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End result of Biden’s ambitious infrastructure proposal may underwhelm

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By Jeremy Pafford on 01-Apr-2021

Reinvestment in infrastructure has finally made it to centre stage of US political discussions, but prepare to be underwhelmed by what ultimately results from what will be a partisan debate over a subject that on its surface should not be contentious.

This blog previously has expressed optimism that a large investment in US infrastructure renewal stands its best chance in decades of occurring this year, as it seemingly would be the one massive spending bill that could garner bipartisan support.

Back in October, the blog posited that if Joseph Biden won the 2020 election and Democrats gained control of Congress, then “you can pretty much take to the bank that an infrastructure bill will be passed.”

While the election caveats did occur, do not go to the bank just yet.

The need for reinvestment in US infrastructure remains, and it would be a boon for the chemical industry and help optimise supply chains. However, substantial skepticism is in order for the $2tr+ jobs and infrastructure proposal unveiled this week, the majority of which would go to building and repairs of roads, bridges, ports, housing and manufacturing, as well as upgrades to the electrical grid and water systems.

Part of that is the price tag, which comes in higher than the $1.3tr, 10-year plan Biden proposed during his presidential campaign. Biden and his fellow Democrats just enacted a $1.9tr Covid-19 relief bill that included stimulus checks for the majority of Americans, as well as additional unemployment and vaccine aid funding. That comes on top of the $2.2tr package passed in March 2020 and a $900bn package passed in December 2020.

That is $5.0tr in relief passed over three bills, and how that relief would be paid took a backseat as getting aid to citizens took precedence. The $2tr+ infrastructure proposal is viewed differently by Biden and the Democrats as well as their Republican counterparts. It is a long-term government investment plan that requires a method of payment, and therein lies the point of uncertainty that has this blog pessimistic about the proposal gaining passage as is.

White House officials are on record as saying that the proposal will be funded via tax increases on corporations and higher-income Americans, with Biden’s team maintaining that those making less than $400,000/year would not have their taxes hiked.

Democrats’ majorities in the House and Senate mean they could pass without one Republican vote an infrastructure bill funded by tax hikes, but that is unlikely because there are a host of moderate Democrats who serve conservative-leaning districts or states where their voting to raise taxes could put their re-election hopes in serious jeopardy.

Understand that, while Democrats have control of Congress, the margins by which they control both houses are razor thin, and some centrist Democrats large tax increases to pay for infrastructure. Lose a Democratic vote here or there and you need a Republican vote or two for passage. Good luck with that, as Republicans are pretty much unified against tax increases or rolling back the tax cuts enacted under former President Donald Trump in 2017.

For the infrastructure bill to go anywhere, Democrats will need to get creative to find funding that is politically amenable for its party members, with Republican support a bonus. Transportation Secretary Pete Buttigieg has floated paying for road improvements not with an increase in the federal gasoline tax but with mileage tax that would charge motorists for the miles they drive over a period of time. That idea did not make it into the current infrastructure proposal, and regardless of the debatable merits and demerits of a mileage tax, that kind of creative thinking is needed to advance the conversation beyond adjusting income tax and corporate tax rates to fund government spending or tax breaks.

Another option for paying for infrastructure investments would be government spending cuts. While those likely could garner some support from cut-government-waste Republicans, it might lose more Democrat votes than it gains from the other side, as cutting government spending after having passed trillions in economic stimulus legislation is incongruous and likely would lead to job cuts during a time when unemployment remains high amid the ongoing pandemic.

As a former long-time member of the US Senate, Biden fashions himself as a skilled dealmaker who can reach across the aisle to build consensus. He will have to do that within his own party first if his ambitious infrastructure bill is to cross the finish line, and it is the view here that infrastructure legislation will make it to his desk for signing at some point this year. What could eventually emerge, however, may be much smaller in scope – perhaps only in the billions of dollars – and not linked with any significant tax increases. That still could be good for the chemical industry, but likely will not be as impactful on overall economic growth as some are hoping.

The road ahead for US infrastructure investment is riddled with potholes. The fix may be a few shovels of gravel and not the brand new road so many parts of this country need.

Disclaimer: The views in this blogpost should in no shape or form be taken as actual forecasts and are my personal views only.