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Friday, April 9, 2021 Leer en Español

Biden Infrastructure Plan Would Hurt Economy in 3 Ways over Long Run, Ivy League Analysis Finds 

The president’s rhetoric is optimistic—but these new long-term projections aren’t.  

Composite Image By FEE | CC 2.0 Via Pixabay and WikiMedia

President Biden is pitching his $2.7 trillion+ “infrastructure” plan, chock full of items unrelated to traditional transportation infrastructure, as key to restoring the economy and putting Americans back to work. It’s right in the name: the “American Jobs Plan.” 

“This is the moment to reimagine and rebuild a new economy,” Biden said in introducing his plan. “The American Jobs Plan is an investment in America that will create millions of good jobs, rebuild our country’s infrastructure, and position the United States to out-compete China.”

The president’s rhetoric is quite optimistic—but his plan’s long-term prospects are not. A new Ivy League analysis concludes that Biden’s plan would actually shrink the economy in the long run. 

New Analysis Pours Cold Water on Biden Plan

Analysts at the Wharton Business School at the University of Pennsylvania weighed the potential benefits the proposed spending would have against the costs incurred by higher government debt and higher business tax rates. They find that while sending piles of cash flying out the door might seem stimulative at first, the long-term effects would all be net negative.

By 2031, Wharton projects that the size of the economy’s total output will have shrunk by 0.9 percent as a result of the “jobs plan.” The analysts also predict a 3 percent decrease in the “capital stock,” a measure of the nation’s productive resources such as machinery, buildings, etc. 

Why will the massive government spending reduce the capital stock? Because the proposal is financed by raising corporate taxes, which directly reduces private sector investment, and because it involves incurring massive amounts of government debt, which “crowds out” private sector investment. 

Why the ‘Jobs Plan’ is Bad News for Workers

Here’s where things get ugly for workers under this “jobs plan.” 

Reduced capital, aka productive tools, means lower worker productivity. Investments in improved machinery, for example, allow assembly-line workers to produce more in output per hour worked. And productivity is inextricably linked to worker wages.

“More investment of capital means: to give to the laborer more effi­cient tools,” Austrian economist Ludwig von Mises lucidly explained. “With the aid of better tools and machines, the quantity of the products increases and their quality improves. As the employer consequently will be in a position to obtain from the consumers more for what the em­ployee has produced in one hour of work, he is able—and, by the competition of other employers, forced—to pay a higher price for the man’s work.” 

Of course, if capital—and hence productivity—is decreased, the opposite effect occurs and workers earn less over time. So, it’s not surprising that Wharton concluded the massive multi-trillion “jobs plan” will, by 2031, actually lead to a 0.7 percent decrease in average hourly wages. The analysts also note that there will be almost no increase in employment, as measured by total hours worked.

Long-Term Harms, Not Benefits

Similar negative effects play out over an even longer time frame, Wharton projects, with net negative results from the “jobs plan” in 2040 and 2050.

Image Credit: Wharton School, University of Pennsylvania 

The Takeaway: Rhetoric and Promises Don’t Guarantee Results

President Biden’s sweeping “infrastructure” proposal is just the latest example in a long history of ambitious political rhetoric masking mediocre results. Politicians often point to the proposed benefits of their policies, often tangible and easy to see, and make their case for big government spending based on the benefits alone. 

But while rhetoric can be rosy, real-life involves trade-offs; the weighing of benefits and costs. And when we do this honestly for Biden’s infrastructure proposal, the results are grim indeed.