The Best and Worst of Biden’s Infrastructure Plan
(Bloomberg Opinion) -- President Joe Biden is preparing to lay out a plan to spend $2.3 trillion on improving the nation’s infrastructure, paid for by raising taxes on corporations, with the ink barely dry on this month’s $1.9 trillion pandemic relief package.
- Mohamed A. El-Erian: Infrastructure Plan Opens Way to More Sustainable Growth
- Noah Smith: It's Not Infrastructure; It's Reimagining the U.S. Economy
- Liam Denning: Tesla Isn’t the Biggest Winner From Biden’s EV Plan
- Tyler Cowen: Bring Back Supply-Side Economics
It's an admirably ambitious plan, but its sprawling character and scale carry big risks, too. Here are five things I’ll be focusing on.
- Any successful effort to improve the nation’s bridges, roads, public transit, ports, airports, tunnels and water systems should go hand-in-hand with reducing regulatory barriers. Carrying out a building project today requires compliance with a slew of environmental regulations, labor standards and authorizations by various government entities. The regulations can slow the pace of work to a crawl, and increase its costs. If Biden is serious about these investments, he will need to challenge members of his own Democratic Party on regulation.
- The administration is planning for eight years of spending, including $620 billion for transportation, doubling federal funding for public transit, and $650 billion for programs to provide services like high-speed broadband and clean, lead-free water. These are the right elements of a good infrastructure plan. The focus is on spending that will have a high social value with the goal of improving productivity and quality of life over the long haul. Notably, the goal is not to stimulate the economy in a Keynesian sense, with shovel-ready jobs. High-social-value infrastructure plans often work — for example, the interstate highway system has generated enormous economic and social returns. Infrastructure-as-stimulus plans seldom work because it takes too long for the spending to happen to help the economy over the short term. Biden is wise to focus on the former and abandon the latter.
- Biden wants to shower special treatment on the manufacturing sector, to the tune of $580 billion. This nod to economic populism stirs memories of the policy goals of former President Donald Trump. In a program billed as providing investments in the U.S. economic future, it is odd that over one-quarter of the spending seems designed to hold on to the jobs of the past. Some of this spending is geared toward competing with China. But what’s needed first is a comprehensive China strategy, not a windfall for the semiconductor industry.
- Politico reports that Biden will not rely on a wealth tax to pay for his spending programs. That is good news, as a wealth tax along the lines of one proposed by Senator Elizabeth Warren of Massachusetts would be an impractical, unethical and economically flawed way to generate revenue. Instead, the president appears ready to increase taxes on corporations, including setting a 21% minimum tax on global corporate earnings and raising the corporate income tax rate from 21%, where it has been since the 2017 tax law, to 28%. Rather than relying on corporate income taxes, Biden should have been more ambitious. A key goal of his infrastructure plan is to move the economy toward clean energy to fight climate change. So where is the carbon tax? Putting a price on carbon would lead households and businesses to use newer, cleaner technology for energy. Business leaders are open to the tax. Republican opposition has softened. Progressive Democrats, concerned that market-based solutions will be inadequate and inequitable, seem to be the major obstacle. The president should stand up to them. It’s refreshing that Biden wants to pay for the programs with tax revenue rather than by borrowing that would increase the deficit. But higher taxes will blunt the growth effects of the program. That’s reason to think more carefully about where the revenue will come from. Do we want less business income, or less pollution?
- The plan is almost comically broad. I’m all for spending $180 billion to upgrade research laboratories. Whether to spend more on in-home care for older Americans is a good debate to have. But let’s not call those proposals infrastructure programs.
And the balance of spending in this infrastructure proposal should be more heavily weighted toward … infrastructure. Biden wants to spend $400 billion — nearly 20% of the total cost of the bill — on improved in-home care for the elderly and people with disabilities, while only allocating $115 billion for roads and bridges.
Much of the debate about the infrastructure plans will focus on whether there is political space for another multi-trillion-dollar bill. I am worried about whether there is economic space. Much of the spending could occur in 2021 and 2022, and could be temporarily financed by additional deficits, even though Biden wants to pay for all if it with higher taxes eventually.
Can the economy handle a temporary deficit boost this year and next? That will depend on whether the $1.9 trillion stimulus law Biden just signed pushes the economy too hard, leading to consumer price inflation, higher interest rates and financial instability.
I am worried that it will. And if it does, the president may find less political support for a program this expensive.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute. He is the author of “The American Dream Is Not Dead: (But Populism Could Kill It).”
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