Inflation Shrinks the 2021 Infrastructure Bill

Milton Friedman was right

In a rare and unfortunate moment of bipartisan agreement, both houses of Congress came together and passed the 2,702-page, $1.2 Trillion “Infrastructure Investment and Jobs Act.” While the politicians celebrated their accomplishments, many economists argued that government spending was already out of control due to the pandemic and that additional spending on top of all the Covid-19 related spending would cause inflation.

Democrats argued that that wasn’t true because their version of monetary theory, which is called Modern Monetary Theory, says governments can spend all they want without causing inflation. Investopedia provides this definition: “Modern Monetary Theory (MMT) is a heterodox macroeconomic framework that says monetarily sovereign countries like the U.S., U.K., Japan, and Canada, which spend, tax, and borrow in a fiat currency that they fully control, are not operationally constrained by revenues when it comes to federal government spending.” (emphasis added)

Conventional monetary theory, which says that excessive government spending would always cause inflation, was succinctly summarized by Milton Friedman, who said, “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”

Milton Friedman was right on the money, so to speak. The excessive government spending in 2021 and 2022 caused inflation because it was funded by the Federal Reserve System’s balance sheet, which resulted in an unprecedented increase in the money supply, which set into motion the forces that resulted in rapid inflation.

With the highest inflation rates in 40 years, the funds allocated to repair bridges and other infrastructure are coming up short because current costs have skyrocketed. “Those dollars are essentially evaporating,” said Jim Tymon, executive director of the American Association of State Highway and Transportation Officials. “The cost of those projects is going up by 20%, by 30%, and just wiping out that increase from the federal government that they were so excited about earlier in the year.” As a result, many state and local infrastructure projects that were supposed to be funded by the infrastructure bill have been put on hold because the funds allocated in the bill are insufficient to pay for the projects.

Democrats in Congress are now saying that they need to fix this problem by passing another spending bill to fill the gap with more deficit spending. They should read Milton Friedman instead.

This is a classic case of divine economic retribution and yet another confirmation that the laws of supply and demand and conventional monetary theory cannot be ignored.