Let's Piketty-fy infrastructure week

One of my favorite jokes over the past four years has been Infrastructure Week, which was one of those Trump administration policies that was perpetually two weeks away for the past 200 weeks.

I think there's pretty broad consensus for all but the hawkiest of spending hawks that infrastructure spending would have been one of the most impactful policies Trump could have made. It's just that Trump chose to spend his political capital elsewhere.

So I was struck this morning a bit by Nomura's Richard Koo, who argued that the US, like Japan and other developed nations, has become a "pursued economy." He defines that as a situation where companies earn a higher rate of return in emerging markets than investing at home.

Koo argued that Trump supply-side policies like tax cuts and deregulations push that return on capital higher. He also said infrastructure would be a good investment in pursued economies, as the returns are higher than the cost of borrowing for the US government.

Koo then argued that a Biden administration would likely carry out the infrastructure spending, but reverse the other supply-side reforms - the tax and regulatory policies that Koo says raises the domestic return on capital.

That is all pretty standard supply-side dictum.

What Koo describes is a pretty classic example of a savings glut - there's a mismatch between savings (too much) and consumption (too little), which has led to lower returns on capital.

I think why Koo's standard trope on supply-sideism today struck me in particular is because I'm currently reading the (fantastic) book by Matt Klein and Michael Pettis, Trade Wars are Class Wars.

While Koo doesn't mention trade and tariffs (your textbook supply-sider would argue that trade frictions and tariffs are a form of regulation, and argue for open trade and no tariffs), the arguments against regulation and (especially) taxes don't really match up with the current views on inequality.

While Klein and Pettis look at trade barriers as a key factor that exacerbates inequality, their proposed solution to solving our inequality problem runs a bit more pragmatic than Koo:

Unless policies with the rest of the world change, the United States cannot unilaterally reduce inequality, raise living standards, and stabilize or reduce its current account deficit at the same time without restricting foreign investment... In the near term, US Treasury debt should be issued as needed to accommodate the desires of foreign savers. Lower payroll taxes, larger standard deductions on income taxes, and a better social safety net, particularly for health expenses, would all help generate the necessary budget deficits while simultaneously ameliorating the unequal distribution of income.

Larger standard deductions have an outsized impact on lower earners, rather than the Trump tax plan where 100% (or more) of the benefits accrued to the highest earners (I'd argue a payroll tax cut benefits the highest earners most, but I'm willing to consider the other side). Providing more social benefits is also a direct transfer to lower-earners, reducing inequality.

What the types of policies floated by Klein and Pettis do, at the end of the day, is allow those who need to consume more goods and services (lower-wage workers) the opportunity to do so. Those who can't consume nearly enough (the wealthy) would see their savings decline, but would lead to higher returns on investment.

A dollar put in the bank account of lower earners is likely to be used for consumption, while a dollar to the highest earners is likely to be saved and invested, leading to the lower capital returns Koo warns about. If we increase consumption across those most likely to consume, that leads to higher returns on investment.

Summary: We're already running into a steep wall with respect to inequality, no matter what the prevailing tax or regulatory rules say. But looking through tax and regulatory regimes - or worse, pretending those regimes help lessen inequality - makes that wall that much higher.


Addendum: This all has much bigger implications than just infrastructure week

A few extra thoughts on this topic I might revisit at some point

  • Fed policy is increasingly set with inequality in mind*.
  • The post-pandemic K-shaped recovery is based on the fact that high-earners have held up much better than lower-income workers, and that's going to have some pretty big ramifications even after we vaccinate everyone and try to get back to normal.
  • Digital platforms are winner-take-all, where scale trumps all and benefits accrue to a smaller and smaller slice of companies.
  • Some of the biggest hurdles to a comprehensive US infrastructure program are high labor costs. Higher wages are good for reducing inequality. There seems to be a mismatch. Can we either reduce the total costs of the project, or figure out a way to ensure the high price tag of these projects ensures wages get distributed to the right people?

See: San Francisco Fed's Mary Daly, "Is the Federal Reserve Contributing to Economic Inequality?"

See also: Axios, Jerome Powell's ironic legacy on economic inequality

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