What Worries Me About the 'Big Beautiful Bill' Isn't the Price Tag. It's Everything Else.
Republicans have delivered on the One Big, Beautiful Bill (OBBB). I didn't expect it to get it done by the aspirational 4th of July "deadline," but President Trump signed the bill into law on Independence Day. He basically got everything he wanted.
Back in January, when the broad contours of the GOP's tax and spending ambitions were just coming into focus, I talked about the prospects for its passage with Bloomberg's Scarlet Fu. I summarized our conversation here:
While it's true that republicans will have a trifecta come Monday morning, it could still prove difficult to get a package that does tax, border, deportation, and deregulation in one big reconciliation bill across the finish line. As Biden discovered when democrats had their own trifecta, having enough seats to pass legislation isn't the same thing as having enough votes (think Sen. Manchin (D-WV) and Sen. Sinema (D-AZ). Could a handful of republicans thwart parts of Trump's agenda? Sure. In fact, there are already reports of frustration brewing in the House. But as I told Scarlet, I would be surprised if they don't end up passing something that does most of what President-elect Trump has called for.
Scarlet asked whether I could envision republicans "embracing the idea of Modern Monetary Theory and just printing the money needed to finance the deficits." I knew we were reaching the end of the segment, so there was no time to walk through the mechanics of government finance (to explain that all government spending is already financed by keystroking new money into existence), but I did explain how the MMT lens could be applied to evaluate the GOP's tax and spending ambitions.
I had a chance to elaborate on that point in a series of recent interviews: The Lever podcast with David Sirota, NPR's On Point with Meghna Chakrabarti, and Bloomberg's The Close with Romaine Bostick. Looking at the OBBB through the MMT lens, I explained that I was less unnerved by the bill's "price tag" and more concerned with its human, environmental, and inflationary impacts. Let me say a few words about each of these concerns.
The Human Toll
When it comes to the human toll, the bill will have devastating effects on the most vulnerable people in America. Unlike the 2017 Tax Cuts and Jobs Act (TCJA), which was more-or-less a straight up tax bill that sprinkled relief across the entire income distribution (though tilting the windfall heavily in favor of those at the top), the OBBB combines regressive tax cuts with regressive spending cuts. The spending cuts are so large that the Congressional Budget Office (CBO) has shown that they will more than erase the benefits that the tax cuts themselves would have delivered to low-income households.
Taken as a whole, the OBBB provides tax relief and new financial perks for millions of Americans and businesses while clawing back support that millions of these same people receive from programs like Medicaid and food assistance (SNAP). According to many experts, this will result in the largest cuts to the social safety net in US history. It will clobber low-income Americans, who will end up— on balance—worse off in the coming decade. Two million tipped workers are among those at risk of losing health coverage because of the cuts to Medicaid and the Affordable Care Act.
When all is said and done, as many as 17 million Americans could lose their health insurance coverage, kids and families will go hungry, hospitals in rural communities will shutter (taking decent-paying jobs down with them), and we could see more than 51,000 preventable deaths each year. As I wrote here, the OBBB is an egregious piece of legislation that strips resources from those at the bottom of the income distribution while showering even more wealth onto people who already enjoy substantial economic security. That's a feature (not a bug) of the OBBB that democrats have been highlighting for some time and something they're hoping voters will focus on when they head to the polls next year. Here's Senate Democratic Leader Chuck Schumer:
We're going to be in their states in every way. We are going to organize. We are going to have all the people who are hurt organized. You're going to see a constant, constant battle in those states, reminding people day in and day out of what happened. And that's going to be Democrats in the Senate. It's going to be all of the groups who were hurt so badly. It's going to be just average folks. You saw how many people marched last month. There'll be many more marches, many more protests against this "Big, Ugly Betrayal."
Republicans admit they're vulnerable here, which is why they've structured the bill so that the tax cuts hit right away while many of the harshest cuts to the safety net don't ramp until 2027/28. President Trump and his allies want families to feel the perks of the legislation before they feel its pain. (I'll come back to this as it's crucial to the way I think about the bill's potential inflation risk.) It also means that democrats will have their work cut out for them when it comes to persuading voters, including tens of millions of MAGA voters, that republicans should be punished for throwing them to the wolves.
The Environmental Damage
When it comes to the environment, the OBBB eliminates $543 billion worth of tax incentives aimed at boosting the development and adoption of clean energy by businesses and American consumers. Climate experts warn that it "destroys thousands of clean energy jobs, and puts us all at greater risk from climate disasters."
Because of the substantial rollback in the Inflation Reduction Act (IRA), Patrick Drupp, director of climate policy for the Sierra Club., has dubbed the OBBB "the most anti-environment bill in history." Removing those tax breaks means that it will be more expensive to bring wind and solar—generation that can be added relatively quickly—onto the grid at a time when energy demand is rising at a historic rate. Here's an excellent summary of the IRA provisions that get rolled back. Meanwhile, Dana Drugmand writes that the bill "extends a tax credit to production of metallurgical coal, ….cripples a program intended to crack down on methane emissions, … and raises the tax credit level for carbon capture and storage projects that involve enhanced oil recovery—a type of drilling using carbon dioxide to stimulate oil production."
I could write for days about the OBBB's environmental toll, but I would just be referencing and summarizing the work of experts in the climate space. You can read more here here here here here and here. As you might imagine, there are externalities associated with the environmental harms that spill over into other areas of concern, like human health and inflation.
The Inflation Risk
There are various opinions—and some heated disputes—about the extent to which the OBBB will juice domestic production and employment. Champions of the bill would have us believe that we're about to witness a bonafide, trickle-down miracle that will push real GDP growth as high as 4.9% in the near term. That's what the White House Council of Economic Advisors (CEA) is touting.
Critics are mocking the CEA's rosy outlook, accusing White House economists of basing their projections on "fantasy" assumptions that look nothing like what's being predicted by more credible forecasters.
One of the reasons the Trump administration is touting these eye-popping growth projections is that republicans are being pressed on the budgetary effects—i.e. debt and deficit—of their "massive" bill. By assuming explosive growth, they hope to sell financial markets (and voters) on the notion that what they're doing isn't fiscally irresponsible.
As I've been saying in various interviews, I'm not unnerved by what the Congressional Budget Office (CBO), the Yale Budget Lab (YBL), the Penn Wharton Budget Model (PWBM), or the Center for a Responsible Federal Budget (CRFB) have to say about the budgetary effects of the OBBB. I look at things through an MMT lens, so the "fiscal cost" of the tax and spending bill doesn't give me a lot of insight into the things I really care about. What I'm most concerned about are the bill's human, distributional, environmental, and inflationary impacts.
A point I have been making for decades is that when it comes to inflation risk, it's not enough to know whether Congress is "paying for" its spending vs. adding to the deficit. The reason is that it would be pretty easy to assemble a tax and spending bill that is deficit neutral but highly inflationary and therefore fiscally irresponsible—e.g. a generous Universal Basic Income (UBI) "paid for" by raising taxes only on those in the top 1% of the income distribution. That would punch up spending by almost every American while doing relatively little to curb demand at the very top. Conversely, I could draft legislation that substantially increases the fiscal deficit while dragging inflation lower—e.g. single-payer health care such as Medicare for All. Total (public + private sector) spending on healthcare as a share of GDP might fall from around 18% to something like 15% (depending on which version of Medicare for All we're considering), freeing up substantial real resources (including labor). Hence, it would be a mistake to assume that any generic increase in the deficit will necessarily lead to higher inflation or that Congress can avoid inflation by keeping everything deficit neutral.
From an MMT perspective, understanding the sector financial balances means understanding that on the other side of every government deficit lies a matching (financial) surplus that accumulates in some other part of the economy. Who receives those payments, and whether and how that money goes on to enter the veins of commerce—chasing after existing goods and services or spurring new investment—can spell the difference between a benign increase in the deficit (like we had following the 2009 American Rescue and Recovery Act or the 2017 Tax Cuts and Jobs Act) and one that makes a mess of inflation.
It's worth noting that none of the headline macro forecasts referenced above (CBO, PWBM, YBL, CFRFB) predict that the OBBB will lead to ruinous inflation. In part, that's because they view the package as only modestly expansionary in the short-run. Most of what happens on the tax side is just an extension of the 2017 tax cuts, so there's no new fiscal impulse to worry about on that front, and a lot of the new stuff (no tax on tips/overtime/auto loan interest/etc.) expires after a few years. When you couple the new tax stuff with higher near-term spending on defense and immigration, all of the headline models project modest inflationary pressures, which the Fed counters by raising interest rates. As interest rates move higher, all of the models assume there will be enough crowding out of private sector spending to push inflation down to the Fed's 2 percent target in a reasonably short period of time.
So the problem with the OBBB, according to all of these models, isn't that it provides so much fiscal stimulus that it requires the Fed to aggressively tighten monetary policy. It takes only a modest rise in interest rates to hold inflation in check. The problem, according to CBO (and the others), is that you end up with a worse performing economy relative to a baseline case where the 2017 tax cuts were allowed to expire, shrinking the fiscal deficit over time. In all of these stories, the deficit is the culprit, and a slower-growing—not inflationary—economy is the punishment.
The White House disputes all of this. President Trump wants—and expects—interest rates to be lower, not higher, in the coming months and years. His administration sees more rapid, not slower, economic growth as a result of the OBBB. And the Trump team believes that inflation will trend down, not up, as manufacturing capacity expands and advances in Artificial Intelligence (AI) deliver a productivity miracle.
Faster growth. Lower inflation. Lower interest rates.
That's what Kevin Hassett (director of the White House National Economic Council), Stephen Miran (chairman of the White House Council of Economic Advisers), and Scott Bessent (U.S. Treasury Secretary) are all promising. In July 7 interview on CNBC, Secretary Bessent said, "We're going to have economic growth in a non-inflationary manner." In a joint op-ed a week earlier, Hasset and Miran wrote:
Another argument raised is that the bill will cause inflation to pick up as growth takes off. Those with this view, of course, fail to account for the fact that a factory spending boom that increases U.S. production drives down inflation by increasing supply. The Biden administration threw fire on inflation with government spending and used skyrocketing regulations to impede supply. To see the effect of today's proposed policies, look no further than the 2017-19 acceleration in growth that was accompanied by low, stable inflation.
It would be nice if we could jump directly from the tax incentives that are designed to spur new investment to the shiny new factories themselves, but that's not how things work. Before a build-up in new manufacturing capacity can help drive down prices, all of those new factories have to be built. And that requires labor (with the requisite skills), capital equipment, lumber, steel, concrete, copper, etc. How is all of this supposed to happen in a non-inflationary way with high (and rising) tariffs on key inputs, a shrinking labor force via mass deportation, and a budget bill that will significantly drive up health care, energy, and other costs?
Long before "Liberation Day," Secretary Bessent defended the use of tariffs, arguing that "tariffs can't be inflationary because if the price of one thing goes up—unless you give people more money—then they have less money to spend on the other thing, so there is no inflation."
Well, republicans just passed a bill that gives pretty much everyone more money (while setting the stage for higher energy, health care, and other costs that feed directly into inflation). So am I worried? You bet.
