By Mike Koetting September 29, 2021
I assume all readers of this blog are familiar with the current state of play in the massive infrastructure expenditures proposed by the Biden administration. In very short, the Senate agreed on a bi-partisan “hard” infrastructure bill with the idea, among Democrats at least, that a larger ($3.5T at proposal) “softer” infrastructure bill be adopted by House Democrats and be passed by reconciliation in the Senate to avoid a filibuster.
At present, both are stalled in the House over the size and contents of the total package and, as really a subsidiary issue, the process for moving forward. The stall in the House is caused primarily by a small group of centrist Democrats, reinforced by the specific threats of Senators Manchin and Sinema to not support a reconciliation bill that is $3.5T should it get to the Senate. Their argument, made by Joe Manchin in a Wall Street Journal op-ed, is that we can’t afford this much infrastructure.
While I’m reluctant to make iron-clad pronouncements about the future, I think the odds are pretty good that they are just wrong. Also, since it doesn’t require as much future gazing, I think the odds are even better they are not being precisely honest about their motivations, perhaps to themselves as well as the voters.
Affordability sounds like a straightforward concept—until you think about. There are cases where something is simply unaffordable. No bank would give my wife and me a loan to purchase a $10M penthouse. That’s unaffordable. But get more realistic. Could we afford a condo that’s 50% more than our current abode? Well…yeah, we could. We’d have to rearrange some other expenditures, but in truth we could without completely upending our life. But we think of it as “unaffordable,” which, in fact, is simply short-hand for a complicated stew of factors—whether it makes economic sense, whether there are things we would rather spend our money on, what risks we are willing to take with long term resources, and so forth. Affordability, as it turns out, is a pretty squishy concept.
Somehow, we spent trillions and trillions of dollars on wars in Iraq and Afghanistan and there was never a serious discussion whether we could afford it. We just did it. Same for covid relief. One specific example ties in with my last blog about how the pandemic made it clear how poorly the official description of our government corresponds to the underlying reality. Last spring, the Federal Reserve bought five percent of the entire $20T bond market—at peak. buying bonds at the rate of $1M per second—and not only did no one ever ask if that was affordable, no one even remembers. I am not saying these were bad expenditures; in fact they probably staved off bigger problems. But this unelected group, with no specific Congressional authorization, just did it. Somehow saving bond traders is automatically affordable while infrastructure is not.
Ezra Klein, in a really enlightening interview with economic historian Adam Tooze, puts it this way:
It is just weird that we have an institution of checks and balances and filibusters and committees and divided government that operates when you need to ask, should people get help in their everyday lives? But then an institution functionally run by just Chairman Powell and the Fed board operates around the question of, well, do we just need to begin buying up all the debt anybody wants to sell us?
Consider this another way. According to analysis from Brookings, infrastructure spending was about 2% of GDP during the late 70s/early 80s at the height of building out the interstate highway system. Since then, it has averaged around 1%. Would anyone suggest we couldn’t have afforded the Interstate highway system? We could, we did and we have been reaping significant benefits ever since.
More Specific Arguments
Setting aside the sloppy rhetoric, there are two arguments that could be made against the high level of infrastructure investments—it creates excess inflation and it makes “too great” a claim on future revenue streams. The first is, at best, debatable, and the second is a philosophical judgement that buckles on inspection.
Inflation is the more immediate concern. Prices are rising and there is reason to be concerned about those impacts. But, reading among various economists suggests their basic sentiment is profound uncertainty. It is not just about the possible impact of a very large infrastructure investment. It extends to great uncertainty about the connection of macro-economic policy and inflation: there has been no serious inflation since the mid-eighties, pretty much regardless of what happened, even when the pre-covid unemployment rate dropped to previously unthinkable levels. Moreover, there can be no question but the circumstances surrounding the pandemic are quite unique and that makes it even harder to understand what would be the likely impact on inflation.
There is nothing even remotely like a consensus that these bills pose a clear inflationary threat. Seems to me majority sentiment is pretty well summarized by Mark Zandi, a Moody’s Analytics economist who has extensively modeled Biden’s plan. He says he can’t find any reason to be very concerned about inflation from these bills given the way they are targeted and paid for. He even suggests that some of the provisions, particularly around housing, might have a modest deflationary effect in out years.
This doesn’t mean we can ignore the issue of inflation. But at worse what we’re seeing is a caution flag and probably a weak one at that.
So what about the issue of “too great” a claim on the future. From my perspective, the cartoon says it all.
The salient point here is that not making these expenditures also puts a claim on the future, and maybe even a larger claim than making them. When I was a kid there was a commercial for oil filters that ended with the auto mechanic turning to the camera, shrugging his shoulders and saying: “You can pay me now, or you can pay me later.”
The question then is who speaks for the future? That’s a heavy-duty question. You can make an argument that just about any plausible expenditure is necessary for the future—and “just about everything” is truly unaffordable. Still, it seems to me the opponents of this bill, mostly older, mostly white males, are peculiarly limited candidates to represent the future.
Which brings me to another issue.
Let’s start with the fact that the expenditures proposed within these bills are very popular with voters, even among Republicans. So, opponents find it hard to attack these bills on the substance. The alternative for them is to shake their head sympathetically, then sadly pronounce the measures unaffordable. But as averred above, what that really means is that one chooses not to make those expenditures because you would rather make other ones. And what are the other expenditures they would rather make? Apparently, it is not expenditures in the usual sense, but it is not raising taxes to pay for these bills. Corporations and their ilk have locked arms in opposition to the taxes included in the $3.5T bill. For instance, the larger infrastructure bill includes measures to reduce subsidies to fossil fuel industries and, I know you’ll be surprised, those companies are lobbying against them like crazy. Of course, their lobbing focuses on why we can’t “afford” the expenditures in the bill, not on attacking the fossil fuel taxes per se, something that would be a good idea in any event. Another example: savings from negotiating Medicare prescription drugs is opposed by pharma and specifically opposed by a small group of centrist Democrats, three of whom have received more than $1.6M in pharma funding.
This underlines the disingenuousness of the “affordability” argument. As proposed, the $3.5T bill is primarily paid for by additional taxes on corporations and the wealthy, ideas that are also very popular. So instead of attacking them directly, the arguments focus vaguely on the “unaffordability” of the proposals. If you listen to the opponents of these bills, you’d think the proposed expenditures went directly to the deficit. Nope. They increase taxes on the rich and increase services to people in the middle and lower end of the economic spectrum, which is to say making a step toward improving the overall economic equity of the country without increasing the deficit.
I don’t want to trivialize the many real issues involved in current discussions about the infrastructure bills. There is no easy answer, nothing is unambiguously good and there are all kinds of risks associated. But I do think it fair to say that most of the arguments about the size of these bills are smoke-screens for maintaining a status quo that over favors the rich and entrenched.