A Revival in US Investment Spending: Implications of the Biden Infrastructure Plan

Third Quarter 2021 | By Juhi Dhawan, Phd, Macro Strategist Global Macro Analysis Domestic Market Perspectives

While final dollar amounts are still unknown, a trillion-dollar deal to rebuild the nation's infrastructure seems closer than ever as Congress and the Biden administration hammer out the details.

What You Need To Know

The trillions Congress may spend on infrastructure by year end could sustain nominal US growth for several years.
About $650 billion in maintenance and transit projects are the focus of physical infrastructure proposals.
The Biden administration's "human infrastructure" proposals include a host of expenditures designed to support broad economic participation.

In March, US President Joe Biden proposed roughly $4 trillion in infrastructure spending over eight years. More recently, a nearly $600 billion bipartisan bill focused primarily on physical infrastructure spending gained some support. Meanwhile, on the progressive Democratic side, US 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.

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At the highest level, I would describe the plans as yet another signal of increased appetite for government spending in the US. 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 as much as $2.5 trillion of spending will pass Congress by year end and it may help sustain nominal growth in the US for several years. This is especially important in the context of the post-Global-Financial-Crisis (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, 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 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

Spending Area	American Jobs Plan ($)	Infrastructure Agreement ($)
Roads, bridges and major projects	154 billion	109 billion
Passenger and freight rail	74 billion	66 billion
Public transit	77 billion	49 billion
Airports	25 billion	25 billion
Infrastructure financing authority	—	20 billion
Ports and waterways	17 billion	16 billion
Electric vehicles	157 billion	15 billion
Road safety	19 billion	11 billion
Reconnecting communities	24 billion	1 billion
Subtotal, Transportation Infrastructure	546 billion	312 billion

Power infrastructure	82 billion	73 billion
Broadband	100 billion	65 billion
Water infrastructure (including lead pipes)	111 billion	55 billion
Resiliency	47 billion	47 billion
Orphan wells/abandoned mines	16 billion	16 billion
Superfund	—	5 billion
Western water storage	3 billion	5 billion
Subtotal, Other core infrastructure	358 billion	266 billion

Total, Common Areas	904 billion	579 billion

Long-term care (home-based services)	400 billion	–
Tax credits (mostly clean energy)	424 billion	–
Housing, schools, and buildings	326 billion	–
R&D, manufacturing, and other spending	566 billion	–
Subtotal, Additional Spending	1.7 trillion	–

Total	2.6 trillion	579 billion

Source: Committee for a Responsible Federal Budget.

2. Offering Technological Innovation a Helping Hand

The Biden plan includes $100 billion to expand high-speed broadband ($65 billion in the bipartisan plan), primarily in 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—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 could create inclusive growth and help those who have lost their jobs to reskill and find gainful employment.

The education and workforce-development proposals could have a medium-term impact. They could 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 (which is among the lowest in the developed world), and 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's 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

	10-year estimate
Education	506 billion
Free universal pre-kindergarten for all three- and four-year-olds	200 billion
Tuition-free two-year community college	109 billion
Increase Pell Grants for low-income students	80 billion
Invest in evidence-based strategies to strengthen completion and retention rates at community colleges and institutions that serve students from disadvantaged communities	62 billion
Provide two years of subsidized tuition for students from families earning less than $125,000 enrolled in a four-year HBCU, TCU, or MSI	39 billion
Funding to train, equip, and diversify American teachers	9 billion
Expand existing institutional aid grants to HBCUs, TCU, and MSIs	5 billion
Provide funds for building a pipeline of skilled healthcare workers with graduate degrees	2 billion

Families and Children	495 billion
Make childcare affordable, invest in high-quality care, and fund training for childcare providers	225 billion
Create a national comprehensive paid family- and medical-leave program	225 billion
Expand summer EBT to all eligible children nationwide	25 billion
Expand free meals for children in high-poverty districts	17 billion
Launch a healthy-foods incentive demonstration program	1 billion
Facilitate re-entry for formerly incarcerated individuals through SNAP eligibility	Unknown
Work with Congress to automatically adjust length and size of unemployment benefits based on economic conditions	NA

Expanded Tax-Credit Extensions	855 billion
Extend the Child Tax Credit expansions from the American Rescue Plan through 2025 and permanently make the Child Tax Credit fully refundable	450 billion*
Extend tax credits for Affordable Care Act premium payments enacted in the American Rescue Plan	200 billion*
Make the American Rescue Plan EITC expansion for childless workers permanent	125 billion*
Make permanent the temporary Child and Dependent Care Tax Credit expansion enacted in the American Rescue Plan	80 billion*

Possible Interactions and Estimating Differences	Up to ~$50 billion

Subtotal, Spending and Tax Credits	~$1.8 trillion

^* Estimate from the Committee for a Responsible Federal Budget. Source: Committee for a Responsible Federal Budget.

4. Giving "Made in America" a Boost

The Biden plan sets aside $180 billion for technology research and development, including $50 billion to help boost US semiconductor manufacturing. 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's 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
Global manufacturing capacity by location (%)

Source: BCG report with the Semiconductor Industry Association, "Turning the Tide for Semiconductor Manufacturing in the US," 9/20.

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 isn't 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 some funding will be allocated to these areas if 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. It 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
US renewable consumption is overcoming coal after 100+ years

Source: EIA Monthly Energy Outlook, 3/21. In quadrillion British thermal units.

Evaluating the Merits and Risks

As large as the dollar amounts in Biden’s plan are (and recognizing that the final totals are 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 Recovery Plan. State and local governments fund more than 75% of traditional infrastructure, and thanks to the meaningful grants offered under the American Recovery Plan ($350 billion), more such spending is likely through this channel.

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. To put that in perspective, public spending on infrastructure fell 8% between 2003 and 2017, driven by a 28% decline in capital investment. It's 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 infrastructure plan, I’d note that the spending is spread over eight years and the associated tax proposals (to help pay for the spending) are spread over 15 years. That means the plan is likely to have a more stimulative effect up front, perhaps providing a lift in growth of 50–75 basis points³ 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.

The broad infrastructure plan risks driving inflation higher once full employment has been reached.

Additionally, as part of the persistent increase in federal spending that we'd see, the broad infrastructure plan risks driving inflation higher once full employment has been reached. As companies, especially multinationals, are asked to pay their “fair share,” higher taxes will dent corporate profits. I'm expecting some increases in the corporate tax rate, the 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: Given the large dollar amounts at play, the risk of poor investments is worth considering. Not to mention the fact that infrastructure development will also drive up demand for oil in the next few years and potentially contribute to an oil price spike—just as focus is shifting to decarbonization and reduced fossil fuel use. Keeping a close eye on the design of the proposal, 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.

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¹ Source: American Society of Civil Engineers, “America’s Infrastructure Report Card,” 2021

² Source: Business Roundtable, “Delivering for America,” January 2019

³ A basis point is a unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indices, and the yield of a fixed-income security.

The views expressed here are those of the author. They should not be construed as investment advice. They are based on available information and are subject to change without notice. Portfolio positioning is at the discretion of the individual portfolio management teams; individual portfolio management teams, and different fund sub-advisers, may hold different views and may make different investment decisions for different clients or portfolios. This material and/or its contents are current as of the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management or Hartford Funds.

Important Risks: Investing involves risk, including the possible loss of principal.

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Juhi Dhawan, Phd

Macro Strategist