Top Economists: Bipartisan Infrastructure Framework Does Not Worsen Inflation

July 15, 2021 | Portman Difference

Inflation is surging at the fastest clip in more than a decade.

On Tuesday, the Labor Department released their latest Core Consumer Price Index reading, showing that inflation surged to 5.4 percent year-over-year in the month on June, rising at its fastest pace in nearly 13 years. This continued rise in prices has led many to worry that big spending packages, such as the multi-trillion-dollar package proposed by the Biden administration and Congressional Democrats, could lead to even more inflation. Douglas Holtz-Eakin, President of the American Action Forum, and Michael Strain, Director of Economic Policy Studies at the American Enterprise Institute, examined the proposed bipartisan infrastructure package and concluded that it would not cause an increase in inflation.

The two argued that for inflation to increase, a spending package would have to increase demand, or services. For example, President Biden’s proposed $3.5 trillion spending package contains trillions in social spending, which will add to the demand side and put pressure on inflation. The bipartisan infrastructure plan does just the opposite – core infrastructure provides supply, or goods. Furthermore, they say that most of the spending in the bipartisan proposal would occur after 2022 and after the current inflation concerns will have likely subsided.

Their explanation is below and here.

“In our view, inflation is a real risk facing the economy. Congress should be concerned about inflation, and we encourage members to seek clarity from the Federal Reserve about its expectations and plans, and to apply close scrutiny to future spending plans. But we do not view a well-structured infrastructure plan as a meaningful upside risk to the inflation outlook.

“Inflation occurs when economic demand for goods and services increases faster than the economy’s ability to produce goods and services. Much of President Biden’s spending plans would be inflationary because they would increase demand. Increased payments to households are one example.

“A well-structured infrastructure bill would boost the supply side of the economy, reducing inflationary pressures. Improving roads, bridges, and ports would make it less costly for businesses to operate, allowing them to increase their output per hour, and putting downward pressure on consumer prices.

“In addition to boosting productivity, the timing of the proposed infrastructure plans mitigates concern about inflation. The goal of the proposed infrastructure plan is not to boost the demand side of the economy, giving it a quick, Keynesian jolt through “shovel-ready” projects. This type of infrastructure spending could be inflationary. Instead, the goal is to increase the productive capacity of the economy over the course of nearly one decade. Under the plan, (roughly) no money would be spent in 2021. The vast majority of the money would be spent after 2022. We expect inflationary pressures from President Biden’s February stimulus, reopening, and pandemic-related supply constraints to have abated by 2023. So spending under the infrastructure plan would overwhelmingly occur after current concerns about inflation have subsided.”