Fight Inflation By Reducing Infrastructure Costs

This week Federal Reserve Board Chairman Jerome Powell suggested in a speech to the National Association of Business Economists that larger increases in interest rates may be needed if inflation does not subside. President Biden can help the chairman by rolling back his Executive Order that will require the $1 trillion of new infrastructure projects to be built with project labor agreements—which drives up labor costs.

The Fed announced last week that it will raise the federal funds rate by 25 basis points to try to lower inflation. The Fed also announced that it plans to do the same another 6 times this year, and 3 or 4 times next year.

The federal funds rate should be 2 percent in December 2022 and at 2.75 percent in December 2023 if the Fed proceeds on a schedule announced at last week’s Federal Open Market Committee meeting. The Fed’s policy, with the announced rate increases, will remain one of extreme monetary accommodation, with negative real interest rates. Inflation has never been reduced when its rate is above the federal funds rate.

However, with consumer price inflation running at almost 8 percent, the personal consumption expenditure index (the Fed’s preferred inflation measure) at 6 percent, and producer price inflation at 10 percent, the Fed’s announced interest rate hikes are not nearly enough to get inflation out the economy.

Mr. Powell said in the NABE speech, “If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so. And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well.”

One way the Administration can help Chairman Powell tame inflation is by reducing labor costs.

Some of the Administration’s actions are resulting in higher labor costs. On February 4 President Biden signed an Executive Order requiring project labor agreements on Federally-funded construction projects worth $35 million or more. These agreements set standards not only for wages, but also for stoppages, working conditions, and dispute resolution mechanisms. The Executive Order would apply to all Federal projects, including the approximately $1 trillion in the Infrastructure Investment and Jobs Act that the president signed into law on November 15, 2021.

Project labor agreements require a collective bargaining agreement with a union, and those hired under collective bargaining agreements cost more than nonunion labor. Only about 13 percent of the construction workforce is unionized, potentially leaving out 87 percent of construction workers.

Project labor agreements cover subcontractors, too—including transportation subcontractors. The president’s Executive Order says specifically, “Agencies shall require every contractor or subcontractor engaged in construction on the project to agree, for that project, to negotiate or become a party to a project labor agreement with one or more appropriate labor organizations.”

This is a new requirement. President Obama did not require the use of project labor agreements; he merely requested that Federal agencies consider them on projects of $25 million or more.

With almost 11 million unfilled jobs, allowing infrastructure construction companies to reduce labor costs would enable them to offer services at lower costs to states, reducing inflation. Even without project labor agreements, earnings have been rising as employers must offer more to get a share of the workers they need.

Another way that the Administration can reduce infrastructure costs is by using One Federal Decision, part of the new infrastructure law that allows Federal agencies to reduce the time taken for permitting and approval of projects.

One Federal Decision allows projects to be considered by Federal agencies simultaneously, rather than consecutively. Rather than a project gaining approval from one agency and then moving to the next, all agencies can work on approving a project at the same time. This can cut project approval time from five or ten years to two years.

The Fed’s actions mean that rates for private and public borrowers, including those who want to finance infrastructure projects, will rise. It will become more expensive for companies to borrow, and for state and local governments to pay interest on their debt.

The Infrastructure Act contains many useful projects, including improving the roads and bridges that Americans use daily. Americans spend their money carefully and wisely, always shopping to get the best value for each dollar, and buying items that can be delivered today, not ten years from now. To spend more and to waste more time than necessary are foolish. The Federal government should negotiate contracts for roads and bridges no less wisely than the American public spends its hard-earned income.

To beat inflation, spending Federal funds more wisely would be a good start. Combining this with more aggressive interest rate hikes would be even better.