Infrastructure Plan Opens Way to More Sustainable Growth

While economists will spend weeks calculating the detailed impact of President Joe Biden’s wide-ranging $2.3 trillion infrastructure initiative, two big takeaways seem clear based on what administration officials have signaled already. First, the initiative should please those hoping that the U.S. economy that emerges from the pandemic is stronger and fairer, both sustainably. Second, it is likely to be less pleasing to shareholders who have become used to windfall cash handouts to companies being passed on to them through higher dividend payments and stock buybacks.

President Biden’s infrastructure approach seeks to make human, physical and technological capital more productive. The traditional emphasis on basic infrastructure such as roads and airports is supplemented by measures to unleash the productivity of a much wider spectrum of the American population and to enhance the use of technology.

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This translates into a significant public investment push that has the potential to “crowd in” additional private sector investment, delivering a more responsive supply side built for the world of tomorrow rather than the one of the past. If the details are designed and executed well, it is an approach that would readily supplement the demand stimulus that has already been injected into the economy and help bolster growth.

To alleviate concerns about both an additional surge in government debt and the disruption to financial markets that could arise, the Biden administration is said to propose increasing corporate taxes in two ways: raising the domestic rate to 26% from 21% and increasing the overseas rate to 21% from 13%. The resulting impact on productive corporate activities should be contained by what has been strong multiyear growth in profits and profitability, in absolute terms and relative to the share of labor. Moreover, most companies should be able to navigate the cash hit by limiting stock buybacks and dividend payments rather than curtailing investments. Finally, the potential impact on demand would be less than the alternative of a generalized increase in household taxation.

By reducing the free cash flow that could end up in immediate payments to shareholders, the tax measures intended to contain the rise in debt could cause some financial market discomfort. This would come at a time of multiplying signals of excessive risk-taking and three financial near-accidents just in the first quarter of 2021. But rather than argue against Biden’s approach, this highlights the need to make progress on all three elements of the long-needed economic policy transition, especially given the need to also alleviate concerns about inflation: Do more on pro-productivity/growth measures, which the infrastructure initiative does; gingerly moderate protracted monetary policy stimulus, whose limited benefit to the economy is already offset by the high and growing risks of irresponsible risk-taking in markets and misallocating resources economy-wide; and enhance measures at both the macro and micro levels to reduce the mounting threat of financial instability.

Economists and politicians from both sides of the U.S. political spectrum have long advocated a revamping of infrastructure. Based on what we know so far, President Biden’s approach has the right construct that is underpinned by the clear objective of ensuring a stronger and fairer economy. If implemented well, including being part of a wider policy rebalancing, it would supplement the existing demand stimulus by bringing into a play a second strong engine to power high, inclusive and sustainable growth.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is president of Queens’ College, Cambridge; chief economic adviser at Allianz SE, the parent company of Pimco where he served as CEO and co-CIO; and chair of Gramercy Fund Management. His books include "The Only Game in Town" and "When Markets Collide."

©2021 Bloomberg L.P.

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