DANIEL VAUGHAN: Bipartisan infrastructure spending plan could increase inflation

A bipartisan group of senators has brokered an initial infrastructure deal with the White House.

It’s yet again another infrastructure week in Washington, D.C.

This deal is only a framework for now, but it includes some particulars that are known. Overall, it’s nearly $1 trillion in new spending at a time when all data shows inflation surging.

The nice part about having Republicans involved in the negotiations is that they were able to rein in the impulses of the Biden administration. Biden and congressional Democrats wanted several trillion in new infrastructure spending, most of which was not actual infrastructure spending at all.

Republicans kept Democrats on the topic at hand, dealing with actual infrastructure issues. The Wall Street Journal reports:

The plan includes nearly $400 billion in expected baseline transportation funding that Congress must regularly renew, along with $579 billion in new spending. Of the new spending, $312 billion…would go to transportation projects and $266 billion would go to other infrastructure needs like water systems, broadband, and improving power grids.

Aside from road and transportation projects, the framework funds other infrastructure too. The deal reportedly “dedicates $55 billion for water infrastructure, $65 billion for broadband, and $73 billion for building thousands of miles of new transmission lines intended to speed the transition to renewable energy. There is also $21 billion for environmental remediation of polluted areas and $47 billion for resilience projects to deal with climate change, extreme weather events, and cyberattacks.”

Many of these are good things that Congress should seek to fund and fix. An infrastructure deal was there for years for the Trump administration, which never took the initiative.

The problem is not the ideas. The problem is timing.

Inflation is surging at the moment. Nearly everything in the economy is becoming more expensive. Inflation rates are at a 13-year high. The last inflation report from the Bureau of Labor Statistics showed:

The all items index rose 5.0 percent for the 12 months ending May; it has been trending up every month since January, when the 12-month change was 1.4 percent. The index for all items less food and energy rose 3.8 percent over the last 12-months, the largest 12-month increase since the period ending June 1992.

The following report is due on July 13, right when the actual negotiations in Congress will begin on all the particulars of an infrastructure bill.

Former Obama administration economic advisor Lawrence Summers said “the primary risk to the U.S. economy is overheating — and inflation.” Jason Furman, chairman of President Barack Obama’s Council of Economic Advisers, remarked about the massive Democratic spending spree in their COVID-19 relief bill that it was “too big for the moment,” adding, “I don’t know of any economist that was recommending something the size of what was done.” All of which encourages more inflation.

Summers pointed to several areas pushing inflation higher:

Inflationary pressures are mounting from the boost in demand created by the $2 trillion-plus in savings that Americans have accumulated during the pandemic; from large-scale Federal Reserve debt purchases, along with Fed forecasts of essentially zero interest rates into 2024; from roughly $3 trillion in fiscal stimulus passed by Congress; and from soaring stock and real estate prices.

Nothing has shifted the momentum on those inflationary items. In fact, housing prices have continued surging.

The Wall Street Journal reported that “median existing-home sales price in May topped $350,000 for the first time… The figure was nearly 24% higher than a year ago, the biggest year-over-year price increase NAR has recorded in data going back to 1999.”

Things like used car prices are spiking too, with every category of used car more expensive this year than last. Used cars are like several sectors of the US economy, which are seeing price increases across the board. And the price increases in one sector roll over into another, causing inflation everywhere.

Summers and other liberal economists are trying to paint a pretty picture of infrastructure spending during an inflationary period. But it’s all guesswork at this point. The U.S. economy has never experienced a shock like a global pandemic. Everything got shut down, and demand was purposely killed. Now things are reopening, and demand is skyrocketing.

Nearly $1 trillion in new infrastructure spending would, by definition, increase demand for resources and services. Building materials that are expensive in housing could also get increased from infrastructure demands. Pretending this won’t have an impact is ignoring what’s right in front of us.

Now maybe the Biden administration argues that a bit of inflation is fine, and people losing more of their paychecks from that is worth it while more government spending takes place. But again, this is all guesswork.

Suppose the Biden administration’s infrastructure spending boosts inflation like the COVID-19 relief spending allegedly has done so far. If that happens, people are going to feel the pain much sooner rather than later.

The smart play would be to let this inflationary moment pass before spending mountains of new money. If inflation is just a short-term issue, then infrastructure spending can happen next year. But the Biden administration is playing with economic fire. They could just as quickly spike inflation above what anyone expects. That will have negative consequences for all of us.