It’s a ‘bizarre time’ for a big infrastructure plan, economists say
There is one big problem with the federal infrastructure plan that President Donald Trump rolled out Monday: Economists say this may be exactly the wrong time to pump a bunch of extra money into the U.S. economy.
The unemployment rate is already headed toward historic lows. Wages and interest rates are rising and Congress just pumped massive stimulus into the economy through a $1.5 trillion tax cut and $300 billion in new federal spending.
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Typically, big infrastructure initiatives are targeted for moments when the economy is struggling and the unemployment rate is high. The concern with Trump’s $1.5 trillion plan is that any new infrastructure projects it creates will just move workers from current projects into different ones rather than creating new jobs.
And the Federal Reserve, already hiking interest rates as the economy improves, may move even faster if it appears that infrastructure spending coupled with tax cuts and other federal spending are leading to faster inflation.
“If you asked every economist whether this was a time that the U.S. desperately needed this kind of fiscal stimulus, I don’t think anybody would say that it is,” said Megan Greene, chief U.S. economist at Manulife.
The time for a big increase in infrastructure spending, economists argue, was in 2010 or 2011 when the unemployment rate remained just below 10 percent and the economy was struggling to move into a higher gear. The backdrop now is quite different with unemployment at 4.1 percent and growth rates improving.
“It’s a completely and utterly bizarre time to be doing this, and frankly it’s probably not going to happen,” said Ian Shepherdson of Pantheon Macroeconomics. “Unless you magically improve the labor force participation rate and get a miracle on productivity, all you will do is tighten labor markets, drive up wages and lift demand when it doesn’t need lifting.”
Without an increase in the size of the labor force, which has remain stuck near a 30-year low for years, or a strong uptick in productivity, the Fed would likely to be forced to hike interest rates in response to a sharp uptick in wages in order to fight inflation.
Economists note that because it typically takes months if not years for infrastructure projects like road, bridges and port repairs to be completed, any bill that Congress passed this year may not have much immediate impact on the economy.
“Even if something passes, these projects are rarely shovel ready, they generally take a number of years,” Greene said.
That could be especially true given that the White House envisions turning a $200 billion federal investment — all offset by budget cuts — into $1.5 trillion in overall spending through contributions by state and local governments and the private sector.
This would require states to come up with more money than they typically provide for joint projects with the federal government. And private sector companies would have to identify infrastructure projects where the potential for profits is worth the risk of committing significant funds.
Still, even if a delay in moving ahead with infrastructure projects limits the inflationary impact, the initiative is coming at a very odd time in the economic cycle.
Following the impact of the tax cut bill and the new federal spending, the 2019 federal deficit is expected to hit $1.2 trillion or more. The Committee for a Responsible Federal Budget estimates that if provisions from the tax bill are made permanent, the deficit could soar to $2.1 trillion by 2027.
The administration itself is worried about the impact such deficits could have on interest rates. That’s because when a country’s fiscal position worsens, investors demand higher rates on government debt. Higher rates can make it harder for individuals and corporations to borrow and spend, slowing the economy.
White House Office of Management and Budget Director Mick Mulvaney said Sunday on Fox News that the rising deficits could lead to a “spike” in interest rates. And he called the increasing red ink “a very dangerous idea,” adding that he hoped faster growth from the tax cuts would eventually generate more government revenue and reduce deficits.
Advocates of infrastructure spending have long warned that the nation’s aging roads, bridges, railroads and other transportation assets are a threat to future economic growth. The American Society of Civil Engineers estimated last year that the U.S. is on track for $3.9 trillion in losses to gross domestic product and more than 2.5 million lost jobs in 2025 if it fails to make up a multitrillion-dollar backlog in unmet investments.
But even liberal economists who generally like the idea of more government spending on infrastructure warn that pumping federal dollars in now — even the relatively small amount the White House has in mind — will not create new jobs but instead just move around existing workers. And pursuing an infrastructure plan that increases deficits would not make much sense.
“I think paid-for infrastructure would make a lot of sense right now. I think unpaid-for infrastructure would not,” said Jason Furman, a Harvard professor who served as chair of the Council of Economic Advisers under President Barack Obama. “There are two arguments for infrastructure: short-run stimulus to create jobs and long-run investment in being able to move goods and people more efficiently. Argument No. 1 is not operative today and has not been for several years.”
The White House said it would pay for its infrastructure spending with unspecified other cuts. But Furman and other economists and even some Republicans favor a deficit-neutral approach to infrastructure with new government revenue, potentially including an increase in the federal gasoline tax, which has not been raised since 1993. The White House is not proposing such an increase.
Rick Geddes, a professor and director of the Cornell Program in Infrastructure Policy, said Washington should move away from the idea of infrastructure investments as an economic stimulus policy and instead focus on ways to give state and local governments incentives to invest in new technologies such as smart street lights that gauge vehicle and pedestrian traffic and roads that tell you when they need maintenance.
“I’d caution against thinking of it within a stimulative, macroeconomic framework,” he said. “We need to improve and take care of the infrastructure we already have rather than building out any giant new networks.”
February 12, 2018 at 08:44PM