Reconstruction of part of U.S. Interstate 90 in Chicago, April 5.

Photo: tannen maury/Shutterstock

The 2,702-page, trillion-dollar infrastructure bill under consideration in Congress is a monumental feat of bipartisan negotiation, but if passed, it will likely heap more fuel on the inflation fire.

While infrastructure, in the long term, will enhance the supply side of the economy and help keep inflation low, its effects in the short term will likely be the exact opposite. A recent working paper published by the National Bureau of Economic Research reviewed the evidence of infrastructure investment’s short-term negative effects on the economy and found little sign of stimulus effects. Drag occurs in part because building new infrastructure disrupts the use of existing infrastructure, braking the economy’s supply side, not stimulating it.

During road construction, for instance, traffic increases substantially, falling only after the project is completed. More traffic increases the amount of time it takes for the economy to produce the same amount of goods and services, which pushes prices higher. With such a large infrastructure package, we can expect this phenomenon to be widespread.

It is a common refrain in macroeconomics that policy makers ought to “lean against the wind” through contractionary policy like interest-rate hikes when the economy is growing above potential, and stimulate the economy through rate cuts when it is in a hole. Extraordinary circumstances like a financial or public-health crisis may warrant more government spending. With this reasoning, the infrastructure spending is slated to arrive at precisely the wrong moment. Policy makers are leaning forward as wind blows from behind.

Monetary policy is stimulating the economy more aggressively than at any time since the Great Depression. Households also have more than $2.5 trillion in excess savings they are beginning to spend, unemployment benefits have pushed up the wage demands of new hires, and the economy is still turbocharged from the wildly excessive American Rescue Plan Act, passed this spring.

While the U.S. desperately needs improvements in roads, bridges and tunnels, the timing couldn’t be worse for inflation.

The Federal Reserve’s preferred measure of inflation ran at an annual rate of 6.1% in the second quarter, the highest since the inflation crisis of the early 1980s. Soon, rather than increases in the price of goods, the main drivers of inflation will be increased costs of services and growth in wages caused by high employment levels. For evidence that this is beginning to happen, look no further than July’s ISM services report, in which 66.7% of service businesses said they are raising prices and less than 1% say they are cutting prices.

There are other hidden inflationary forces in the bill. A persistent driver of inflation is the regulatory cost of doing business, and the bipartisan infrastructure bill is filled with new regulations.

The bill would mandate new cars to have breathalyzer and eye-tracking technology to prevent drunk driving, climate technology for preventing children from being accidentally left in vehicles on hot days, safety technology for automatic emergency-braking and crash-avoidance systems, lane-departure warnings and corrections, specialized rear guards on certain types of vehicles, automatic shut-off systems, and more. The bill also requires the Transportation Department to update the regulations covering car seats, vehicle headlights, hoods and bumpers, and to provide more-stringent enforcement of auto regulations. By increasing the cost of producing a new car, the bill would increase the cost for consumers.

It may be a few years before these regulations take effect, but they’d start affecting prices immediately as manufacturers begin working on compliance and development.

The auto regulations are of special importance right now because of the outsize role car prices have played in recent inflation dynamics. The Biden administration and the Federal Reserve insist that higher inflation is transitory, in part because car-price growth will decelerate as supply chain bottlenecks get resolved. But this bill will provide upward pressure on car prices years into the future.

The administration was reckless in its stimulus efforts this spring. The money spent on stimulus checks and overly generous unemployment benefits would have been far better spent building bridges and roads.

Mr. Miran served as a senior adviser for economic policy at the U.S. Treasury, 2020-21, and is a co-founder of Amberwave Partners.

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