As Congress discusses the proposed $579 billion infrastructure proposal and President Biden’s $2.2 trillion American Jobs Plan, the administration contends these spending proposals are essential to making the nation more competitive and restoring the Covid-damaged economy.
“Put simply, these are investments we have to make,” the president said.
Economists and others are unsure. Some say these moves will ultimately strengthen the economy, but they should be carefully monitored by the Federal Reserve lest they trigger 1970s style inflation.
Critics say the president proposes too much government spending and takeover of the economy.
“This is the least responsible macroeconomic policy we’ve had in the last 40 years. The primary risk to the United States economy is overheating—and inflation,” wrote Larry Summers, a former Clinton administration economic advisor. “Policymakers need to accept economic reality,” he adds. “The moment has come to move past emergency policies.”
However, the president’s proposals, supporters say, will do more than boost the economy; they will improve society.
The Biden plan includes spending to repair roads and bridges, transit projects, rebuilding school buildings and hospitals. It would also expand electric vehicles, replace all lead pipes and overhaul water systems.
It also aims to expand the clean energy workforce, increase manufacturing and boost caregiving as a profession to serve the elderly and disabled. “We can’t afford not to do this,” the president says.
However, critics warn the plan also include some frivolous measures unrelated to a recovery. They also argue it costs too much.
Skeptics say any economic recovery is more effective in the private sector. They point to Congressional Budget Office research.
The CBO estimates additional government infrastructure would deliver about five percent return for the tax dollars spent. That’s about half of the economic return of private sector investments, CBO writes. A study from the non-partisan Tax Foundation concludes new federal spending usually doesn’t pay for itself.
“Consider the $579 billion bipartisan infrastructure framework,” the Tax Foundation writes. “Over 10 years it would spend $312 billion on transportation infrastructure improvements and $266 billion on other infrastructure projects like water infrastructure and broadband deployment. If we assume the entire $579 billion yields a 5 percent return, the plan would generate about $67 billion in additional federal revenue over 10 years according to our modeling. This $67 billion of new revenue would cover about 11.5 percent of the spending.”
That’s a skimpy return on taxpayer dollars, says economist Mark Skousen. He adds the policy would repeat the mistakes of the 1970s.
“I expect price inflation to rise to 4% or more in the coming years, based on today’s policies,” Skousen recently wrote. He called the plan “a monstrosity.” The president, he contends, proposes enormous spending on various “government boondoggles.”
If the program is enacted at a time of record deficits and debt, the Biden administration says paying for it should include raising the corporate tax rate to 28% from 21%. That number, the White House noted, would still be below what corporations paid before President Donald Trump’s tax cuts in 2017. The Biden administration also wants to increase the minimum tax on U.S. multinational corporations to 21%.
The tax overhaul incentivizes job creation and investment in the U.S., end profit-shifting to tax havens and ensure large corporations pay “their fair share,” the administration says.
However, some are wary.
Sixty nine percent of Americans believe a tax hike will hurt growth, according to a Harris poll. This decision will directly raise taxes for lower- and middle- income Americans, respondents said.
Another part of the debate is whether the government can take on trillions in new debt, raise taxes and continue low interest rates without risking 1970s style long-term inflation.
The latter was an economic disaster. It included double digit inflation, slow growth, huge deficits and 20 percent interest rates. This was the stagflation era. It was partly caused by the Federal Reserve of the 1970s bowing to the political pressure of the Nixon administration in the 1972 elections. Monetary historians say that Fed kept interest rates too low. After the election, this led to skyrocketing inflation.
High inflation rates, after decades of low inflation, recently reappeared.
This month the U.S Labor Department reported consumer prices in June rose 0.9% from May and 5.4% over the past year. Treasury Secretary Janet Yellen called this “rapid inflation.”
This was the sharpest 12-month inflation spike since August 2008. Excluding volatile oil and gas prices, so-called core inflation rose 4.5% in the past year, the largest increase since November 1991, the U.S. Labor Department said.
President Biden says the plan will work over the long term. He says jobs created and potential tax hikes in his plan ensure that it “will reduce inflation.”
A senior policy analyst with the Tax Foundation says success depends on how quickly the nation overcomes Covid.
“Most of the inflation that Sec. Yellen is referring to is being driven by the supply-chain issues related to the pandemic and the rapid reopening of the economy, which is hopefully transitory in nature,” says Garrett Watson.
Watson adds the administration should be cautious. The plan “complicates the administration’s ability to deficit spend on a large scale over the next year or two, at least from a political perspective, even if the inflation issue is temporary.”
Another economist says preventing long-term inflation from spiking depends on the “independence of the Federal Reserve.”
Christopher M. Russo, with the Mercatus Center at George Mason University, says the Fed’s intends to keep long term inflation at two percent or a less a year.
“They understand the lesson of the 1970s and I believe they will make the right call as long as they retain their political independence,” Russo adds.
In some crises, he notes, such as World War II, the Fed temporarily lost its independence to the Treasury.
