Evaluating the merits and risks
As large as the dollar amounts in these plans are (and recognizing that the final totals are very likely to be lower), I’ve been asked by some whether the proposed spend is large enough to reverse the effects of the country’s long decline in infrastructure investment. My response is that this spending will come on top of substantial funding for state and local governments in Biden’s already enacted American Rescue Plan. State and local governments fund more than 75% of traditional infrastructure, and thanks to the meaningful grants offered under the American Rescue Plan ($350 billion), more such spending is likely through this channel. (It’s also worth noting that the bipartisan bill is in addition to the surface transportation bill, which includes funding for transit, rail, and other areas of physical infrastructure and is still making its way through Congress.)
Importantly, the kind of infrastructure cutbacks we saw after the last recession are less likely this time around, given a stronger revenue picture and more help from the federal level. For perspective, public spending on infrastructure fell 8% between 2003 and 2017, driven by a 28% decline in capital investment. It is also possible that public-private partnerships will be encouraged, enabling private companies to augment the government’s infrastructure funding, especially as the transition to a lower-carbon economy ensues.
In terms of the overall economic impact of the Biden plans, I’d note that the spending is front loaded over a shorter period and the associated tax proposals (to help pay for the spending) are spread over a longer period. That means the plans are likely to have a more stimulative effect up front, perhaps providing a lift in growth of 50 bps – 75 bps over the next few years (and alleviating concerns of a fiscal cliff). Higher growth, in turn, will put upward pressure on interest rates. If designed well, these investments should also raise US productivity over time.
I would note that as part of the persistent increase in federal spending that we would see, the infrastructure plans risk driving inflation higher once full employment has been reached. In addition, as companies, especially multinationals, are asked to pay their “fair share,” higher taxes will dent corporate profits. I am expecting some increases in the corporate tax rate, GILTI (global intangibles tax rate), and the highest personal income tax rates. An increase in the capital gains rate is also possible.
And then there are what I’d classify as the unexpected outcomes, such as the risk of poor investments given the large dollar amounts at play or the fact that infrastructure development will drive up demand for oil in the next few years — just as the focus is shifting to decarbonization and reduced fossil fuel use — and potentially contribute to an oil price spike. Keeping a close eye on the design of the proposals, including earmarks for specific projects, will be important in the coming months.