April 01, 2021 | 15:07
American Jobs Plan: Paving the Road to Recovery
President Biden’s “American Jobs Plan” shifts the policy agenda from reviving the economy to revving its recovery. The initial volley in a two-step plan includes $2.3 trillion of spending on infrastructure, spread out over eight years, largely directed at roads, bridges, broadband internet service, schools, affordable housing and electric vehicle charging stations, as well as new funding for research and development and caring for the elderly and persons with disabilities. To finance the increase in spending, the plan calls for raising the corporate income tax rate from 21% to 28% (reversing half of the previous reduction and pushing it above the median of major economies) and making multinationals pay more tax on foreign earnings, moves that are expected to generate $2 trillion in revenue over a 15-year period. There was no mention of hiking the top personal income tax bracket or raising the capital gains tax, though this could be included in the second part of the President’s agenda, to be announced in mid-April, which focuses on child care, health care and education. The combined proposals, as part of the president’s “Build Back Better” mandate, are expected to tally $3-to-$4 trillion over a decade.
Democrats aim to push the infrastructure plan through Congress this summer. While portions may garner bipartisan support, Republicans will strongly resist the tax hikes. This is another bill that will likely need to be shoehorned through the reconciliation process that requires a simple majority to pass in both chambers. But even attaining unanimous Democrat support (as is likely to be needed in the Senate) isn’t guaranteed given differing demands between party moderates, who may resist higher taxes and bigger deficits, and progressives, who are pushing for even more spending. The final bill will likely look different from the president’s plan, but the broad contours could remain intact.
The American Jobs Plan will no doubt grease the economic recovery, but it will have much less punch, at least this year, than the two recent stimulus bills that totaled $2.8 trillion or 12% of GDP. If $3 trillion of total spending is granted, it would amount to 1.3% of annual GDP averaged over a decade. The funds will be rolled out over quarters and years rather than days and weeks. Legislating infrastructure spending is notorious for the lengthy delays between passing the bill and putting shovels in the ground. And the spending boost will be partly offset by revenue-raising measures of more than $2 trillion to clear the reconciliation bar. Still, the Plan should provide some economic thrust, largely because there is a higher multiplier effect on spending, especially on infrastructure, than on tax changes, especially those directed at the highest income earners who have the lowest propensity to spend extra income. The infrastructure projects will also have positive spillover effects on construction, manufacturing and mining. While higher corporate taxes could impede some investment and hinder U.S. competitiveness, improved roads, bridges and schools should boost long-run productivity and potential growth.
We won’t factor the American Jobs Plan into our economic outlook until we get a better sense of its ultimate size. The benefits will mostly accrue in the medium to long term, perhaps adding less than one-half per cent to the level of annual GDP over the next decade. Still, the recovery plan can only support our above-consensus growth call for this year and next.