This Key Number Means Trouble for Our Nation’s Spending Spree

Andy Snyder|April 2, 2021

Biden laid out his infrastructure plan. It’s more than $2 trillion worth of work that, apparently, our country cannot survive without.

If he pulls it off, he’ll have done what the two presidents before him couldn’t do.

But how to pay for it?

The men before him couldn’t answer it… and neither can Biden.

The president pitched his ideas. But even he doesn’t appear to be convinced of the merit.

“If others have additional ideas,” he said, “let ’em come forward.” Such wavering does little to reassure a skeptical nation.

But Biden was clear on one thing… no tax increases for people making less than $400,000 per year.

If you believe that, then we’ve got a federally funded bridge (just rebuilt!) to sell you.

Oh sure, it’s no lie to say your tax rate will stay the same. But to say this plan won’t cost the majority of Americans big money is flat-out deceptive.

It may well be the costliest plan in American history… and few folks see it coming.

Trouble 2X

In yesterday’s column, we teased the most important number to watch in all this infrastructure spending hoopla. None of the major outlets has mentioned it. And yet, it’s the make-or-break figure that could make all this spending worthwhile… or bring the country to its fiscal knees.

You see, the aim of this sort of federal spending is twofold.

We’ll let the boss at the White House explain the first part of the plan.

“It modernizes transportation infrastructure. Our roads, our bridges, our airports.”

It will fix 10,000 bridges, Biden said. It will modernize 20,000 miles of roads. It will build new rail lines and connect more cities. And, in general, it will green things up.

Not a bad idea.

But he continued to the second part of the decadelong spending plan…

“It grows the economy in key ways. It puts people to work to repair and upgrade that we badly need.”

That’s where things get sticky. It’s that mentality – “I’m from the government, and I’m here to help” – that gets us in trouble. It’s what brought Pittsburgh down and has stirred so much trouble throughout nations with heavy-handed governments.

You see, there’s a number attached to all this spending.

It’s called the “output multiplier.”

In the simplest of terms, it tells us the ultimate value of each dollar spent by the government.

Simple Math – Big Figures

For example, a tax credit for creating a new job has a high multiple – 1.23. It makes sense. A new job spurs further spending all down the line.

Unemployment benefits have one of the highest multiples – 1.6. Again, it makes sense. Those out of work quickly spend their money on essentials.

Housing tax credits, though, don’t do much. They’ve got a multiple of just 0.88. It takes too long for the money to flow through the economy.

There’s a flaw in these figures, though. Most look only at the first year of spending.

That’s dangerous. Very dangerous.

Sure, extended unemployment benefits may give us a big pop right away. But the high wanes quickly. As we’ve seen, it becomes very hard to wean folks off the free money.

On the other side of things, housing credits have a low multiplier – at least for the first year. But what does a person more good… a roof over their head or free money to buy a pack of smokes?

That’s where things get tricky with this latest New Deal-type plan.

Infrastructure spending has a deceptive multiplying effect. In the first year, it’s quite lousy – just 0.8. That’s because spending takes time to ramp up. Building highways takes a lot of time, especially during the planning phase.

But as time goes on, the effect grows. If we dare to do the math, we see that in five years, the multiplier doubles to 1.6.

So Biden is right to say the spending will grow the economy. That $2 trillion could lead to $3.2 trillion in total economic impact.

But, going back to the top, at what cost?

Mortgaging the Future

It’s important to note that the effects of FDR’s New Deal were felt for decades after its inception.

It not only radically shifted the philosophy of the government but also created massive ripples throughout the economy for more than a generation.

Economists are still calculating the effects of FDR’s welfare initiatives. Such things didn’t exist before the big plan. Now they’re a critical part of the nation’s economy.

The thing that keeps us up at night is the timing of it all. The picture three years from now does not look pretty.

Remember, the Federal Reserve has just printed some $3.5 trillion. It’s created some justified inflation fears.

The Federal Reserve says it’s not worried, though. Even if things heat up, Jay Powell tells us, he’ll let it run hotter for longer.

Most folks expect the Fed to give in to the heat around 2023… just as the effect of all this infrastructure spending is kicking in.

It will create a nasty, dangerous situation for the Fed and the economy it is in charge of.

At the same time as the money bosses will want to slow things down, a huge slug of unstoppable money will just be gaining momentum. It will make fighting inflation far harder than just flipping a lever and gradually raising rates.

Powell will be forced to stand on the brakes… if he has the guts.

For the unprepared… it’s trouble.

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It’s a once-in-a-generation innovation for a once-in-a-generation spending spree that will affect the fate of the nation for decades to come.

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