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A revival in US investment spending: Implications of the Biden infrastructure plan

US Macro Strategist Juhi Dhawan discusses six key themes in the US infrastructure proposals, from shovel-ready projects to modernization of the power grid, and considers the broad economic impact and potential for unintended consequences.

The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.

In March, US President Joe Biden proposed roughly $4 trillion in infrastructure spending over eight years. More recently, a nearly $550 billion bipartisan bill focused primarily on physical infrastructure spending gained support. Meanwhile, on the progressive Democratic side, Senator Bernie Sanders proposed $6 trillion in spending. In this note, I’ll highlight some of the key themes in the proposals related to physical, technological, and human infrastructure.

At the highest level, I would describe the plans as yet another signal of increased appetite for government spending in the US (see my recent note on mounting US debt and the risk of default). While there is a wide range of potential outcomes in terms of the final dollar amounts — given the Democrats’ slim majority in Congress and the complexity of the plans — my expectation is that about $2 trillion – $2.5 trillion of spending will pass Congress by year end and that it will help sustain nominal growth in the US for several years. This is especially important in the context of the post-GFC environment, in which growth has been anemic and has tended to falter in the face of external shocks.

Infrastructure, by its nature, is linked to boosting both immediate economic growth (via investment spending, job creation, and earnings gains) and longer-term growth (by adding productivity-enhancing capacity, generating spillovers from research and development, improving education, and increasing connectivity via broadband access). At the same time, as I’ll discuss, investors will need to consider the impact of the tax hikes required to pay for the spending, as well as some potential unintended consequences of the plans.

Key themes to keep an eye on

1. Funding shovel-ready projects with more immediate impact — Maintenance and transit projects are the focus of the physical infrastructure proposals, with about $650 billion earmarked for highways, transit ports, airports, water and sewer systems, and other needs in the original Biden proposal (the American Jobs Plan) and somewhat less in the bipartisan plan (Figure 1). Public infrastructure spending in the US has been on the decline for decades, leaving a funding gap of more than $2.5 trillion by one estimate.1 From an employment and growth perspective, these shovel-ready projects can have a relatively rapid impact. Their full impact lies in the medium term. According to a recent study, a total of $737 billion in surface transportation over 10 years would add 1.1 million jobs by 2028.2 Every additional dollar invested would create $3.70 in economic growth over 20 years, adding to the productive capacity of the US economy.

FIGURE 1

Focus on the physical: How the Biden and bipartisan plans compare

2. Offering technological innovation a helping hand — The original Biden plan includes $100 billion to expand high-speed broadband, while the bipartisan plan includes $65 billion. This is primarily for rural areas of the country where companies don’t have the financial incentive to make the investment themselves. In this case, the economic payoff will be more long term, but for the Biden administration it’s about supporting grass-roots change — and particularly now that the pandemic has made the need for broad-based digital connectivity an obvious imperative. The Biden plan would also lift technology research and development spending (more on this in point 4 below).

3. Supporting growth across the economic spectrum — The Biden “human infrastructure” proposal (the American Families Plan, Figure 2) includes a host of expenditures aimed at supporting broad economic participation and thereby boosting growth. Among the largest of these are proposals to extend the expansion of the child tax credit that was part of the American Rescue Plan ($450 billion) and to provide pre-kindergarten and two years of community college at no cost ($309 billon). Some 40 million American families began benefiting from the child tax credit expansion in mid-July, putting additional discretionary dollars in the pockets of those at the lowest income level. This increase of 0.5% in spending power for those with a high marginal propensity to consume could offset some of the drop-off in fiscal support when enhanced unemployment benefit payments expire in September.

The education and workforce development proposals will have a medium-term impact. They can create inclusive growth and help those who have lost their jobs to reskill and find gainful employment. This funding could be the start of an increased focus on lifelong learning and a more fundamental shift in education to address skills mismatches — a likely factor behind the record job openings currently not being filled.

One of the key benefits of the human infrastructure proposals may be an increase in the US labor-force participation rate (among the lowest in the developed world), which, as I wrote last year, could eventually lead to higher growth in the economy. Improved access to childcare and paid leave could help close the gap in labor force participation rates between the US and other developed nations. Finding a path to citizenship for undocumented immigrants and expanding work visas could also boost the labor supply, although support for these proposals is varied.

It is important to note that while there is bipartisan support for physical infrastructure, human infrastructure is solely backed by the Democrats, and the range of asks in the plan reflects disparate priorities within the party. These divides risk disagreements and delays in the passage of a bill, putting the likely timing of a resolution in the fourth quarter of this year. There is also an ongoing discussion about expanding Medicare, another key Democratic objective, although the chances of widespread support for such a move are less clear.

FIGURE 2

Human infrastructure spending in Biden's American Families Plan

4. Giving “made in America” a boost — The Biden plan called for setting aside $180 billion for technology research and development, including $50 billion to help increase US semiconductor manufacturing. While it is unclear how much will ultimately be pushed through, there is a desire to give domestic manufacturing a boost. The country’s share of global semiconductor manufacturing capacity has fallen from 37% in 1990 to just 10% today (Figure 3). In the coming decade, the US is on track to account for just 6% of incremental new capacity. By offering incentives, the government can beef up the country’s share for strategic reasons, including reviving domestic manufacturing, which has been weak since the GFC, building more resilience into supply chains, and reducing reliance on China. It is conceivable that innovation could get a boost if these programs are designed well.

FIGURE 3

Growth in US manufacturing capacity has been outpaced by Asian rivals

5. Building up the housing supply — The lack of supply in housing has been forcing prices higher and making it harder for many young Americans to buy a home. The original Biden plan includes $300 billion for housing, schools, and buildings. While there is not much clarity yet about how this money would be allocated, this is an important area to monitor as housing is the single largest budgetary item for most families. If the plan is enacted, we could see the supply of housing rise and prices start to moderate. Some proposals on the table would expand tax credits to incentivize construction and rehabilitation of affordable housing, as well as investments in affordable rental housing.

6. Paving the path to a lower-carbon economy — One of the key differences between Biden’s American Jobs Plan and the bipartisan proposal is the amount allocated to climate-related infrastructure. Since climate change is a priority for the Biden administration, I expect that some funding will be allocated to these areas if the Democrats go it alone or fund a second bill via reconciliation.

As the world gradually consumes more electricity from renewable sources (and uses more of that electricity for electric vehicles and other new technologies), the power grid will need to be modernized. The Biden plan includes $82 billion to invest in this key phase of the energy transition, while the infrastructure plan includes $73 billion. The Biden plan also proposes an extension of many tax credits that support the renewables industry, in an effort to accelerate the transition to a lower-carbon economy (see Figure 4). Public dollars in clean energy, electric vehicle infrastructure, power grid improvements, and clean manufacturing are all part of the Biden administration’s commitment to steer the economy toward less reliance on fossil fuels.

FIGURE 4

Reaching an inflection point on US energy production sources

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 (my colleagues and I wrote about the rising risk of inflation in a recent paper). 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.

Conclusion

While President Biden’s first legislative accomplishment, the American Rescue Plan, was focused on helping Americans weather the pandemic and getting the economy back on track, his infrastructure proposals are geared toward driving longer-term growth. The plans could lift investment spending, shore up the poorest households, and accelerate the transition to a lower-carbon economy. Workforce development, expanded childcare, education, and a focus on technological innovation could improve productivity in the medium term, helping to lift the US economy away from deflationary forces and toward higher nominal growth and a more equitable income picture.

1Source: American Society of Civil Engineers, “America’s Infrastructure Report Card,” 2021
2Source: Business Roundtable, “Delivering for America,” January 2019

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