President Biden on Wednesday announced a $2 trillion infrastructure and jobs package that looks to reshape the American economy. If you haven’t heard, our country’s infrastructure is in poor shape. The American Society of Civil Engineers recently upgraded our country’s grade on infrastructure from a D+ to a C-. Not exactly Stanford material for the US of A on infrastructure (think roads, bridges, tunnels, water pipes, water treatment, electric grid, power (renewable and others) and much, much more).
Already, Minority Leader Mitch McConnell has announced Republican opposition to the bill. There will be a litany of reasons, but without reading any press releases as to why, I can tell you the talking points likely to be made and the actual reason why they will oppose the bill.
1) “The deficit.” Republicans are now, again, deficit hawks (except when cutting taxes for companies, or anytime they are in power. See graphic here.
2) “Increasing corporate taxes will hurt the US economy.” Umm, maybe. But when they were cut under Trump, it didn’t help the U.S. economy either, and companies have only had a few years of significantly lower taxes, so a little bump in the rate to put lower- and middle-class Americans to work seems like a reasonable trade. See here how cutting corporate taxes didn’t do much for the U.S. economy.
3) “The Green New Deal means Alexandria Ocasio Cortez, Antifa, and immigrants will take our jobs!” Hogwash.
Enough of the paraphrasing Republican opposition to the bill and back to why Democrats support infrastructure spending and Republicans oppose it. Democrats want to fund projects to improve the quality of our infrastructure now. No questions asked, no stipulations. They believe it is the government’s job to provide quality infrastructure at no direct, added cost to the populous (taxpayer). They are comfortable with corporate taxes being a method to fund some of the upgrades, and believe, as highlighted by generally accepted economic principles, that if they pay for the projects now and build now, the price tag will be lower than in the future because of inflation.
Democrats also believe that the economic multiplier effect of upgraded infrastructure will create new jobs and economic development (which also means more tax revenue to pay for such things). For example, when the federal highway system was first authorized in the 1956 under President Eisenhower, a Republican, the national highway had the following impacts t the U.S. economy:
· The system reduced travel times for trucks and cars by 30% compared to before the system was built.
· The construction of the Pacific Coast’s I-5 freeway generated 15% more income for residents in California, Oregon, and Washington.[1]
· Studies by the Congressional Budget Office and Federal Reserve Bank suggest that every $10 billion increase in transportation infrastructure investment will lead to an increase in economic output (GDP) between $13 billion to $20 billion, depending on the overall state of the economy.[2]
· The Bureau of Economic Analysis (BEA) has identified higher multipliers for investment in highways than many other types of infrastructure investment. BEA estimates a highway investment multiplier of 2.0 (meaning a $2 increase in GDP for every dollar spent), compared to 1.8 for electric power infrastructure and 1.6 for water/sewage infrastructure. A review of economic impacts of highway expenditure by FHWA suggested that the economic multiplier of highway expenditure is in the range between 1.26 and 1.86.[3]
Republicans have a more pay as you go approach. They want to have the federal government to provide low interest loans to States and then States administer the loans for specific projects. It is low interest, and if the states run a tight ship, they can fix their own infrastructure over time, depending on how much revenue they generate from projects. This isn’t a bad idea and is useful to have (we already have a few versions of this- the Transportation Infrastructure Finance and Innovation Act (TIFIA) and the Water Infrastructure Finance and Innovation Act (WIFIA) programs provide a rate equivalent to the treasury rate which closed at 2.38% last week) but not all infrastructure makes money. And this highlights a fundamental difference between Democrats and Republicans; Democrats believe that providing services to its populous (taxpayers), is a good idea. Critics of this approach argue that Democrats pay less attention to the economics (deficit/cost) of these services, however in the case of infrastructure, the economic multiplier effect is a massive economic benefit.
On the other hand, Republicans want the government to spend as little money as possible and collect as little money as possible from taxpayers, relying on businesses to solve problems and create jobs. ‘Use the private sector and create jobs through companies, not the government.’ Unfortunately, fixing potholes, roads, and bridges, don’t make anyone money in most cases (they only save us on vehicle maintenance from jacked up suspensions).
An often-used bipartisan talking point is about leveraging the private sector via public private partnerships (P3s) This is cited as a method to pay for infrastructure when governments don’t have the available cash. This is a misnomer because P3s are more akin to a mortgage on your home; they allow you to live in your home now (build your project now) but you pay more for it and pay for a long time because you are paying the private entity a return on their investment (between 10-20% depending). That isn’t to say that P3s aren’t a good idea- the private sector is often better equipped to take on various risks, find innovation, reduce costs and schedule to build complex infrastructure projects.
Bringing us back to the impending bill- reconciliation remains the most likely way Democrats and President Biden can move forward a bill. It will likely be party line because of the dollar amount, and if it includes anything related to solar or wind energy, be ready for the entire bill to be tagged a Socialist, Green New Deal that will take away American jobs. Only recently, has infrastructure become the target of extremists who oppose many forms of government spending, and that is a shame.
For more information on what is included in the bill, please click here.
Chris Margaronis works on innovative infrastructure delivery and financing, with specialties in complex problem solving and management. His unique perspective has evolved through years of experiences on staff for a California Congressional Representative in Washington DC, as a Project Manager for Public Private Partnership (P3) projects at LA Metro, and through his experience working in private equity.
He can be reached at pcmargaronis@gmail.com
[1] https://www.eh.net/eha/wp-content/uploads/2018/06/Kitschens.pdf