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.