The Senate will soon consider the multitrillion-dollar “Build Back Better” tax and spending bill passed by the House on a narrow partisan vote. The largest peacetime tax and spending increase in our history, the bill would do serious long-term damage to the U.S. economy.
It would spend $2.4 trillion on a multitude of temporary programs which, if extended permanently, would cost $4.6 trillion. It would also increase individual and business taxes by more than $2 trillion.
President Joe Biden and his economic advisers apparently believe that more stimulus spending is needed every few months to keep the economy going and that higher taxes on investment and business have no negative impact on the private economy. Just the opposite is true. The Penn Wharton Budget Model shows that the combined effects of higher spending and taxes would hurt economic growth, fuel more inflation, reduce private investment, and increase government debt.
In the last 12 months, Congress has enacted a $1 trillion COVID relief bill, a $1.9 trillion stimulus spending bill, and a $1.2 trillion infrastructure bill. This is on top of $2.6 trillion in other COVID relief bills passed last year. That’s $6.7 trillion in spending so far. Passing the House bill would increase total spending since the pandemic began to between $9.1 trillion and $11.3 trillion. That’s an astonishing amount of new spending.
The Penn Wharton model spells out the negative economic consequences of the increased spending. The transfer payments in the bill would direct resources away from capital formation. A smaller capital stock would mean less investment in equipment, factories, and other assets that produce goods and services. The result would be less economic output and lower economic growth.
The increased spending would lead to higher government debt, which would crowd out investment in private capital, leading to lower wages and fewer jobs. If the spending is extended permanently, government debt would be 11.6% higher in 2031, 19.6% higher in 2041, and 24.4% higher by 2050.
The Senate should pause before rushing to pass this bill in the last weeks of the year. Adding trillions of dollars of more spending would fuel more inflation and hurt our economic recovery.
Bruce Thompson was a U.S. Senate aide, the assistant secretary of the treasury for legislative affairs, and the director of government relations for Merrill Lynch for 22 years.
