After ups and downs and what appeared to be a vanishing likelihood of success, the House passed the bipartisan infrastructure bill the Senate negotiated. It will be signed by President Biden in a matter of days. Included in the $1 trillion package is a wide variety of upgrades and renewals. They include:
- Roads and Bridges: $110 billion
- Public Transit: $39 billion
- Passenger and Freight Rail: $66 billion
- Electric vehicle charging stations: $7.5 billion
- Internet access: $65 billion
- Grid modernization: $65 billion
- Airports: $25 billion
- Water and waste: $55 billion
Much of this is vital to our future competitiveness and some will help expand opportunities for people from all walks of life. It should be a cause for celebration. Yet, the timing is a cause of consternation for economists. The supply chain, already groaning under the weight of restricted supply and booming demand, could well crack and send the price of raw materials skyward. The claim of 2 million good jobs sounds great on its face, but, at a time when employers are struggling to fill empty positions, the federal government will be strangling them.
To illustrate the effects of the $1 trillion flood of infrastructure improvements on the economy, imagine you have just planted a garden. Tiny green shoots are sprouting from the ground. They appear delicate and you wish to help them grow into something sturdier that will one day bear fruit. Mulch has helped your plants grow in the past, so you decide to add some of that to your soil. There’s only one problem: you have added too much at the wrong time, piling the nutrient-dense material over the sprouts. The plants will suffocate or rot under the weight of all that organic material. Rather than helping them grow, you have killed them.
Pouring all that money into today’s economy is a little bit like that. Perhaps we can entice some people to come back out of retirement (there was an enormous bump in retirement last year, helping to trigger this labor shortage), but, on net, we are adding more openings to an economy that already has the biggest positive gap between openings and unemployed ever. Meanwhile, supply chain issues for everything from beef to copper are well documented. Investments in durable goods by firms, long languishing, are currently exploding. Plopping a federal-government-sized gorilla on the scales will exacerbate that problem. With CPI at the highest level in more than 30 years, we cannot afford to do that.
Homebuilding is declining again, not because of a lack of demand, but because builders are simply unable to procure the supplies they need to build the houses. We want to nurture private industry and infrastructure is essential to that in the long term, but if we plow into this too quickly, we will tear up the soil and render it barren. Instead, the Biden Administration should create a plan that involves easing into this bill. Let the economy breathe for another six months to a year before doing anything. Perhaps it would even help to tap the brakes a little bit.
Some higher taxes on spending could help stave off just enough of the buying frenzy to allow supply chains to catch up. Incorporating prices on carbon may not be the most popular thing politically, but it helps achieve the goal of lower emissions and the stimulus of the freshly passed infrastructure bill will help offset any pain. If it is sold as a way to give money back to the middle class via an expanded Earned Income Tax Credit and a permanent addition of the expanded Child Tax Credit, it will become much more palatable. One thing is certain: if care is not taken, inflation will spiral out of control.