The American jobs plan: Assessing the potential economic impact
|Summary
On March 31, the Biden administration released the "American Jobs Plan" (AJP), an eight-year, $2.25-trillion spending proposal with funding for transportation, water, broadband, power, and a host of other policy items.
This $2.25 trillion spending initiative was also paired with proposed tax increases primarily concentrated on the corporate side of the tax code. Exactly how much new tax revenue these proposed changes would raise is subject to debate, but we think a reasonable estimate is about $1.75 trillion over 10 years.
To assess the economic impact of the plan, we draw on analysis from a variety of sources including the Congressional Budget Office, the International Monetary Fund, the Penn Wharton Budget Model, and Oxford Economics' Global Economics Model.
In an optimistic scenario, enactment of the AJP later this year sees outlays on new programs and projects ramped up relatively quickly, and their efficacy is on the higher side of estimates for the return on public investments.
In our view, this would boost real GDP growth by 0.5-1.0 percentage points over each of the next couples of years, with the positive impulse fading in the second half of the decade. Employment would be one to two million jobs higher by year-end 2023compared to the baseline under current law, and both headline and core infiation are a few tenths of a percentage point higher for the next few years. Long-run potential real GDP growth would see a boost of a tenth or two of a percentage point.
In a pessimistic scenario, a slower ramp-up in spending and a weaker efficacy of public investment produces smaller near-term results in 2022 and 2023, with the growth impulse reduced and pushed further into the middle part of the decade. Under this scenario, we suspect the GDP growth and infiation impact might only be half as much as the “optimistic” scenario. From a long-run perspective, potential real GDP growth would see no impact or even a modest reduction of a tenth or two of a percentage point.
What might AJP enactment mean for our U.S. monetary policy outlook? We suspect it could pull forward and/or modestly increase the number of hikes that occur once the tightening cycle begins, but we are skeptical it would be a full-blown game-changer based off the numbers we laid out above.
Of course, in reality, the AJP is unlikely to be enacted in full. Legislators on both sides of the aisle have already expressed some skepticism about parts of the proposal, and the recently announced “American Families Plan” will be competing for attention and resources. We believe a more likely outcome is that the two plans are eventually merged and whittled down into something much smaller, with some parts scaled back and others removed altogether. The next several months should be a roller coaster ride for fiscal policy, so stay tuned.
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