From FT-IGM US Macroeconomist Survey:
source: FT-IGM US Macroeconomist Survey, December 2021.
Therefore, contrary to the concerns expressed by some observers, the mid-term effects of the “Rebuild Better Act” and the “Infrastructure Investment and Employment Act” that have been passed have not been widely recognized by academic economists, and the modal response “has no substance to inflation. Sexual impact”. (This is a longer range than the best analysis range of short-term macroeconomic econometric models, see this postal.)
How could this be? It is useful to remember that the long-term output effect of infrastructure investment is estimated to be quite high. Therefore, over time, increased investment in public capital will have a relatively large impact on output, as shown in the aggregate demand-total supply chart below.
figure 1: An explanation for the medium-term impact of effective infrastructure investment spending.
In this interpretation, the long-term aggregate supply curve moves from ASLR to AS’LR (dark gray arrow), that is, full employment GDP rises, even if the aggregate demand curve shifts outward (light gray arrow). Due to the large shift in the long-term AS curve, in this case, downward pressure on the price level (or more accurately, downward pressure relative to no infrastructure investment) will appear.
If the impact on full employment GDP is small (relative to the shift of the AD curve), the net impact may be zero or positive for inflation.
What about the BBB Act contains a large number of arguments that do not fit the types of infrastructure considered in the typical research on infrastructure investment? It is important to remember temporary shocks (higher retained wages can move the short-term aggregate supply line upward, which is the flat line in Figure 1). Why these reserved wages may be higher? Question 10 in the survey resolved this issue.
source: FT-IGM US Macroeconomist Survey, December 2021.
The second most likely factor identified in the survey is difficulty in parenting. If the BBB can alleviate some of these constraints on labor participation, then in the short and medium term, inflationary pressures can be alleviated. For example, More than 15% of proposals for the latest iteration of BBB for universal preschool and affordable childcare.
Build Back Better may further reduce inflation by increasing supply to meet demand. For example, policies that support preschool, childcare, and long-term care can help parents and caregivers stay or re-enter the labor market; support housing construction may reduce rents; investment or support for infrastructure, research, and other capital may increase labor productivity. However, many of these potential inflation easing aspects of Build Back Better are usually long-term policies and are unlikely to have much short-term impact on supply.
