The US Infrastructure Plan May Be Hugely Inflationary

November 9, 2021 Updated: November 14, 2021

Commentary

What’s the worst thing a government can do when there’s high inflation and supply shortages? Multiply spending on energy- and material-intensive areas. This is exactly what the U.S. infrastructure plan is doing and—even worse—what other developed nations have decided to copy.

If you thought there were problems of supply and difficulties in accessing goods and services in the middle of a strong recovery, imagine what will happen once central banks and governments turn up the printing machine to the max to spend on white elephants.

There’s no such thing as “multi-cause inflation.” What President Joe Biden calls “speculation” is simply more money going to the same number of goods. So-called “supply chain disruptions” is more money going to the same services, and “cost-push inflation” is nothing other than more money created to bloat government spending and “infrastructure” plans going to the same number of goods. As one of my followers explains, “More credit issued for GDP-related purposes chasing the same amount of goods and services.”

More money printed to bloat government spending chasing the same goods and services: Monetary inflation.

Who benefits from this massive spending plan? The biggest beneficiaries are Asian economies, according to Bloomberg Economics. Vietnam, Indonesia, and South Korea would get a boost of up to 1 percent of GDP, with India, Japan, and China gaining 0.4 percent to 0.8 percent of GDP.

However, an additional—and quick—$1 trillion spending boost in energy-intensive and material-consuming industries also is likely to create important challenges in terms of inflation and supply shortages.

The key parts producers in the world are likely to see more orders but also much higher energy prices and transport costs.

The reader will likely argue that infrastructure spending is good and needed. However, the problem of demand-side policies is that they create a bottleneck and inflationary pressures in the worst moment possible.

Even if the plan is implemented in eight years, it’s likely to put further pressure on prices of essential goods and services instead of putting more effort into reducing the burdens on improving the technology and supply chains through competition and investment.

The problem of demand-side policies is that they create a bullwhip effect that’s likely to reduce the potential for jobs. Why? Because firms that are already facing rising energy bills are unlikely to be able to hire personnel as they would have in a normal recovery.

The first effect of such an energy-intensive plan is damage to service sector costs and citizens’ expenses. Pushing a massive spending bill financed with printed money just when the United Nations Food Price Index reaches a new all-time high, and oil, gas, copper, and aluminum are at five-year highs is a big problem for small and medium enterprises and families. You may have a job, but costs are going to be very steep.

The entire plan reads “more oil, gas, copper, and aluminum demand”: $110 billion in new spending for roads and bridges, $73 billion to upgrade power infrastructure, $66 billion for rail, $65 billion for broadband infrastructure, and $39 billion for transit.

Is this infrastructure needed? Maybe. But it would have been a better idea to present the plan with a stronger emphasis on allowing the private sector to pace it according to the reality of supply and demand, and less as a spend-for-spending’s-sake way to boost nominal GDP without understanding the risk to the services sector, which is 67 percent of the U.S. economy.

The services sector is going to be hurt badly from the rise in inflation as well as the shortages. The U.S. consumer might find that job creation is much smaller than the government expects, because it has always been so with these plans, and that the inflation tax will be much steeper for all.

U.S. citizens may think the government is paying for this plan, but they’re wrong. Consumers and taxpayers will suffer the rise in the cost of living added to higher taxes.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

Daniel Lacalle, Ph.D., is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.”