Democrats’ plan to spend more than $4 trillion over a period of years on everything from road repair to child care would boost the U.S. economy in the long run without sparking higher inflation, according to a new analysis from Moody’s Analytics.
Roughly tracking President Biden’s Build Back Better agenda, the $579 billion infrastructure bill currently under negation in the Senate, and the $3.5 trillion reconciliation package Democrats hope to pass alongside it, would increase GDP growth while benefiting lower- and middle-income workers most, Moody’s chief economist Mark Zandi and assistant director Bernard Yaros Jr. say.
The plan also seeks to avoid significant deficit spending. “The legislation is more-or-less paid for on a dynamic basis through higher taxes on multinational corporations and the well-to-do and a range of other pay-fors,” the analysts write, adding that the fiscal support it would provide would be enough to get the economy back to full employment, without pushing the economy much beyond that. “Worries that the plan will ignite undesirably high inflation and an overheating economy are overdone,” they say.
A one-two punch: On its own, the smaller infrastructure bill would have a relatively modest effect and start out as a drag on the economy as the pay-fors including multiple tax hikes take effect, the report says. But by 2023, as spending flows, economic growth would be 0.6 percentage points higher relative to a baseline with no infrastructure investment. At its peak in the middle of the decade, the programs would create an additional 650,000 jobs. However, the unemployment rate would not fall below 4%, and the negative effects of the pandemic would never be fully overcome.
If Congress also enacts the larger, $3.5 trillion spending package, the positive economic effects would be amplified. Most of the negative effects of the pandemic recession would be erased by 2022, the analysts say, while economic growth would be about one percentage point higher compared to the baseline.
“The increased social investments in the package, particularly related to child and elder care, healthcare, and housing, also quickly support stronger GDP and jobs,” Zandi and Yaros Jr. say. “There are more than
2 million more jobs by mid-decade and the unemployment rate is at least 0.5 percentage point lower.” Over the long run, the economy becomes more productive thanks to a better-educated population and higher workforce participation.
Inflation threat downplayed: The analysts say that while worries about rising inflation cannot be dismissed, current conditions – including an unemployment rate near 6% and a depressed labor force participation rate – indicate that the economy still has plenty of slack. Additionally, the spending plans include elements that would reduce inflationary pressure in the long run.
“[M]uch of the additional fiscal support being considered is designed to lift the economy’s longer-term
growth potential and ease inflation pressures,” Zandi and Yaros Jr. write. “For example, consider the additional spending on new rental housing supply for lower-income households, which is critical to rein in rent growth and housing costs, or the efforts to reduce prescription drug costs.”
Democrats tout report: The White House sent the Moody’s analysis to reporters Wednesday, Roll Call reports, and Senate Majority Leader Chuck Schumer urged lawmakers to read it.
“I hope my colleagues are listening to those benefits — long-term economic growth, easing inflation pressures, lifting productivity, strengthening the labor force, reducing income inequality,” Schumer said on the Senate floor. “That’s what one of the nation’s leading economists predicts our two infrastructure bills will achieve. The report by Moody’s should light a fire under all of us.”
The bottom line: Though the analysis is unlikely to change partisan minds, it offers Democrats a strong defense of their proposals, as well as their general approach to social welfare spending. “Greater investments in public infrastructure and social programs will lift productivity and labor force growth,” Zandi and Yaros Jr. say. “Passage of legislation is far from certain but failing to pass legislation would certainly diminish the economy’s prospects.”