The Capital Note

The Infrastructure ‘Deal’ — A Lesson in Salami Tactics

George Washington Bridge seen from Fort Lee, N.J. (Mike Segar/Reuters)

Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: infrastructure, food inflation, pension plans and low yield, a little local difficulty for electric vehicles, and shrinkflation. To sign up for the Capital Note, follow this link.

News and Views

“Laws are like sausages. It is best not to see them being made,” as Otto von Bismarck probably didn’t say, but it’s easy to understand the point that he didn’t actually make.

And then, to stick with the sausage theme, there are “salami tactics” (szalámitaktika) as the Hungarian communist dictator Mátyás Rákosi probably didn’t say either. Nevertheless, what he may or may not have described proved to be pretty effective.

Salami tactics can be defined in various ways but, at its core, it means slicing bits and pieces of the opposition’s platform — often in ways that seem relatively innocuous (less so in post-war Hungary) — until there is nothing left. In the U.S, such tactics frequently come with the label “bipartisan.”

Which brings me to yesterday’s “bipartisan” infrastructure deal.

The New York Times:

President Biden struck an infrastructure deal on Thursday with a bipartisan group of senators, signing on to their plan to provide about $579 billion in new investments in roads, broadband internet, electric utilities and other projects in hopes of moving a crucial piece of his economic agenda through Congress.

“We have a deal,” Mr. Biden said outside the White House, standing beside a group of Republicans and Democrats after a meeting in the Oval Office where they outlined their proposal. “I think it’s really important we’ve all agreed that none of us got all that we wanted.”

Note that, according to NPR:

According to the White House, the price tag comes in at $1.2 trillion over eight years, with more than $500 billion in new spending.

If we are in the mood to be spending billions (despite an increasingly perilous debt pile), there are, I suppose, worse deals that could have been cut.

The New York Times:

Still, if it succeeds, the bipartisan plan would, for the first time since President Barack Obama’s 2009 economic rescue plan, pump significant federal investments into the nation’s crumbling infrastructure — not only roads, bridges, and transit, but broadband, waterways and coastlines eroding as the planet warms.

Under the plan, $312 billion would go to transportation projects, $65 billion to broadband and $55 billion to waterways. A large sum, $47 billion, is earmarked for “resilience” — a down payment on Mr. Biden’s promise to deal with the impact of climate change.

While the extent to which the nation’s infrastructure is “crumbling” has been wildly overstated, at least this package has the merit that the billions to be spent on, say, “resilience” make rather more sense than alternative plans to invest in premature or inefficient green technologies, assuming they are spent wisely (no small assumption). Regardless of the damage that climate change may or may not bring in its wake, toughening our infrastructure would almost certainly pay for itself. That’s true, say, of sea-defenses for our low-lying coastal cities or for burying electric cables underground, particularly in regions such as the northeast.

As for, broadband, on the other hand, well, take a look at what Kevin Williamson has to say here.

Then there’s the idea that the plan will create “a first-of-its-kind Infrastructure Financing Authority that will leverage billions of dollars into clean transportation and clean energy.”

The ghost of Gosplan still stalks the earth, it seems, even as memories of Solyndra appear to have faded.

However, all this would, by the dismal standards of the Biden era, be (sort of) acceptable if that were the end of the matter. But it’s not, and I’m not referring to this little twist, although I could be:

Senator Mark Warner, Democrat of Virginia, said the package would pump around $40 billion into Internal Revenue Service enforcement to produce a net gain in tax revenues of $100 billion.

If those extra billions are merely funding for additional taxpayer harassment by the IRS that would be bad enough, but if they also incorporate an extra license for the IRS to pry into individuals’ lives, the timing, given the ProPublica leaks, is, to say the least, unfortunate.

As NPR (which also provides useful additional details of what’s in the package here) explains, including those billions for the IRS was designed to help find a way of paying for this deal without reversing the 2017 tax cuts, a no-go for the deal’s GOP supporters. Other measures to achieve this include “redirect[ing] unused unemployment insurance relief funds,” and “repurpos[ing] unused relief funds from 2020 emergency relief legislation,” both of which make some sort of sense. Dig down a little further, however, and it looks as if much of the purported funding is expected to come from the equivalent of scrabbling down the back of the couch. It includes Strategic Petroleum Reserve sales, “Public-private partnerships, private activity bonds, direct pay bonds and asset recycling [some sort of privatization, it seems] for infrastructure investment” and, in what may well be an exercise in wishful thinking, “the expectation that infrastructure investment will generate economic growth.”

But this deal is not the end of the matter.

Back to the New York Times:

Both the president and top Democrats say the plan, which constitutes a fraction of the $4 trillion economic proposal Mr. Biden has put forth, can only move together with a much larger package of spending and tax increases that Democrats are planning to try to push through Congress unilaterally, over the opposition of Republicans.

“If this is the only thing that comes to me, I’m not signing it,” Mr. Biden said during remarks in the East Room of the White House. “It’s in tandem.”

Still, he signaled optimism about the success of the compromise . . .

Quite how this is a “compromise” is hard to say. In essence the GOP are supposed to agree to a small slice, the first cut of salami, if you like, of what will ultimately be a far larger and infinitely more destructive package, and in return for what?

Perhap I’m missing something — and these bipartisan Republicans are playing a form of 4D chess too complex for my simple mind to grasp — but, for now, I’d just draw your attention to NR’s new editorial on this matter and, in particular, this:

Given that Democrats are treating the two bills as a package deal, why should Republicans view them any other way? Biden is not in fact giving up any ground by signing on to some provisions with Republicans if he’s going to get everything he wants anyway via a partisan parliamentary maneuver. All that Republicans would be giving Biden would be the veneer of bipartisan cover . . .

Around the Web

Food inflation

Via the IMF:

It is plausible that consumer food price inflation will pick up again in the remainder of 2021 and 2022. Indeed, the recent sharp increase in international food prices has already slowly started to feed into domestic consumer prices in some regions as retailers, unable to absorb the rising costs, are passing on the increases to consumers. More is likely to come, however, since international food prices are expected to increase by about 25 percent in 2021 from 2020, stabilizing in 2021. A pass-through of 20 percent (13 percent in the first year and 7 percent in the second) would, thus, imply an increase in consumer food price inflation of about 3.2 percentage points and 1.75 percentage points on average in 2021 and 2022, respectively. An additional 1 percentage point to the 2021 global consumer food inflation could be added by the higher freight rates.

The impact, however, will vary by country. Consumers in emerging markets could experience even higher increases due to the higher dependency on food imports (e.g. countries in sub-Saharan Africa and the Middle East and North Africa). The pass-through from producer prices to consumer prices also tends to be larger for emerging markets. For low-income countries struggling from the pandemic, the effects of further food inflation could be dire and risk a backslide in efforts to eliminate hunger.

Emerging markets and low-income countries are also more vulnerable to food price shocks because consumers in these countries typically spend a relatively large proportion of their income on food. Finally, for emerging markets and developing economies an additional risk factor is the currency depreciation against the US dollar—possibly due to falling export and tourism revenues and net capital outflows. Since most food commodities are traded in US dollars, countries with weaker currencies have seen their food import bill increase.

And for more on this topic, our chart guy, Joseph Sullivan:

Global food inflation has now reached rates consistent with discontent boiling over into real trouble for governments. The last time year-over-year food inflation hovered near the 40 percent broached in the latest release of data was around March 2011, when large-scale protests first erupted in Syria. Those were part of the “Arab Spring” movement catalyzed only a few months before that, in December of 2010, by a Tunisian street vendor’s self-immolation amid frustrating living conditions. While the Arab Spring had many causes, the run-up in food prices certainly seems to have been one factor behind this complex phenomenon. Research has documented a robust link between food price increases and food-related unrest, and the prices of cereals — a type of food popular in the Middle East — had risen by a particularly large amount in the run-up to it . . .

Pension systems and low yield:

Jason Zweig in the Wall Street Journal:

Another problem PSERS [the Pennsylvania school pension fund] shares with many smaller investors is unrealistic expectations.

In mid-2009, the 10-year Treasury note yielded nearly 4%, whereas today it produces only a whisker more than 1.5% in income. Yet public pension plans have barely shaved their assumptions about how much their assets will earn.

In 2009, the typical pension system was reckoning on an 8% average annual future return. Even after 12 years of relentlessly falling interest rates, that assumption has dropped only slightly to 7%, according to the National Association of State Retirement Administrators.

PSERS is assuming it will get 7.25%. That’s roughly what it earned over the past decade—but much of that came from a bond market that now yields next to nothing . . .

What could go wrong?

Newsweek:

As temperatures hit triple digits during California’s heat wave last week, the state’s power grid operators encouraged residents to relieve pressure on the grid by charging their electric vehicles before the peak energy use times of day.

The California Independent System Operator (ISO), which oversees the grid, called upon Californians to conserve energy twice last week through the use of Flex Alerts, which ask residents to practice energy conservation on a voluntary basis. Charging electric vehicles before the time period covered by the alerts was included on a list of energy conservation tips the California ISO posted on Twitter, as was avoiding use of large appliances and turning off extra lights.

“Now is the perfect time to do a load of laundry,” the state’s Flex Alert Twitter account posted on June 18. “Remember to use major appliances, charge cars and devices before #FlexAlert begins at 6 p.m. today.”

Patty Monahan, the lead commissioner on transportation at the California Energy Commission, told Newsweek last month that the times of day Californians choose to charge their electric vehicles will be important in keeping the power grid balanced as reliance on electric vehicles grows.

A reminder, perhaps that consumers forced to rely on one form of energy supply may find themselves more vulnerable than they may now realize.

It’s also another reminder that the green-energy transformation is looking a lot like an exercise in spending billions to make our energy infrastructure less rather than more efficient.

Random Walk

Shrinkflation:

Bloomberg’s Stephen Mihm:

How will we know if inflation is making a comeback? Most economists are focused on the price of commodities, wages, and other basic goods and services. But history suggests they might want to keep an eye on a related phenomenon that often escapes notice: so-called “shrinkflation.”

This practice became increasingly common in the 1960s and 1970s, when manufacturers confronting runaway inflation tweaked packaging rather than hike prices. At first, the practice attracted relatively little notice: It’s difficult to discern changes in unit prices when they’re camouflaged in different-looking boxes and bags . . .

But:

As inflationary pressures rose over the course of the 1970s, manufacturers pursued a number of methods to pass along price increases. The most basic of these was so-called “downsizing” – same package, same price, fewer goods.

In late summer of 1974, for example, Woolworth’s offered a packet of pencils at its back-to-school sale for 99 cents – same price as the previous year. But as a sharp-eyed reporter at The New York Times observed, the packages only contained 24 pencils, six fewer than the previous year. The same strategy affected packets of construction paper (24 sheets, not 30) . . .

Gumball makers may have pulled of the most brazen act of shrinkflation. As the price of sugar climbed in the 1970s, they couldn’t easily raise prices – gumball machines were set up to accept a specific coin. And they couldn’t make the gumballs smaller – the dispensers couldn’t reliably handle any other size. So they created a hollow in the formerly solid gumball. Instead of sugar, kids got some air.

Brim Dark Decaf Coffee came up with a variation of that strategy by using a proprietary “puffing” technology to boost the volume of its coffee beans, allowing it to fill what had been a 13-ounce container of coffee with only 11.5 ounces. The company claimed that this alchemical process yielded a more flavorful coffee from fewer beans.

And now, a commercial break.

Back to Mihm:

In the past year, there have been increasing reports crafty manufacturers whittling away everything from sheets of toilet paper to servings of cat food. These have intensified in recent weeks.

If the trend continues, beware: This may signal that inflation, long dormant, may finally be resurgent.

— A.S.

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