Infrastructure: Deal or no deal in D.C.?

Summary

It has been nearly three months since President Biden rolled out the "American JobsPlan" (AJP), a $2.25 trillion spending proposal focused on infrastructure and other areas of public investment.

Most recently, the Biden administration has gone back and forth with roughly 20Senators from both parties in an attempt to zero in on a bipartisan agreement. Yesterday, the talks appeared to achieve a breakthrough, with both sides saying they have a deal.

In short, the two sides took the "physical" infrastructure portions of the AJP, which amounted to roughly $1 trillion in new spending, and cut that figure in half. Our understanding is that the agreement includes $559 billion in new spending over five to eight years.

It appears that the new spending is "paid-for" through a mixed bag of policy changes such as increasing funding for the IRS to improvement enforcement and collect unpaid taxes, reallocating unused funds from COVID relief, and leveraging private investment for public/private partnerships, among other changes. Critically, the agreement does not include the proposed corporate income tax increases from the AJP, such as taking the corporate income tax rate up to 28%.

A bipartisan agreement has both political and procedural advantages that the White House likely finds attractive, but this is not to say the agreement is without its challenges. Perhaps the biggest concern among some Democrats is that this agreement would make the other parts of the AJP and the $1.8 trillion AmericanFamilies Plan (AFP) less likely to pass through budget reconciliation.

At this point in time, it appears that the solution from Democratic leaders is to tie the bipartisan infrastructure agreement to a budget reconciliation bill that would contain the other parts of the AJP and the AFP. In other words, no reconciliation bill means a bipartisan infrastructure bill.

If this is indeed true, to some extent this does not leave us too far from where things started, in our view. We have written previously that we think something will probably pass this year, and we believe a $1 trillion package of mostly physical infrastructure would be the fallback plan should a larger package fail to gain enough political support.

The real question, in our view, continues to be whether the more partisan parts of Biden's proposals, such as the higher taxes and increased spending apart from traditional infrastructure, have enough support to get through reconciliation.

We still suspect the answer is yes, but that the headline figures for new spending and tax increases will need to be scaled back to become law. That said, we do not view the reconciliation bill as a guarantee. It would not surprise us if the eventual efforts to pass the remainder of the AJP and AFP eventually failed.

For illustrative purposes, we think an agreement along the lines of the one reached his week would add roughly 0.3 percentage points to U.S. real GDP growth in 2022. An increase in economic growth of this magnitude might nudge our forecasts for nonfarm payroll growth and inflation a bit higher, but ultimately this policy change would probably not fundamentally alter our macroeconomic outlook.

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