Update 568 — CPI up 6.2%, I-Word Heard
But Benefits Top Risks: IIJA, Look Forward
In less than 24 hours, the world’s three largest economies — the U.S., China and Japan — each released inflation data showing prices rising at the fastest rate in 30 years. The 6.2 percent increase in prices over the last 12 months shows inflation building in the U.S.
What impact will the just-passed IIJA have on inflation and on the economy overall, if any? In this update, we overview the IIJA’s key provisions and projected benefits, examine the trials of implementing policy, discuss implications for the midterms, and argue why recent inflation readings should not derail Democrats’ fiscal agenda.
Lastly, Happy Veteran’s Day. The staff of 20/20 Vision thanks America’s veterans for their service to our country.
Late Friday, the House of Representatives passed the Infrastructure Investment and Jobs Act (IIJA). President Biden is expected to sign it into law on Monday. The funds will create millions of jobs over the decade, reduce inflationary pressures by expanding throughput, ease supply chain congestion, and support a robust recovery.
Refresher on the IIJA
The $1.2 trillion Infrastructure Investment and Jobs Act is split into two portions: the first, a reauthorization of the federal government’s discretionary surface transportation spending, the second, roughly $550 billion in new spending on physical infrastructure and public works programs. The funds touch physical infrastructure across the country, from railways to water pipes to roads to broadband.
The IIJA is likely to have a positive impact on the macroeconomy. According to Moody’s Analytics, the IIJA alone would add $167 billion to real GDP in 2024 compared to the status quo. If the Build Back Better Act is also passed, the two pieces of legislation would add an additional $440 billion to real GDP in 2024 compared to the status quo. Additionally, the IIJA is expected to create 660,000 jobs over the next decade, though that figure more than doubles if BBB is passed as well. Together, both bills could put downward pressure on inflation due to their investments in productivity-boosting sectors and supply chains.
The new funds in IIJA are broken down as follows:
- Transportation ($284B)
- Clean Energy Transmission and Grid ($73B)
- Broadband Deployment ($65B)
- Water Infrastructure ($55B)
- Climate Resilience ($50B)
- Environmental Remediation ($21B)
The Transportation section can be broken down as follows:
- Roads, Bridges, and Major Projects ($110B)
- Passenger Rail ($66B)
- Ports, Waterways, and Airports ($42B)
- Public Transit ($39B)
- Safety ($11B)
- Electric Vehicle Charging Network and Electric Buses ($15B)
- Reconnecting Communities ($1B)
New Funding in the Infrastructure Investment and Jobs Act, USD Billions
These new funds are critical toward repairing, improving, and expanding the nation’s physical infrastructure. However, the efficacy of the legislation — along with the political effect — will only be realized if implemented properly. With public trust in government at historic lows, inefficient use of taxpayer funds would degrade the spending’s efficacy.
Smart Investment or Just Spending?
The IIJA is the largest investment in infrastructure in American history and is a moment for the public sector to shine and restore faith in government. Smart investments in our nation’s physical infrastructure are best achieved through the public sector.
Despite the inadequate funding for removing lead pipes, the $15 billion dedicated to the project will have a tangible impact on America’s children by removing millions of lead pipes nationwide. Removing lead pipes is best pursued by the federal government due to its access to public right-of-ways access, negotiation position with property owners, and ability to accumulate centralized data on lead pipe locations — a task of federal magnitude.
But the risk for corporate leakage — or wasted money going toward corporate pocketbooks and not infrastructure due to the numerous public-private partnerships scattered throughout the legislation — and reduced efficacy exists. The risks can spiral into a massive boondoggle if not handled properly.
The broadband investments may be co-opted by incumbent private telecommunication monopolists. Providing federal money to these companies to expand internet access to underserved areas has historically not been effective, only marginally increasing broadband access above baseline trends. But states have the authority to choose which companies get the contracts. If the Biden administration wants to see broadband access demonstrably improve, it can encourage states to choose new companies and alternative models of broadband deployment to increase effectiveness and competition.
The IIJA will also contribute to the fight against climate change. While the IIJA would only move us one percent closer to our emissions reduction goal, it is still one percent more than the status quo. And when coupled with Build Back Better, the impact doubles. But the emissions reductions can only be realized if the IIJA is properly implemented. If projects are completed through more carbon-intensive means or some of the carbon-reduction projects run over budget, the IIJA may increase carbon emissions.
The passage of the IIJA was a much-needed political boost to President Biden and Congressional Democrats, especially after Democrats’ poor performance in last week’s elections. Even though the Senate passed the bill in August, its passage in the House was delayed for months due to negotiations over the Build Back Better Act.
Despite being a legislative accomplishment on its own, the IIJA has taken a political back seat to BBB. Now that it has passed, Biden and Congressional Democrats should take a victory lap and claim credit for passing a major infrastructure package. The White House has indicated that projects funded by the IlJA will begin as early as Spring 2022. If so, voters will have plenty of time to form judgments about the bill before the midterm elections, carrying potential political risks and rewards for Congressional Democrats:
- Rewards: If voters can see tangible examples of new infrastructure projects getting underway next year, they would link Democrats’ rhetoric on the bill to actual results. Particularly, Democrats have focused on how the bill will make historic investments in underserved communities, such as through lead pipe removal. If some of these projects get started next year, Democrats will be fulfilling a major promise made to voters.
- Risks: If the initial rollout of these programs is delayed or ineffective, Biden and other Democrats’ rhetoric praising the bill will ring hollow. The bungled rollout of Healthcare.gov in 2013 dealt a big blow to the Affordable Care Act’s initial political and policy success. If next year’s news is talking about how taxpayer money is being wasted, that could significantly harm Democrats in the midterms, particularly if Democratic base voters believe Biden and Congress failed to deliver on their promises.
Given the time frame of infrastructure projects, few, if any, projects can be expected to be “completed” a year from now. But the early phases of implementation will be critical as voters form their first impressions. Yesterday’s CPI report showing elevated inflation readings should not let policymakers take their eyes off the ball when it comes to fiscal policy. Federal Reserve officials continue to insist that long-term, 1970s-style inflation is not in the cards. Federal spending in the IIJA — spread out over time and on needed projects — will have a negligible impact on inflation. BBB could actually be deflationary over time.
One of the key asymmetries in American politics is that Democrats, as the party that believes in the promise of good government, must produce achievements while in power to prove that the federal government can deliver effective policies. Republicans, on the other hand, benefit politically from gridlock and ineffective government programs, which reinforce their notion that “government is the problem.” Congress has done its part in once-in-a-generation infrastructure investment. Now the burden is on the Biden administration to begin turning the legislative achievement into successful projects.