Biden’s infrastructure plan should supercharge growth over the long term, Dallas Fed president says

Robert Kaplan
Dallas Federal Reserve Bank President Robert Kaplan.

  • Biden’s infrastructure plan can fuel a permanent boost to growth, the Dallas Fed’s president said.
  • Where stimulus will fuel a sudden rise, infrastructure is a “long-term investment,” Robert Kaplan said.
  • Inflation will still likely trend within the Fed’s comfort zone amid the new spending, he added.
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President Joe Biden’s infrastructure proposal can permanently lift the country’s economic output and drive stronger growth for years after the recovery, Robert Kaplan, president of the Federal Reserve Bank of Dallas, said.

The president rolled out the American Jobs Plan in a Wednesday speech, marketing the measure as a critical next step for his plan to revive the US economy. The $2.3 trillion spending package includes investments in traditional infrastructure like roads and bridges, nationwide broadband, clean water, and affordable housing.

The plan’s unveiling comes just weeks after Biden approved a $1.9 trillion stimulus plan. The March bill was necessary to breathe life back into the economy, but the “bump in GDP” expected from the stimulus will wear off over time, Kaplan said in a Bloomberg TV interview.

In contrast, the president’s new spending plan would provide a longer-lasting boost to economic growth as the country emerges from the pandemic, he added.

“The nice thing and the desirable thing, for me, about infrastructure spending: it’s that it’s a long-term investment,” the central bank president said. “It should help, in the future, create higher potential GDP growth, higher sustainable growth, better productivity.”

The American Jobs Plan is only the first half of the White House’s new spending push. Biden said Wednesday he aims to reveal the American Families Plan – a spending proposal with funds for public education and care facilities – in the coming weeks. Combined, the two packages will reportedly cost up to $4 trillion.

The additional spending measures come as economists debate whether Biden’s stimulus risks fueling rampant inflation. Where progressive economists see the plan as necessary, others fear the plan will overfill the hole in the economy.

The Fed has signaled it will allow inflation to rise above 2% as the economy recovers in hopes of reaching maximum employment. The stimulus could drive a sharp rise in inflation, but the impact will likely be temporary as the growth rate similarly slows, Kaplan said.

“I think you’ll see inflation moderate as we get into 2021 and into 2022 and 2023. But I also think it’s wise as a central banker to have a good dose of humility and an openness to learning as this all unfolds,” he added.

Kaplan isn’t a voting member of the Federal Open Market Committee and is set to become one in 2023.

The outlook is similar to that held by Fed Chair Jerome Powell. The central bank chief said the Fed aims to maintain its ultra-easy monetary policy stance well into the future due to lasting uncertainty around the coronavirus recession. Any stimulus-fueled jump in inflation is likely to be transitory, he added in a press conference.

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US GDP growth will likely miss a key forecast if the global economy falters, Dallas Fed says

US Mall coronavirus
A shopper goes up in the escalator in Baldwin Hills Crenshaw Plaza on Tuesday, Dec. 8, 2020, in Los Angeles.

  • Weaker-than-expected global economic growth could hinder the US recovery, Fed researchers said.
  • The CBO expects US GDP to grow 4.6% in 2021, but the chances of that fade on slower global growth.
  • The Fed simulated 2021 growth 1 million times and found weak global growth almost guarantees US underperformance.
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The US economic recovery hinges a great deal on how the rest of the world rebounds, according to researchers at the Federal Reserve Bank of Dallas.

For the moment, the US is expected to fully recover from its virus-induced downturn by the end of the year. The nonpartisan Congressional Budget Office projects gross domestic product will expand by 4.6% in 2021, offsetting the 3.4% contraction seen in 2020.

Yet global risks could drag US growth below the baseline forecast, Fed researchers Jarod Coulter and Enrique Martínez-Garćia said in a study published Tuesday. A model of cross-country growth dependencies shows significant downside risks, and even that outlook is a relatively conservative scenario, according to the team. The data doesn’t reflect cross-country events linked to the pandemic.

Accordingly, the Fed’s estimates suggest a greater likelihood of weaker-than-expected global growth. And further modeling suggests a weaker global rebound would cut into growth in the US. 

By simulating 2021 growth 1 million times, the team found that disappointing outcomes practically guaranteed the US would miss the CBO’s estimate.

Fed
Chart via Federal Reserve Bank of Dallas.

In the worst-case outcomes – 0.5th percentile – global growth coming in below 2.7% equated to a near statistical certainty the US would grow by less than 4.6%. There was also a 55.3% chance that US growth would come in below 1%, essentially relegating the country to another year of bleak economic performance.

Even the bottom 25th percentile of scenarios, in which global growth is less than 5%, show a sizeable impact on the US recovery. Such outcomes set a 95.8% chance that US growth would land below the CBO’s projection, and a 17% chance it would come in below 1.9%.

The study suggests that, in “not particularly severe” tail events, poor global growth often coincides with US GDP growth that’s below the baseline estimate.

“The more extreme the negative global growth outcome becomes, the more likely that the US recovery would falter in 2021,” the team said.

Such global spillover can also erode the US’ long-term economic potential, the researchers added. The CBO revised its projection for potential real GDP slightly lower from January 2020 to February 2021, implying that, even after the virus subsides, the economy’s maximum possible output has been dented.

The central bank’s modeling signals the US’ path forward is notably vulnerable to a slowdown in the global recovery, and that growth through 2021 is critical to the country’s ability to return to pre-pandemic output.

“The longer the recession drags on, the more significant the impact on the U.S. economy’s potential can become – mostly through its impact driving up long-run unemployment – and the longer it may take for real GDP to return to its prerecession path,” the Fed researchers said.

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