “lead to systematically more inflation”.
Although CNBC wrote a baffling headline asserting that inflation could have some silver lining due to the rise in wages, the truth is that a systemic rise in inflation could have some serious effects on people’s earnings and savings. Something the media outlet recognized in that very article.
After all, if raw materials prices keep increasing, companies will transfer that cost to consumers through an increase in prices, as the head of PepsiCo said in a call also reported by Axios.
Hence, with inflation rising and CEOs worried that it could become a more permanent feature of the American economy than previously expected, many are asking if a 3.5 trillion extra spending is the right approach at a time so sensible like this, and especially after the trillion-dollar recovery bill. With former Treasury Secretary for the Clinton administration, Larry Summers concerned that the fed has historically “had almost no success in bringing down inflation once an economy has started to overheat”.
Republican lawmakers have also expressed their concerns about this proposed extra spending. With Senate Minority Leader Mitch McConnell (R-KY) saying that while American households are “facing runaway costs”, the Democratic party still wanted to increase spending to an additional $4 trillion.
Whether the Biden White House will be able to get their budget proposal through Congress is anyone’s guess as Schumer tries to deal with tight margins in Congress, however, the growing pace of inflation will surely cast many doubts over the proposed democratic spending.