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Biden's Infrastructure Package Is a Bridge Too Far
By Robert Krol
“The American Jobs Plan” proposed last week by the Biden administration is a very large ($2.3 trillion over eight years), ambitious and complex proposal. Much of it is also misguided and unnecessary.
To begin with, the emphasis on job creation is odd. Doesn’t the administration remember that the unemployment rate was only 3.6% right before the pandemic? The country had experienced continued employment growth since 2010. This was even true for the manufacturing sector. In addition, wage growth among lower-wage earners had accelerated and was increasing faster than growth among high-wage earners. The U.S. labor market was not the basket case implied by the plan.
Another flaw in the plan involves its considerable confidence in the government’s ability to control large swaths of the economy. Simply increasing funding to government agencies and programs often fails to produce the desired outcomes. Is there the manpower and technology available to implement the policies? History shows that in a large, geographically heterogeneous country the central management of big, complex programs is often very difficult.
For examples look no further than the most recent stimulus law. For instance, the American Rescue Plan Act allocated $2 billion to county governments around the country that do not exist. In another example, during the COVID-19 recession, unemployment benefit fraud in California equaled $11.4 billion, about 10% of claims, according to state officials. Another 17% of claims are still being investigated. These examples illustrate the difficulty of trying to run the U.S. economy from Washington, or even from state capitals.
Another problem with the new Biden plan is that it defines infrastructure very broadly. As a result, it is poorly focused. It proposes expanding long-term care within Medicaid. This may be needed, but it is not infrastructure, nor is it a one-time expenditure. The $400 billion included to expand care for aging Americans and the disabled is but a down payment on this expanded entitlement. Once again, this may be needed, but it is not infrastructure.
Meanwhile, the proposal contains something for everyone, except future taxpayers. The president wants to allocate $52 billion for investment in manufacturing, as if manufacturers do not have access to capital in global financial markets. Which businesses will get these funds? Based on past federal efforts to distribute money to the private sector, we know that political factors will ultimately play a role in these decisions—such as money being directed to districts with close elections or to states represented by powerful members of Congress.
Meanwhile, Biden seems to want to continue former President Trump’s protectionist “Buy American” policies. Under the proposal, all materials used in the construction of projects will have to be from American businesses. This may help some domestic firms, but forcing construction companies to buy from higher-cost domestic suppliers will limit how much infrastructure we can get from each dollar spent.
Throughout the plan, there is an expressed concern about inequality and a desire to increase opportunities for women and minorities. These are issues that concern all Americans. However, by requiring workers to be paid the “prevailing” (aka union) wage, the proposal will have the opposite effect. It will make it impossible for most small, minority-owned businesses to bid on contracts. Many of these businesses operate in competitive markets with very narrow profit margins, so many would not survive if forced to pay union wages.
Expanding Internet Access, Removing Lead Pipes
There are some good features in the plan. It allocates $100 billion to expand access to broadband, especially in rural parts of the country. This makes sense since these areas are unprofitable and underserved by the private sector. The increased access to the internet will produce educational benefits for the young and help expand telemedicine. Rural hospitals often lack medical specialists, and telemedicine can help provide these services in rural areas at an affordable price.
While providing drinking water has traditionally been a state and local matter, lead exposure from old pipes has caused serious health problems for children. Biden proposes spending $100 billion to remove lead pipes from water supply systems around the country. This has the potential to create net positive benefits for Americans.
Despite all the distractions, the plan does have a traditional core infrastructure component. It calls for spending an additional $115 billion on roads and bridges. This is not a particularly large increase in spending, given the eight-year time horizon of the plan. By comparison, the president is willing to spend $400 billion expanding non-infrastructure aid for home care for the elderly and the disabled.
Biden’s proposal seems to overfund some things and underfund others. For example, he wants to spend $85 billion on mass transit, which seems like a mistake as we’ve seen declining ridership in most major cities in the U.S. At the same time, he calls for $17 billion to expand U.S. ports, which seems inadequate, given the growing importance and size of cargo ships.
The plan calls for repairing the 10 most economically significant bridges in the country. Prioritizing spending on high-return projects makes sense. However, the proposal does not provide clear criteria for how this selection will be made. Rest assured, politics will play a role, making the proposed “economically significant” impact difficult to achieve.
Paying for the Proposal
This huge bill will be financed in part by raising the corporate tax rate from 21% to 28%. This is unfortunate for two reasons. First, the 21% rate is comparable to most other industrialized countries. The higher rate will discourage investment by U.S. firms at home as well as investment by foreign firms into the U.S. This will slow the country’s economic growth. Second, these tax policies move the U.S. away from the user-pays principle that has financed much of infrastructure. The federal gas tax, which finances roads and transit spending, is an example of a user tax. The idea is that those who use the roads should be the ones who finance their construction and maintenance. Like electric or cell phone bills, which finance power and communications infrastructure, a user tax offers a fair and efficient way to fund infrastructure in the U.S.
The plan stresses the need to confront climate change, as well as the impact climate can have on infrastructure. With respect to the latter issue, extreme weather can damage infrastructure. The plan argues for weather-resilient infrastructure. Civil engineers may understand what this means, but most people do not. More details are needed.
At the same time, there is no proposal to institute some form of a federal carbon tax to reduce carbon emissions over time. Most economists argue that this approach is the most efficient way to reduce emissions because it creates incentives for all businesses and consumers to think of ways to reduce their consumption of fossil fuels. There is no free lunch when it comes to mitigating climate change; it will cost more. But despite support within the Democratic Party for policies to combat climate change, the administration lacks the political courage to propose a carbon tax and make a reasoned argument for it.
Overall, this large, bold plan is poorly designed and includes many policies unrelated to infrastructure. In some ways, it reads like a central planning document. A smaller, more focused plan is needed, one that actually aims to meet infrastructure needs. Congress will need to make significant changes to this proposal if the goal is to improve infrastructure in America.