More Shovel-Ready Stimulus Coming?

On August 10, the Senate passed a bipartisan infrastructure bill. Senate Majority Leader Chuck Schumer celebrated the passage, saying: “It's been a long and winding road, but we have persisted and now we have arrived. … Today, the Senate takes a decade’s overdue step to revitalize America’s infrastructure and give our workers, our businesses, our economy the tools to succeed in the 21st century. The bill will make large and significant differences in both productivity and job creation in America for decades to come.”

The bill is more than 2,000 pages long.

The vote, 69 to 30, was uncommonly bipartisan. Those voting “yes” included Senator Mitch McConnell of Kentucky, the Republican leader, and 18 others from his party who shrugged off increasingly shrill efforts by former President Donald J. Trump to derail it.

While the bill is billed as spending $1 trillion on infrastructure, it actually would increase new federal spending by just over half that, or $550 billion, over the next 10 years. It would also renew and revamp existing infrastructure and transportation programs set to expire at the end of September.

The bill includes $110 billion for roads and bridges, and $73 billion to update the nation’s electricity grid so it can carry more renewable energy. Another $66 billion is for passenger and freight rail (mostly for Amtrak), and $65 billion is allocated for expanding high-speed internet access. There’s plenty more for water systems and infrastructure ($55 billion), Western water storage ($50 billion), public transit ($39 billion), airports ($25 billion), clean buses and ferries ($18 billion), removing lead pipes ($15 billion), and electric vehicle charging stations ($8 billion).

President Joe Biden initially had proposed a $2.3 trillion infrastructure plan. The bill now includes far less funding than he and his fellow Democrats had wanted for lead pipe replacement, transit, and clean energy projects, among others.

Here are a few of the major issues regarding this bill:

(1) Financing. On August 9, the Congressional Budget Office (CBO) estimated “that over the 2021-2031 period, enacting Senate Amendment 2137 to H.R. 3684 would decrease direct spending by $110 billion, increase revenues by $50 billion, and increase discretionary spending by $415 billion. On net, the legislation would add $256 billion to projected deficits over that period.”

Based on current law, the CBO estimates that budget deficits could total $15 trillion from 2021 through 2031 (Fig. 14). Federal debt rose to 100% of nominal GDP during 2020, the highest since 1946 (Fig. 15). The CBO projects that it will remain slightly above 100% through 2031. The latest spending bill would increase federal government debt some more, but it might also boost GDP somewhat.

The August 2 WSJ reported: “The spending will be paid for with a variety of revenue streams, including more than $200 billion in repurposed funds originally intended for coronavirus relief but left unused; about $50 billion will come from delaying a Trump-era rule on Medicare rebates; and $50 billion from certain states returning unused unemployment insurance supplemental funds.” In addition, nearly $60 billion is projected to come from economic growth spurred by the spending and $87 billion from past and future sales of wireless spectrum space.

(2) Interest expense. Increasing deficit-financed fiscal stimulus runs the risk of boosting interest rates on a rapidly growing mountain of federal debt. Over the past 12 months through July, the federal government’s outlays on net interest paid rose to $351.7 billion, up from a recent low of $312.7 billion during April (Fig. 16). This implies that the average interest paid on the debt rose from a low of 1.48% during April to 1.62% during July (Fig. 17).

(3) Labor shortages. While Schumer expects his bill to create more jobs, there are plenty of unfilled job openings now. There may not be enough qualified construction workers to even start all the new infrastructure projects that are shovel ready anytime soon. During July, payroll employment in the construction industry totaled 7.4 million, still down by 227,000 from the pre-pandemic high during February 2020 (Fig. 18). There were 339,000 job openings in the construction industry during June (Fig. 19).

(4) Shovel ready? Back in 2009, former President Barack Obama made some lofty promises about the infrastructure overhaul that his $800 billion economic stimulus plan would provide. Obama used the phrase “shovel-ready projects” in reference to construction projects that could begin right away. In the end, however, only $98.3 billion of the $800 billion stimulus was dedicated to transportation and infrastructure. Of that $98.3 billion, only about $27.5 billion actually was spent on transportation infrastructure projects.

“The problem is that spending it out takes a long time, because there’s really nothing—there’s no such thing as shovel-ready projects,” Obama said in a 2010 NYT interview. When it comes to economic stimulus, local governments may take years to begin actual construction even once they receive funding.

(5) Political intrigue. Now for the hard part: House Speaker Nancy Pelosi (D-CA) has repeatedly said she will not take up the bill just passed by the Senate until the Senate clears another stimulus bill stuffed with $3.5 trillion in social spending. That second bill will require the Democrats to use the reconciliation process since it is likely to be opposed by every Republican senator. Leaders of the Congressional Progressive Caucus in a letter to Pelosi warned that a majority of its 96 members confirmed they would withhold their support for the bill passed by the Senate until the second, far more expansive package gets through the Senate.

The Democrats view the first bill as focused on physical infrastructure, while the second bill is aimed at “human infrastructure.”

The second bill includes spending on free community college, childcare, paid family leave, efforts to slow and mitigate climate change, Medicare expansion, extensions of beefed-up household tax credits, and universal pre-K. It is unclear whether all those provisions will be permitted under the reconciliation rules.

The Democrats need the unanimous support of all 50 Democrats in the Senate to approve any elements of the budget framework, and McConnell has vowed to oppose a debt-limit increase if Democrats proceed with plans to increase spending.

Despite Schumer’s victory speech, it’s still a long and winding road, and the finish line hasn’t been reached yet.

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