Karl W. Smith, Columnist

What Another $3.5 Trillion Could Do to Inflation

The Democrats’ outsized budget proposal has the potential to overheat a U.S. economy that is already struggling to keep up with record demand.

August 12, 2021 at 10:00 AM UTC

By Karl W. Smith

Karl W. Smith is a Bloomberg Opinion columnist. Previously, he was vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina.

One cause of (transitory?) inflation.
Photographer: Micah Green/Bloomberg

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With inflation at its highest level in several decades, centrist Democrats are beginning to echo Republican concerns that the Democrats’ $3.5 trillion spending package will further overheat a U.S. economy already struggling to keep up with demand. Those worries are justified — but critics shouldn’t get ahead of themselves.

Inflation will almost certainly drift downward in the near term even if the full package is passed into law, which is unlikely. The real concern is that the package would exacerbate more fundamental supply constraints in the economy, driving up inflation over the longer term.