As President Biden unveils a $2 trillion dollar infrastructure package for the U.S., it’s clear that his administration are committed to strengthening the post-pandemic economy. This episode of Macro minutes discusses the key challenges of the proposal and what it means for politics, climate change and beyond.
Welcome to another week of Macro minutes. Joining our host Stephanie Kelly, for another U.S. politics special, is the familiar voice of Luke Bartholomew, our Senior Monetary Economist and regular guest on the podcast. Together they open up the conversation around President Biden’s bold infrastructure plan and its macro and political impacts.Part 1 sets the scene for the U.S. in terms of the Covid crisis before explaining what the infrastructure package includes and how it's funded
Part 2 covers what this new proposal actually means in relation to politics, the macro environment and climate change.
Transcript
Macro Matters: build back better - Biden's infrastructure plan
Stephanie
Hi and welcome to Macro Matters. My name is Stephanie Kelly and together with my co-host, Paul Diggle, we guide you through the complex world of politics, economics and markets. This week, we are looking at the latest initiative from the Biden administration, which is a major infrastructure package to the tune of over $2 trillion.
President Biden (Sound clip)
It's not a plan that tinkers around the edges. It's a once-in-a-generation investment in America, unlike anything we've seen or done, since we built the interstate highway system in the space race decades ago. In fact, so largest American jobs investment since World War Two.
Stephanie
There you heard President Biden talking about his latest major fiscal initiative, which is set to be followed in the coming weeks by a second so called human infrastructure bill. So to talk about these initiatives and what their impacts might be, I'm really happy to be joined by Luke Bartholomew, who is covering the US outlook while James McCann is on parental leave. And he's a regular on this show. Anyway, welcome to the show Luke.
Luke
Hey Steph thanks for having me.
Stephanie
So I guess, maybe let's start this week by just talking a little bit about what's been done so far, in terms of the scene that's been set ahead of this massive infrastructure bill. And in particular, I guess, how the US compares against other countries. And in some ways, it feels like a huge amount has been done in the US by way of a fiscal support through the crisis, but then in other ways, you look at kind of, I don't know, Western European short work schemes and furlough in the UK and they are quite different. How would you rank the US versus other countries in terms of what we've seen so far?
Luke
Sure. So I think if you just add up the sheer quantity of dollars that have been spent, by the US that is an extraordinarily large number, both in an absolute sense, and as a percentage of GDP, and ranks US pretty much towards the top of most other economies. But a lot of US support has tended to be quite direct. So direct spending by the government, whereas we saw perhaps strong European economies, there was a bit more of the state taking on these contingent liabilities. So without necessarily like spending any money up front, the government promised that were this company to fall into default, there would be this backstop, right, which doesn't involve upfront spending, but it sort of is a commitment of the state's financial resources. I think, as you also said that, there's been a very different approach in terms of how the economy was allowed to respond to the shocks. So the US took what I suppose you might argue, as a slightly more laissez faire approach, at least in the first instance of, essentially, when lockdown was announced, firms just almost immediately fired workers. And then the government sort of directly gave those guys income and cash flow support. So we saw US unemployment spike massively in the US last year in the first wave of the COVID shock. Whereas in Europe, there's much more sort of like labour market schemes whereby the government rather than paying individuals have paid firms to keep those jobs going. So to me, the government is writing a paycheck, but it's done via the intermediatry of the firm itself. So unemployment has sort of appeared to stay much lower in Europe and sort of the labour market adjustment has gone through hours lost that people just aren't working, but they're not put up as unemployed. They're all furloughed. So I guess that sort of reflects very different labour market cultures in the UK, Eurozone, and then compared to the US, which is much more liberal.
Stephanie
Yeah, totally, I guess as well It's the directness of the package that's been kind of interesting in the US is just having checks sent out to households, or, you know, increasing unemployment, but but not necessarily changing the calculation for corporates as to whether they hold on to staff or or lose staff, which I think is probably a topic for another day in terms of the long term impacts that can have whether at the end of this COVID crisis when those short work and furlough schemes are rolled off, do companies still shed staff because something has changed or not? I mean, I guess those are Bigger, Longer term issues. But I think that the point is well made, which is the US has just seen such a huge amount of fiscal support in a way that the government just hasn't been actively involved in the US economy in the past. I think it's probably one of the things strikes me most is, you know, we asked this question the beginning of the COVID crisis, like what can change what's going to change as a result of this. And one thing does seem to be this idea that the government interacts with the economy in a really direct way and interacts with individuals in a really direct way, literally sending you a check in the mail. Which is, which is a pretty big change.
Luke
it's extraordinary in many senses, and, you know, comparing it to the US response after the financial crisis, which I think we would on the whole consider to be probably smaller than was actually required. And once the financial sector was sort of saved, there was less done, as some people would put it, perhaps a little bit rhetorically to bail out households, right? The financial sector was bailed out. That's completely different this time around. I mean, I think it probably is worth distinguishing between sort of the package that we got the cares act as it originally was the 2.2 trillion that came March, April, last year, the direct sending out checks in the midst of COVID. That was sort of about keeping the economy on life support. At that point, you know, the government had basically said, You can't go to work, we're going to shut down the economy. And so and then he was handing people, whatever replacement in income and cash flow to get them through that crisis. So some people will call that stimulus. But I think that's a sort of loose use of the word because it's not really trying to make the economy grow.
Stephanie
It's about keeping the economy alive
Luke
Yeah, exactly. Whereas to move the story on perhaps, a little prematurely, but to move the story on what we got from the buyer administration at the started this year, the $1.9 trillion, that's much more like old fashioned stimulus. It's about trying to boost growth, at the margin, make the recovery come as quick as possible. And so whilst the European countries, other developed markets in the US both did the COVID emergency thing in slightly different ways, as discussed, the one that where the US really stands out, is this extra fiscal stimulus on top, we're not seeing that from the other countries, this attempt to really supercharge growth.
Stephanie
Yeah, totally. Even the distinction you made there around the two bill, speaks to the political change that has also happened in the interim, in terms of having a new government in place, under the Biden administration, and just what that entails. I mean, you also mentioned the Obama era fiscal support, which, you know, was massively hampered by the kind of elements of the republican party at the time that were not supportive of significant fiscal stimulus. And we always say this that, you know, the evidence suggests that Republicans care a lot about fiscal deficits, when they're in opposition. I think in some ways, you're kind of seeing that play out now, in a way that actually last year, you know, particularly when when Trump was still in power, and you still had a Republican majority in the Senate, they were much more willing to go a step beyond in terms of providing that support. I think it's interesting this time around that you see so much Republican opposition to the fiscal stimulus that Biden has enacted, and further wants to, probably suggesting that some things don't change in Washington, when it comes to these kinds of things. Without wanting necessaril to front the overall package discussion, I think bipartisanship continues to be an issue whereby if Republicans are in a position of power, their willingness to provide fiscal support, be that stimulus, or just as we might call it, life support, I think is much higher. I think it's more challenging once you've got a situation with Republicans and opposition. That's been the case for a number of decades, the academic evidence bears that out. And I think we're seeing that play out. Again. Luckily, for the Democrats, they do have a majority, just about, in the Senate, which means that they can, they can go about and get this bill done. So let's talk a little bit maybe about the infrastructure package. So first of all, to say, you know, for anyone who's listening, who hasn't had a chance to read through the details of the infrastructure bill, maybe it's worth just giving them a couple of headlines as to what the bill is, what size it is, how it's been kind of put forward, that kind of thing?
Luke
Sure. So the package itself is probably worth about $2.25 trillion of spending, although there is actually a little bit of ambiguity about that and you can add it up in slightly different ways. And if you want get it almost $2.6 trillion of extra spending. The broad bulk of this is meant to be on sort of the physical infrastructure side. So the obvious stuff of bridges road also in a broad banned investment in clean improving access to clean water. So that's getting rid of lead pipes, which is actually still an extraordinarily big issue in the US the amount of schools not education institutions that have led pipes going into them. But that's potentially a different matter, but also investment in things like a child tax credit, and various other things that you might not necessarily think of as standard infrastructure stuff, but the Biden ministration has sort of justified it in terms of the way in which it would improve the productive potential of the economy. So that's sort of the spending side of it. And then what distinguishes this package, I suppose, in some ways from the previous stuff that we talked about, is that this is meant to be financed on the other side by tax increases. So there are proposals to finance this package of an increase in the corporate tax rate, adding a few percentage points on that and various other tax measures on corporates in terms of international profits. But yeah, so I suppose the big headline around corporate tax is that it was cut from 35 to 21%, under the Trump administration, and the Biden administration is proposing a small reversal of that up to 28% as things currently stand. One other thing, just to say on that is that the spend out of the infrastructure is over a shorter period to the tax increases. So I guess, Steph, I mean, what's interesting, from my perspective, is that the numbers are what are the chances of that sort of proposal getting through Washington as things currently stand?
Stephanie
So it's a good question you're already seeing after the announcement, I think it was last Thursday, the announcement was made. And over the Easter weekend, we saw quite a lot of headlines and political reaction to the bill. Now, I think, as always, it seems like eyes are always on Joe Manchin, the moderate from West Virginia, who's an important senator, as he's seen as sort of a very visible, very moderate Democrat, who is the most likely to potentially throw Biden's plans off course. Now, I think what he said in the past is that he wanted this bill to be bipartisan, but also that he wants it to be fully tax funded. And now I can't see a world in which republicans ever support raising taxes, particularly for a democrat administration. That's just the reality of the politics in DC. So that was never kind of a goer. And it's very clear that the Biden administartion has gone to great pains, as you mentioned, to make the bill look fully tax funded. Now, again, we've probably discussed whether it counts if you've got spending over 10 years and taxes over 15. But that's the way that they've done it to try and appease that kind of more moderate wing of the Democratic Party. I was kind of interested that he came out over the weekend. I'm sorry, Joe Manchin, that is, and said, he wouldn't support the corporate tax rate going to 28%, which is what the Biden administration has pencilled in. Now, he said, it has never gone above, I think he said, 25%, he made a reference to the 25% threshold, which suggests that's where he'd be comfortable with that being. But that's about 300 million, I guess, in lost tax, if you don't, if you don't do corporate taxes, if you don't raise corporate taxes, all the way to 28%. They're currently at 21%. So I guess that's the interesting thing, that the first ball that's been kicked in this game has been around the corporate tax rate, but I expect there will be many, many balls in the air. And there will be many, many political debates and discussions about this in the in the weeks to come. It's slightly under pressure now, because it looks like July might be the date by which at least Nancy Pelosi in the house has said she wants this bill done, which is just pretty soon, pretty soon for this kind of thing.
Luke
So I guess one big question there, therefore, is, if there's potentially this $300 billion, "black hole" that comes from only putting up the corporate tax rate to 25%, does that mean that the whole package itself ends up having to be shrunk by that, or do they find financing elsewhere?
Stephanie
I guess it's I mean, this is very much conjecture, I suppose. But it's plausible that they make the bill a little bit smaller to make up for it. I think what's more realistic is this is one element of lots of different threads that will be pulled on this bill. It seems like Manchin is pretty comfortable with a very large bill. He's just not comfortable with obviously the corporate tax rate going to the rate he's talking about. In the past I think he said something like he'd be comfortable up to 4 trillion or something like that. So it's more like where can they get the money from? 'm no tax expert expert, but assumably that wouldn't come from, you know, tax on the middle classes, because that's a clear kind of Biden, I think line in the sand has been he won't raise taxes on households making under 400,000 or something like that. So it becomes a conversation then about do they do more on capital gains, do they do more on international taxes? Or does Manchin get more comfortable with the idea that maybe there's a 300 million hole? And maybe that's small, and that's okay?
Luke
Perhaps that can be waved away over 10 to 15 years?
Stephanie
Yeah, I mean, this is the other thing, right? It's like so much of this then has to go through the sausage maker that is DC. So it's kind of hard to see it looking exactly the same. But equally, I think the sizes we're talking about, I struggle to see them becoming much, much smaller, because we are also talking to the trillions here. So what's a couple 100 million between, you know, between friends?
Luke
Well, and indeed, in that context, right, there's potentially another trillion or so to come as well, right. In the second part of this package, as you talked about there is that I'm not sure that I'm a fan of this phrase, but the human infrastructure side, you know, free community college, more financing on childcare, and kindergarten and things like that. And that package. Again, there's got to go through the sausage maker, but in theory that's meant to be financed by taxes, as well. Right. And that's where the personal taxes. Yeah. I imagine that potentially a bit more politically difficult. I mean, for two reasons. And correct me if I'm wrong here, If all the Republicans aren't going to support this, there is sort of long standing support on both sides, that infrastructure investment itself is required. And putting taxes on corporates is just generally easier to do. Whereas spending on free community college or kindergarten, wherever it might be, as admirable as that is, it's less obviously infrastructure, the traditional kind of feels more like a political project of the progressive wing of the Democratic Party. And personal tax is always a bit more personal, born of a better phrase and fraught anyway. So I would imagine as hard as the politics of the first one, the second one could be could be even worse. Is that fair to say?
Stephanie
Yeah, it's probably a fair assumption, it feels like the second one's going to be a little bit more what some on the paternal side might say kind of is sort of touchy feely progressive. I guess government spending in areas that maybe they don't think is necessarily the primary priority. If you compare that against the infrastructure bill, it is, you know, it's roads and its rail and its transport. I think, the key, and Biden is pretty good at doing this, I think that's shown in the bill, is finding sweeteners, right? And in the human infrastructure package, they'll do the exact same thing, right, they'll find sweeteners for key individual senators. So there's some elements of the infrastructure bill, for example, that speak to some of the decommissioning issues that West Virginia faces that would satisfy them. Joe Manchin, right? So in that sense, I expect the next bill would have a similar savviness to it. But it is just naturally, maybe a slightly harder sell again, without having seen the details. It's really tricky to say. But I guess the other question, which we haven't talked about is whether they end up being one bill or two?Does it end up that you actually have infrastructure, including human infrastructure in one bill? Or is it gonna end up being two separate bills?
Luke
And that sort of question depends in part on the manoeuvrings of how bills can be put through the Senate. Right? To some extent it is this idea of reconciliation. Is that is that the thought?
Stephanie
Yeah, exactly. So we got news, I think yesterday that the Senate parliamentarian has said that the infrastructure bill could be put into what's basically like reopening the reconciliation that they use for the first fiscal stimulus, reopening VAT for FY 21. Now, this is all a little bit technical tax year fiscal year stuff. But essentially what that means is, it looks like the democrats have the option to do it in two separate bills, which is obviously they're presenting them as two separate bills. There had been an idea that they would go together as one. But as you pointed out on the human infrastructure bill challenges in some ways, having smaller bills can be less challenging because you just focus on those issues and find solutions. So it feels now like it's more likely we get two bills rather than one crammed in. So essentially, one would be reconciliation wouldn't be done through reconciliation for FYI. 21. Maybe, as I mentioned, July seems to be The date that they're talking about there. And then in the autumn, you'd get like FYI, 22 reconciliations, that's how they do it. They're kind of jiggery pokery that goes on there. But if the politics shift or if the challenges become too great, maybe they could do it is one bill. I know a number of analysts are very divided on this as to whether they'll do one bill or two. I'm probably slightly leaning towards two today. But that's really at the beginning of this. What is, I think, probably a contentious process. I mean, for you, does it matter that much whether it's done in two separate bills or one?
Luke
Certainly not as a macro forecasting exercise. Maybe the first thing to say on the macro forecasting side is that, you know, for all the talk of shovel ready projects, and I like to spend out from this is going to be relatively slow, and probably isn't, at least for the first couple of years or so it will ramp up more aggressively, but it probably isn't needle moving forecast over the first couple of years, by the time the legislation is passed, then the administration put in place to do it planning permission is found. Because remember, when you're building bridges and things like this, you know, it does involve quite an arduous planning process, resources have to be mobilised, there is scarcity of labour in some of those sectors. So to get the juggernaut going does take some time. In terms of its macro impact, I suppose in certain textbook formulation, just sort of ricardio barrows, sort of equivalent to this idea that if spending increases are ultimately financed by tax increases, that all sort of nets out in the wash, because forward looking households can save accordingly, knowing that there are taxes coming. I'm pretty sceptical of all of that, to be honest. And I would expect it to be growth boosting at least over the medium term at the margin. I think there's a good reason for thinking that there are quite hefty size multipliers that is sort of the extra bang for your buck that you get for every dollar of government spending how much that filters through to the rest of the economy, at least in the traditional infrastructure. Steph, I'd expect that to be quite growth boosting. And at the same time, I think this one's a bit more controversial. But it might be the case that corporate tax increases don't tend to weigh on the economy as much as you might think other tax increases migh. And essentially, this is all really a game of like what you think improves the dynamic efficiency, the growth potential of the economy? Like how much distortion do you get for slightly raising taxes versus how much extra growth do you get from better infrastructure. And it's trading those things off, rather than the demand side how much stimulus you get, which has been the stuff that's previously animated the fiscal policy discussions in the US. But if you think that the US corporate sector is quite, you know, there's a lot of profits that what we call rent that sort of reflect the huge size of these corporations, that it might be the case that if you increase taxes on those, that's a lot less distortion than it might be in a standard macro model, all of which is quite a long way of saying that, I'm not expecting big growth impacts at the start. But when it comes through, it will be positive for demand in the medium term, I think, pretty positive for potential growth over the long run. So I think from an economics perspective, it's hard not to be relatively optimistic about this, to be honest.
Stephanie
It's interesting that you said as well, because one thing that we haven't really talked about, but is a really notable element of the bill, is the international taxation element. So obviously, we had Yellen over the weekend, coming out saying that a concerning international minimum corporate tax essentially, is what we're talking about, and is important, and that has potentially potentially quite big implications for lots of countries, because we know the OECD has been working on this idea. It's kind of a digital tax, but essentially, for those big multinationals that are, you know, headquartered in one place, but reality operate lots of places. And that's been hugely contentious, because one element of it assigns kind of reallocation of tax revenues, which the US definitely doesn't want, because obviously, the US benefits a lot in terms of revenue in that regard. But I think this idea of a global minimum tax now has quite a lot of buy in, obviously, from the Biden administration, and it's sort of built into this bill, right?
Luke
Yeah, exactly. Yeah. I mean, the the international politics of that are really interesting in terms of, I guess, like we've also seen in the UK, like corporate tax rates have been increased there. It does seem like if there ever was a global race to the bottom, that is very much come to an end now, and that there is pressure globally for corporate tax rates to go up. And I think that is an important thing for investors to keep in mind when they're thinking about the tax of profits over the next few years. But I guess one thing I'm interested in in terms of that international dimension is that, you know, a lot of this is going to require coordination amongst the developed market economies. And it feels like the US is trying to do quite a lot at the moment in terms of global leadership, it has now opened up this agenda on corporate taxation. There's of course, the green agenda that they want to try and lead on in some way there. There's China politics as well, I suppose my question is, is it sort of like diminishing capital, and they can choose to spend political capital on global leadership in one of these areas? Or was it sort of a positive sum game, the more the US has seemed leaning on one area, it can take the rest of the world forward on others as well?
Stephanie
Yeah, that's a really interesting question. And I never thought about it in those terms. But now that you've put it in those terms, like be very much of the view that the more the US is involved, the more the US gets involved with. And the more that it's seen in this leadership position, the traditionally, it has been in the past. I mean, before the Trump administration, the US was seen as you know, a leader, at least in terms of the political wrangling around climate change, it was seen as a leader in terms of just buy in to multilateral rules based organisations that, you know, the kind of post war system has been built on. I think the reality was that under President Trump's administration, there was less certainty about who, you know, how the US would behave with, with allies, as well as with rivals. So there's just much more uncertainty. And I think, as you rightly point out, the digital tax work or the work on kind of a global minimum corporate tax is probably a good place for the US to be getting involved with, because it's something that in reality it wants to do at home anyway, I think a lot of what the US international agenda is reflect what it's trying to do at home. Right? It reflects a domestic desire. And I think that was true under Trump. And it's still true under Biden, it's just that under Biden, there are benefits to doing that multilateral approach, right, that you can kind of get the afterglow on it facilitates you doing things at home light. We haven't talked about it very much in in this chat. But the bill, the infrastructure bill has a pretty significant green component, probably about half. I was trying to kind of calculate earlier, the proportion of that 2.2 or 2.6 funding, depending on how you want to count it. It looks like maybe half of it is in sort of green initiatives, which is not nothing. I mean, you know, one and a half trillion dollars of green investment in the United States is not nothing. I think the reality is that that's the US is still coming from from behind in terms of this. And as you mentioned, it'll take a long time for these things to roll out. But not only is that furthering the green agenda furthering the US ability to signal on climate change, it's also furthering domestic manufacturing, because it's all about creating jobs, and creating opportunities domestically, for renewable energy for jobs, there's lots of retraining money in the package as well. It's all consistent with the Biden administration, which is, in reality, a domestically focused agenda. But that can benefit from I guess, this kind of international involvement as well. And then finally, maybe just one last question might be around the outlook for the next kind of two years, like pre midterms? This is probably, what do you think this is the kind of the big ticket bills that are coming these kind of infrastructure and human infrastructures, we have to call them for lack of a better word?
Luke
Yeah, I mean, by the time you've done the fiscal stimulus that's already gone and then these two bills, I mean, that's no small thing, to be honest. And what's coming in the human infrastructure bill is potentially some quite radical stuff around as I say free community college. That is also to some extent, social education policy as well. So when you're spending the kind of money that you're spending, it isn't just about the spending, you just can't help but end up dragging other areas into the ambit of those bills, as you say, green policy gets brought in to this as well. But it strikes me that Yeah, we talked about nothing changing in DC or perhaps the one thing that has changed a little bit, Democrats have learned something that they feel that the Obama administration might have been some wasted opportunities, at least along the way, and they want to make the most of those opportunities now, especially as US electoral clocks tick quickly and on two year cycles, ultimately. So I think that is key to get stuff done now.
Stephanie
100%. Especially, which was that's why when you asked me, will they make the package smaller because Manchin wants it to go to 25% instead of 28%. And my hesitancy is that I just think that everything about the Biden administration and in the democrats in congress is signalling that they are aware that they might not win, they might lose the house in 2022, which puts a lot of pressure to get things done now, because this is the chance. And I think, as you say, seems like lessons have been learned, which makes me more optimistic for the bill going forward, as I said, pretty much like it. I mean, it might look a little bit different, but pretty much in the size we're talking about, pretty much with the funding that they've put forward. Maybe it changes a bit. I mean, look, it's always a political debate and discussion. But I think that that's what makes me more inclined to say the package doesn't drift smaller it maybe it changes a little bit, compositionally, the funding might shift a little bit. But overall, the investment side of things remains kind of the same. So that's, I think, actually all we have time for today. But thanks so much for joining, and I'm sure we'll be on talking about this issue again in the months to come. And we can do a bit of a post match analysis to see how much of what we said was accurate, always a dangerous game. And as always, to our listeners. If you've got any comments on the discussion today, or questions or ideas for future episodes, you can email us at macromatters@Aberdeenstandard.com. In the meantime, we're going to take a break next week. Please do tune in again in two weeks time.
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