10 min read
US infrastructure - $2.3 trillion is not enough
Last week the White House released details of its long-awaited infrastructure spending plan, to be known as the American Jobs Plan (AJP). When rumours first started to circulate about the plan it was thought it would be worth around $1 trillion. However, last week’s announcement outlines proposals for spending $2.3 trillion over the next eight years, equivalent to about 1% of GDP per year or about 10.5% of 2020 nominal US GDP. For reference and to give a sense of scale, the Congressional Budget Office’s latest projections from February 2021 anticipate spending about $6.4 trillion and $4.5 trillion on defence and Medicaid respectively over the next eight years. In this Macro Flash Note, Daniel Murray summarises the main elements of the AJP and assesses whether it is enough to address America’s infrastructure needs.
The main points of the AJP are as shown in Table 1.
Table 1. American Jobs Plan
The plan includes proposed tax hikes and changes that will raise over $2 trillion over the next 15 years, thereby fully funding the spending increases:
- Raise the corporate tax rate to 28% from 21%
- Discourage offshoring / strengthen Global Minimum Tax for US Multinationals and raise the rate from 10.5% to 21%
- Discourage tax inversions and the use of tax havens
- Eliminate tax deductions for offshoring jobs and credit expenses for onshoring
- Repeal the Intellectual Property tax deduction loophole on Foreign Derived Intangible Income
- Minimum 15% tax on corporations' book income (reported profits)
- Eliminate tax preferences for fossil fuels
- Ensure polluting companies pay
- Ramp up enforcement to ensure corporations pay appropriate taxes and reduce tax evasion
The tax increases are important as they should make it easier to pass much of the bill via the Budget Reconciliation process that requires only 50 senate votes plus the Vice-President to pass, thereby eliminating the possibility of a filibuster.1
In justifying this spending, the Fact Sheet notes that:
“After decades of disinvestment, our roads, bridges, and water systems are crumbling. Our electric grid is vulnerable to catastrophic outages. Too many lack access to affordable, high-speed Internet and to quality housing. The past year has led to job losses and threatened economic security, eroding more than 30 years of progress in women’s labor force participation. It has unmasked the fragility of our caregiving infrastructure. And, our nation is falling behind its biggest competitors on research and development (R&D), manufacturing, and training.”
$2.3 trillion dollars is a lot of money, but will it be enough to address the chronic underinvestment of the previous decades highlighted in the Fact Sheet?
To answer this question, it is convenient to reference the 2021 Report Card for America’s Infrastructure produced by the American Society of Civil Engineers (ASCE).2 The 172-page Report Card provides a comprehensive overview of the state of America’s infrastructure, including a grading system. A grade of B is considered a “state of good repair”. The report estimates how much investment is needed to raise each section to a B grade over 10 years.
A summary of the report’s findings is shown in Table 2.
Table 2. Existing US Infrastructure and Investment Needs
In total, the report grades America’s infrastructure at a C- with only one element rated a B and one other a B-. The report estimates that:
- 43% of public roads are in poor or mediocre condition, with traffic congestion costing road users $166 billion per year.
- 39% of commuter rail locomotives and rail cars are past their useful life, as are 31% of light rail vehicles.
- 45,000 bridges are in poor condition
- 45% of the population lives or works behind high or very high-risk levees of which 80% have at least one performance concern
- Power outages cost US households between $28 billion and $169 billion each year.
- 56% of intermodal connector pavements at ports – the roads that connect the ports to the main highway system – are in poor or mediocre condition
These numbers demonstrate that there is a real future cost to today’s underinvestment. If people are unable to commute easily and safely to and from work and business are unable to move goods around the country economic growth will be impeded.
The table identifies about $6 trillion dollars of needed US infrastructure investment over the next 10 years of which around $3.4 trillion is currently funded. That leaves a funding gap of about $2.6 trillion. Therefore, whilst the $2.3 trillion proposed in the AJP is indeed a significant sum, when viewed in the context of the ASCE’s estimated funding gap it appears barely sufficient.
Furthermore, not all elements of the AJP are fully aligned with the deficient infrastructure needs identified in the ASCE’s 2021 Report Card. For instance, the Report Card estimates a combined funding gap of around $1.35 trillion in surface transportation, airports, inland waterways and marine ports whereas the AJP provisions only $621 billion for investment in transportation; the Report Card identifies a funding gap of $380 billion for schools and the AJP invests only $137 billion in schools and early learning facilities. And various elements of the AJP are not directly targeted at infrastructure, instead seeking to improve job prospects and medical care, support small businesses or encourage R&D. Taking these discrepancies into account means the difference between the infrastructure Funding Gap identified by the ASCE and the infrastructure spending proposed in the AJP is about $1.6 trillion.3
In conclusion, the $2.3 trillion AJP represents significant proposed investment in US infrastructure and the US labour force that should further help to support the US economy in its recovery from the coronavirus pandemic. Furthermore, the long-term nature of the plan will go some way to reversing decades of underinvestment in the US economy which in turn will help improve productivity trends and raise productive capacity. However, although it is a large number, estimates suggest it falls a good distance short of what is needed to raise the quality of US infrastructure back up to a generally good standard. This is before the bill is subject to political horse-trading that may see its contents watered down. The AJP is therefore a good start but more needs to be done.
1 Most legislation requires 60 Senate votes to pass – a super-majority. The Budget Reconciliation process replaces the need for a super-majority with a simple majority, although it is subject to certain rules and can only be used a limited number of times each year.
3 Another discrepancy relates to a difference in time scale. The ASCE’s Report Card references infrastructure needs over 10 years whereas the AJP is an 8 year plan. If the numbers are applied linearly, this reduces the difference between the ASCE’s funding gap and the AJP a little although the overall conclusions are unchanged.