What Biden's Infrastructure Plan Means for Spending
And taming the misguided inflation narrative
Happy Macro Monday!
Apologies for the delay in today’s article (and the lack of Friday’s) — as I write this I am currently 30,000 feet in the air, somewhere between California and Texas.
As Biden’s infrastructure plan made its way through the news last week, I thought it was a good time to talk about what’s actually in the plan and what its implications are, if passed.
On March 31st, 2021, the White House released a fact sheet on Joe Biden’s multi-trillion dollar infrastructure plan, formally known as the American Jobs Plan. Since then, I’ve seen a bit of discourse on how the plan will be funded (revenue/ raising taxes versus more deficit spending) and how the plan differs from recent relief packages.
The most recent relief package we’ve seen is the American Rescue Act, which I talked about here. While the American Rescue Act was targeted at providing pandemic relief and getting the country back on course, the American Jobs Plan asks that we “re-imagine a new economy” and rebuild a different America from the destruction caused by the COVID-19 pandemic.
“It [the American Jobs Plan] will invest in America in a way we have not invested since we built the interstate highways and won the Space Race—positioning the United States to lead in infrastructure and innovation once again.”
The estimated cost of the American Jobs Plan comes in at about $2.3 trillion, and coupled with it is the Made in America Tax Plan, which would be responsible for covering the full cost of the AJP within fifteen years, if passed. More on this below.
The Trajectory of America
Since the 1960s, domestic investment as a share of the economy (or GDP) has fallen by 40%. The following graph from FRED depicts the shares of government consumption expenditures and gross investment.
The plan offers intensive investment into infrastructure that we have not seen for several decades, and offers a mighty promise of investing “in America in a way we have not invested since we built the interstate highways and won the Space Race,” per the White House press release.
The plan also strays away from inert government investment (such as the default example of “monument building” etc.) and works towards creating real projects that will enhance economic growth and development.
In the official press release, it was also noted that while America remains the wealthiest country in the world, we rank 13th for quality of infrastructure. The goal of this plan is to simultaneously create millions of jobs and build up domestic infrastructure to give America the leading edge needed to out-perform China once again.
A bit about the deficit
In 2020, the federal government ran a deficit of $3.1 trillion, which was triple the deficit for 2020 and approximately 15.2% of GDP — its highest share since the mid-1940s.
The following graph depicts the federal deficit as a percent of GDP, from FRED.
Since 2008, U.S. debt has surged by 200% and remains high in the $20-trillions. This alone, however, does not invalidate the creation of additional programs. In times of crisis especially, we should expect to see debts rise as governments intervene, based on the current system of governance that we live in.
As I’ve mentioned in other articles, there are two main ways to fund large government projects; through revenues or via deficit spending.
The American Rescue Plan is a fiscal stimulus package financed by deficit spending. Deficit spending is any spending that exceeds revenues and the budget deficit, and is financed through borrowing as opposed to via taxation … There are a few ways in which governments can finance deficit spending, with one of these ways being through the sale of government securities and Treasury bonds. In addition, the funds can be minted through an expansion of the money supply.
Is the Economy Overheating?
While the deficit is growing at a rapid rate, it is not unexpected given the unusual circumstances surrounding the economy caused by the pandemic.
Again, unlike the American Recovery Act, the American Jobs Plan’s proposed funding mechanism is via raising revenue through increased taxation. While this will inevitably raise debts, there is a plan in place to cover its costs, that does not come form money printing.
A Breakdown of the American Jobs Plan
Spanning nearly 27 pages, the White House fact-sheet press release of the American Jobs Plan is pretty dense, so I’ve broken it down for all of you below. If passed, the plan would create 19 million jobs, with a large majority of those jobs not requiring a college degree.
The American Jobs Plan states three main goals:
Create millions of jobs
Rebuild the nation’s infrastructure
Give the United States an edge in order to out-perform China
In addition, there are various subsets of the plan dedicated to specific infrastructure projects. Key take-aways directly from the plan include:
Rebuilding clean drinking water infrastructure, a renewed electric grid, and high-speed broadband to all Americans
Modernization of homes, commercial buildings, schools, and federal buildings
Create caregiving jobs and raise wages and benefits for essential home care workers
Revitalize manufacturing, ensure products are made in America, and invest in innovation
Create good-paying union jobs and train Americans for jobs of the future
What stood out as most valuable to me was the distribution of high speed broadband to all Americans and pledge to revitalize manufacturing with made in America products. As I’ve mentioned in several talks over the past few months, giving Americans access to internet has become a primary concern as we transitioned from in person to virtual meetings for everything from elementary school to work. While many of us are afforded the luxury of having the web at our fingertips 24/7, there are still large parts of rural America (and the world) that are not so lucky — something many find easy to forget.
In addition to modernizing roads and ports, the plan includes the creation of 500,000 EV stations, only further accelerating the shift towards electric vehicles. A whopping $1 trillion of the proposal would be dedicated toward environmentally friendly policy meant to address climate change and promote clean energy.
The Made in America Tax Plan
At an enormous price tag of $2.3 trillion over the span of 8 years, the proposed financing of the plan comes from the Made in America Tax Plan, which (as mentioned above) seeks to raise revenue and pay down the $2.3 trillion over the span of 15 years.
The White House published a mighty claim that the tax plan would “ensure that corporations won’t be able to get away with paying little or no tax by shifting jobs and profits overseas. It will reward investment at home, stop profit shifting, and ensure other nations won’t gain a competitive advantage by becoming tax havens.” Perhaps a rather brute truth that I wish was more mainstream — corporate taxes are paid by real people.
A few notable provisions of the proposal, as reported by Pillsbury Law, are as follows:
Biden stays true to his pledge to not increase taxes on individuals earning less than $400,000 annually
A proposed 28% corporate income tax rate, up 7% from its current 21%
A 21% minimum tax on domestic corporations, calculated on a country-by-country basis (doubles the effective tax rate on global intangible low-taxed income)
Set international minimum taxes that would encourage a global corporate minimum income tax standard through multinational agreements
Incentivize domestic jobs through denying deductions for “offshoring” jobs with tax credits in support of “onshoring” jobs
Proposed 15% minimum takes on the “book income” of large corporations, although the term “large” remains undefined in the proposal
Eliminate preferences for fossil fuels
Increase IRS funding in order to “better” enforce initiatives.
Inflationary Expectations
It seems that in every macro-related Substack I find myself talking about inflation, yet again. This is becoming an increasingly hot topic as industries such as crypto take over, and many begin to inflation-fear-monger. While I agree with most of the sentiments and concerns coming out of this line of thought, I find it of most importance to never stray from the truth or exaggerations of it, no matter how appealing it may be.
That being said, I think it is a large deviation from the truth to speculate that this plan will result in money printing and inflation. Even if passed within the next few months, any inflation we may see will be resultant of increased demand and consumption as individuals begin to return to normal life and increase spending outside of the household.
In addition, it’s important to remember that regardless, deficit spending isn’t a new concept. The United States has had a bad habit of financing projects via its deficit for decades, and we haven’t seen things like hyperinflation occur. Even if this project were to be funded via deficit spending (which, again, it not the case as proposed) it is more than likely that this would not change.
Cryptocurrencies hold value in their own right, without a need to distort the truth or exaggerate the actual potential for the de-valuation of the dollar.
Thinking Rationally
Overall, I think there are a few exceptionally good pieces of this infrastructure plan (I can already see the “blink-twice if you’re okay” comments coming my way), such as bringing broadband to all Americans, creating jobs that won’t require a college degree, and incentivizing a faster switch to electric vehicles.
Whether or not the proposal will become law by the summer is uncertain, and whether or not all of these projects are sustainable is another story that we will have to watch unfold if the plan does, in fact, become law.
Since I've rambled on a bit from start to finish, I’ll leave you on one last point — while there are valid inflationary causes for concern elsewhere, as this plan currently stands, we should not fear that it will directly lead to money printing and a boost in the monetary base.
How you find the time to write all this astonishes me.
"Rebuilding clean drinking water infrastructure, a renewed electric grid, and high-speed broadband to all Americans" + Funding for schools are Far & away my favorite parts of it.
Do you think it stays as large as it is or do Reps get the EV Station spending cut out/reduced?