Bipartisan infrastructure proposal is unlikely to add to overall inflation

Economic policy experts call concerns about inflation ‘misplaced’

Ample research has attempted to estimate the impact of public infrastructure investment on economic output. According to theory and empirical studies, public infrastructure investment can contribute to long-run growth. An increase in the stock of public capital, such as new or improved transportation and water systems, generally results in higher long-term levels of economic output.

According to Douglas Holtz Eagan and Michael Strain, the bipartisan bill being discussed in Congress can accomplish this benefit without adding to inflation if carefully structured. The key considerations are how the cost of the legislation is financed and the timing of the investment. According to these prominent economic policy experts, concerns about inflation are “misplaced.”

The recent run-up in prices is a short run phenomenon. The July 12, 2021, release of Blue Chip Indicators reports that “two-thirds of respondents indicate that they think the pick-up in inflation this year is temporary and not likely to linger, with a slightly smaller majority holding that view for next year.”

Bipartisan infrastructure proposal

Learn more about this proposal and others on our Action Center.

We believe that the current proposal does not amount to enough spending in the short run to add to overall inflation. Spending on infrastructure investments is a slow process requiring coordination at federal, state and local government levels. This includes planning, bidding, contracting and construction. Thus, any spur of the infrastructure bill on inflation would not be realized until 2022 and beyond.

A case for government infrastructure investment can be made now. Timing related to when infrastructure investments are made and when benefits are realized are important considerations. Because there is a relatively long timeframe for building infrastructure, the multiplier effect of the spending on output is “greater if the economy starts from a point below the social optimal amount of public capital,” according to a July 2020 paper from the National Bureau of Economic Research.

Yesterday the National Bureau of Economic Research announced that the recession was over in April 2020. By no means does this infer that the economy has fully recovered. While most economic measures have returned to pre-pandemic levels, employment has lagged with approximately 7 million fewer workers than in February 2020. The infrastructure plan is not designed to be a short run stimulus plan, but if we want to realize the benefits when the economy is fully recovered in the future, now is the time to get started.

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