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Moody’s: Infrastructure, budget packages will boost growth, jobs

Report says inflation fears unlikely to materialize; high-income households, corporations will be able to absorb tax increases

Mark Zandi, chief economist at Moody's Analytics, shakes hands with then-Senate Banking Chairman Tim Johnson, D-S.D., after a 2011 hearing on the future of the U.S. housing finance system.
Mark Zandi, chief economist at Moody's Analytics, shakes hands with then-Senate Banking Chairman Tim Johnson, D-S.D., after a 2011 hearing on the future of the U.S. housing finance system. (Scott J. Ferrell/CQ Roll Call file photo)

Top Democrats on Wednesday touted a Moody’s Analytics report saying the emerging $4.1 trillion combo package of spending on physical infrastructure and education, health care, child care and other aid to households would grow the economy and create jobs despite being offset with tax increases.

The report, penned by Moody’s Chief Economist Mark Zandi, says that enacting the $579 billion “hard” infrastructure piece —with money for roads, bridges, transit, rail service, broadband and more — on its own would actually be a drag on growth in the short term because some of the offsets would take effect immediately while the spending is slower to roll out. But by 2023, inflation-adjusted economic growth would be 0.6 percentage point higher, with 650,000 new jobs created by mid-decade. 

If lawmakers follow up with the $3.5 trillion budget reconciliation package under discussion, any negative growth effects in 2022 would be canceled out and real economic growth could be nearly 1 percentage point higher, Moody’s said. 

The report, which Zandi co-wrote with Moody’s assistant director Bernard Yaros, says the aid to lower-income households would be spent quickly while tax increases on the wealthy and corporations would have a “much smaller and slower impact on investment and consumer spending.” As a result, by mid-decade enactment of the reconciliation package could create as many as 2 million jobs and cut the unemployment rate by 0.5 percentage point.

The White House blasted out Moody’s findings to its press list, while Senate Majority Leader Charles E. Schumer urged lawmakers to read the analysis.

“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,” the New York Democrat said on the 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.”

Child care, education benefits

The budget package would make it more cost-effective for more parents to work thanks to the extra time and flexibility created by more affordable child care, the analysis found. The boost for employment would be especially strong for single mothers, mothers with young children and low-income mothers.

The analysis also said there would be macroeconomic benefits in labor productivity because more of the workforce would be educated thanks to universal pre-K, two years of free community college, expanded Pell Grants and other education benefits. These would boost the economy beyond the 10-year budget window “given greater educational attainment and higher labor force participation.”

The Moody’s analysts also said the distribution of income wouldn’t “skew meaningfully” in the direction of well-off households as it has in recent decades. Wealthier Americans have “arguably never been in a better financial position” than they are today, driven in part by “surging stock values and house prices.”

Zandi and Yaros write that inflation fears given all the new spending, including the $1.9 trillion pandemic relief package in March on top of additional support last year, shouldn’t be dismissed. However, they write such concerns are nonetheless “likely misplaced” since unemployment remains uncomfortably high and labor force participation “well below where it was pre-pandemic.” 

The report points out economic growth is not expected to take off spectacularly as a result of the forthcoming spending packages — less than 1 percentage point higher combined in 2022, and an added 2 points in 2023 through 2025. In addition, they wrote, some of the provisions under discussion like building more rental housing supply and curbing prescription drug subsidies should “ease inflation pressures.”

Nonetheless, recent inflation readings — the highest in many years under different gauges preferred by the Labor Department and the Federal Reserve — have Republicans on the offensive over what they believe is a winning issue for them with voters.

If Democrats enact a $3.5 trillion spending package on top of everything else, “it will take an inflation problem we have today and pour jet fuel on it,” Senate Budget ranking member Lindsey Graham, R-S.C., said Wednesday.

Zandi and Yaros wrote that “execution risk” is a major challenge to their generally positive assessment; namely, that the programs aren’t well-designed and the private sector has trouble making them work. They also cited a risk that programs don’t expire and add more to deficits than advertised, because it’s much harder to let benefits lapse than it is to continue them. They also said it was possible some of the “pay-fors,” like bulked-up IRS tax collection efforts or a new border-adjusted carbon tariff, don’t bring in the revenue that’s expected. In the long term, higher deficits and debt could become problematic, Moody’s said.

Jennifer Shutt contributed to this report.  

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