Will Infrastructure Spending Supersize Growth?
If you didn’t have the time or the energy to dive into the Biden Administration’s $2.3 trillion American Jobs Plan (AJP), fear not, I have you covered.
The plan seeks “to reimagine and rebuild a new economy” by deploying government money in four areas:
Classic Infrastructure: Roads, Rails, Bridges and Transit Systems ($621B)
Home Economy/Quality of Life: Water, Schools, Broadband, Affordable Housing $650B
Caregiving Economy: To Help the Nation’s Elderly and Disabled. ($400B)
Workplace Economy: R&D ($180B), Manufacturing and Small Biz ($300B), Workforce Development ($100B)
The spending would be spread over 8 years but would be paid for over 15 years with higher taxes on corporations. Here’s how:
The corporate tax rate would increase to 28%, from 21% (The rate had been 35% before the 2017 tax law slashed it to 21)
The AJP would impose a 15% minimum tax on large companies (those with income above $2 billion)
AJP would double the tax rate on companies’ foreign earnings from 10.5% to 21%
As part of the plan, the Administration would establish a global minimum tax to stop companies from taking advantage of lower tax rates abroad. Treasury Secretary Yellen said the goal is to stop the “race to the bottom” that has prompted some countries to lower their tax rates to attract companies to establish businesses locally.
The rationale for infrastructure spending is that the country needs an upgrade to many of its systems. The White House plan notes that “public domestic investment as a share of the economy has fallen by more than 40 percent since the 1960s,” which is why the wealthiest country in the world ranks 13th when it comes to the overall quality of our infrastructure.
The AJP makes the leap from physical infrastructure to “human infrastructure” when it adds in the caregiving economy. Human infrastructure is a term that has been coined to cover government spending on health, education, and nutrition and the best example of it was the post-war GI Bill, which helped millions of WWII veterans access college or trade schools, provided low-interest mortgages, and established medical care and hospitals for veterans.
In addition to the idea that the plan is a mega-catch up to make up for the lack of investment over the past decades, the other promise of the AJP is that “it will create millions of good jobs.” It may add a bunch of jobs, but it is important to stress that the labor market is likely to recover its former glory with or without infrastructure spending.
According to Moody’s, the AJP would help the labor market return to is pre-pandemic level by early 2023, which is “not much different than without the plan.” The reason is that it would likely take a couple of years for government spending to boost growth. Additionally, some economists have argued that federal infrastructure investments deliver just a portion of the economic returns that private sector investments deliver, 5 percent, according to the Tax Foundation, 7 percent according to Moody’s, versus 10 percent in the private sector.
Economists believe that the government’s investments in infrastructure will add more juice to growth over the next few years, but estimates are all over the place for just how much of a boost the plan in its current form would provide.
Meanwhile, the economy is set to explode higher this year, without accounting for the AJP. In its most recent outlook, the IMF made “a sizable upgrade for the United States (1.3 percentage points),” predicting growth to come in at 6.4 percent this year. That comes after a 3.5 percent contraction in 2020. The IMF also upgraded its view on global growth, which is expected to be 6 percent in 2021 after the historic contraction of -3.3 percent in 2020.
Global growth has accelerated due to the massive $16 trillion in government spending worldwide, which “prevented far worse outcomes.” The IMF’s estimates suggest “last year’s severe collapse could have been three times worse had it not been for such support.” Yellen chimed in that central bankers and treasury officials should “be careful to learn the lessons of the financial crisis, which is: ‘Don’t withdraw support too quickly, we would encourage all those developed countries that have the capacity, to continue to support a global recovery for the sake of the growth in the entire global economy.”