Federal infrastructure spending is very inflationary

Politicians on the right are quick to point out how inflationary government hand outs are to people in need. While there may be some truth to that, in the sense it could promote immediate spending that would not otherwise spent, a bigger driver of inflation is hand-outs in the form of federal infrastructure spending.

During times of recession, a little bit of inflationary pressure can put people back to work. But when the economy is as strong as it currently is, additional federal infrastructure spending leads to inflation. Federal-funded projects enable cash-strapped states and municipalities to engage in projects they would not otherwise engage in, often with strings attached that cause projects to be built that would not otherwise be built — in ways that would not be built if the local government was in the driver seat.

The most anti-inflationary form of infrastructure spending is unrestricted aid to localities from states and federal government. But once you start tying conditions to projects, you start to encourage unnecessary and unwise projects. While politicians are unwilling to hand over money without strings attached in fear it will be wasted or spent in unintended ways, the most efficient way to allocate public resources to hand it out without restrictions.

However, ultimately the best way to ensure wise use of public dollars is for federal government to cut back on handouts to states and localities. Let local taxing authorities decide what projects are right for them, and make them pay the full cost of projects. This would shrink the amount of infrastructure being built, and lead to more right-sizing of government. When governments pay the full-cost of projects, they are far less likely to act in frivolous ways, even in a time like now when public coffers are flush.

It’s not to say there isn’t a time for stimulus during recession, and in some cases only the federal government has the resources to help relatively poor parts of the country, with the federal government’s broad tax base. But the federal government’s largess should be seen as mostly inflationary and distorting of local choices, by offering money for projects that would otherwise not be funded due to a lack of public demand or true public need.