During his recent, somewhat confusing CNN town hall, President Biden claimed that his multi-trillion dollar infrastructure spending packages will “reduce inflation.” Unfortunately not only is that false, but in the short term, that spending will make inflation worse.
“Because we’re going to be provided good opportunities and jobs for people, who in fact are going to be reinvesting that money back into all the things we’re talking about, driving down prices, not raising prices,” Biden told the audience.
Currently, inflation is a serious problem. In June, the data showed that consumer prices were 5.4% higher than they were in June of last year. Most of that increase, 3.6%, has been recorded since January of this year. That means, if this rate continues, annual inflation for 2021 will exceed 7%.
Most Americans are concerned about this, knowing the hardship that inflation places on the average household. The hardship is even greater for low-income and fixed-income Americans who simply can’t increase their income enough to offset the higher prices, meaning they see a decline in their standard of living.
Biden is simply wrong in his approach. Inflation, which is generally rising prices, means that people are willing and able to purchase more goods and services than business is willing and able to provide. In other words, demand exceeds supply.
By increasing government spending by trillions, total demand increases. In the short term, that is inflationary to an economy that is operating at or near full capacity. This is especially true, if that money is financed by selling bonds to the public or by the Federal Reserve simply electronically printing more money to purchase those bonds,
In the longer term Biden is partially correct. If new roads or bridges are built, that could improve interstate commerce and likely put downward pressure on prices, thereby reducing inflation. But that is not the case for Biden’s proposals.
He says his proposal would fix 20,000 miles of roads and 10,000 bridges. That means most of the true infrastructure spending will not be on new infrastructure but will rather be maintenance on existing infrastructure. That’s much different than new roads, bridges etc.
About 65 years ago, the federal government proposed constructing an interstate highway that would run from Maine to Florida. This massive highway would mean trucks could easily transport goods to anywhere on the East Coast of the U.S. by travelling on Interstate 95. By 1969 the roadway was completed.
That investment in new infrastructure did improve efficiency in the economy which tends to increase business’ ability to produce more goods. That does put downward pressure on prices and tends to reduce inflation. But repairing existing infrastructure will not have the same effect.
Trucks and other commercial commerce are already using this infrastructure. Biden’s proposed spending for maintenance will not increase efficiency but rather just make sure efficiency doesn’t decline. As such, this spending does nothing to reduce inflation.
In fact, the increased spending increases demand and will tend to drive prices up, especially considering the economy is already experiencing inflation from all of the excess demand. This has been created by the federal government spending $6 trillion more than they received in revenue in 2020 and 2021.
There is also excess demand because the Federal Reserve (Fed), for some unknown reason, refuses to stay ahead of an inflation problem. Historically, every time there is even a hint of inflation, the Fed acts. This time they are doing nothing.
Biden makes another questionable claim. He says this spending will create millions of new jobs. At this time, that is really not a concern.
We certainly do not need the government to spend trillions of dollars that they don’t have on proposals that will create more jobs. Right now there are 9.3 million job openings. There are 9.5 million unemployed people.
Besides this is the same argument that Obama/Biden made in 2011 to support a massive spending bill. They said there are shovel-ready jobs available right now. Then, when the jobs never materialized, Obama said, “I guess the jobs weren’t as shovel-ready as we expected.”
Biden’s infrastructure spending proposal is a boondoggle that will increase the deficit and public debt while tending to increase inflation, not decrease it. Let’s hope this doesn’t pass.
Michael Busler, Ph.D., is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years.
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