By Laura Tyson and Lenny Mendonca
BERKELEY – Economists across the political spectrum have long advocated an increase in infrastructure investment in the United States. Now, Congress is debating infrastructure spending packages that would secure the current economic recovery and boost potential growth over the next decade.
Despite deep partisan divisions on most other issues, the Senate recently passed the $1 Trillion Infrastructure Investment and Jobs Act (IIJA) by a large majority. The bill now must pass the House of Representatives, where Speaker Nancy Pelosi has secured an agreement for a vote by the end of September. Approval looks likely but is by no means certain, given the complete lack of support from House Republicans and ongoing divisions among House Democrats.
The IIJA focuses on traditional physical infrastructure, where much of the need is for long-overdue maintenance, committing about $550 billion for investment in items like roads and bridges, water infrastructure, and broadband. The bill also contains climate-related investments in clean-energy transmission and electric-vehicle infrastructure, including electrification of school and transit buses.
These investments would be paid for through a combination of unspent emergency relief funds, corporate user fees, strengthened tax enforcement, and revenues from stronger economic growth. The Congressional Budget Office warns that the IIJA could increase the fiscal deficit by $256 billion over the next decade. But additional borrowing to finance infrastructure is warranted, given that the real cost of federal borrowing is currently in the 2% range, while the projected return on investment in physical infrastructure is around 7%.
The IIJA, moreover, is only a down payment on the investments in the physical and human capital needed to achieve inclusive and sustainable growth. Congress must pass an even bigger and bolder plan that focuses on human development, economic mobility, and climate resilience.
To that end, the Senate, with only Democratic support, recently passed a $3.5 trillion budget resolution for the next ten years that includes such investments, and the House has now incorporated the plan into its budget framework. Again, the passage of the plan is by no means certain. Major details need to be decided, and tough negotiations on financing and non-infrastructure items (including immigration) lie ahead.
The US economy rests on fragile foundations. While the rebound from the COVID-19 recession has been surprisingly rapid and robust, the US Federal Reserve may soon start to taper its monthly bond purchases, and the earlier fiscal emergency and stimulus spending packages will soon run their course. The spread of the Delta variant (owing to vaccine hesitancy) has already curtailed demand in pandemic-sensitive sectors like travel, tourism, and hospitality. Worse, the recovery has yet to reach many workers hit hardest by the “dual recession,” especially non-college-educated people, lower-wage women, and people of color in vulnerable sectors.
Moreover, labor-force participation remains low, largely because school closures have forced many parents (predominantly women) to leave the workforce to care for their children. Politically motivated claims that expanded unemployment benefits have fostered low labor-force participation will disappear as those benefits expire this month. Indeed, the experience of states that decided to cut enhanced benefits earlier has already refuted the argument that those provisions were undermining work incentives.
The recovery has been kind to shareholders, homeowners, and the wealthy. Stock markets are hitting record highs, and home prices are up by 25% from a year ago. The number of billionaires continues to grow, with their overall wealth increasing by 62% since 2020. Overall, inequality has continued to increase while economic mobility has declined, leaving a growing number of Americans further behind.
The $3.5 trillion budget plan proposes major investments in social infrastructure to change this trajectory. These include $726 billion for preschool services, childcare for working families, tuition-free community college, increased funding for historically black universities and colleges, and expansions of Pell grants and primary health care. There is also more than $300 billion earmarked for public housing, the Housing Trust Fund, housing affordability, and equity and community land trusts.
To foster sustainable, equitable growth, the plan includes nearly $200 billion for clean-energy development and $135 billion to address forest fires, droughts, and other climate-driven challenges. As evidence of the adverse effects of climate change mounts, denialism and resistance to mitigation and adaptation policies have waned both in the US and around the world. Recent polls show that over two-thirds of Americans now want the government to do more to address climate change. As more communities experience its adverse effects, voters are increasingly joining major investors in demanding action.
The $3.5 trillion plan would be funded through a combination of new tax revenues, strengthen tax enforcement, health-care savings, and revenues from long-term growth. The main revenue generators are an increase in the corporate tax rate to the 28% range, a global minimum corporate tax in the 20% range, and higher tax rates on personal income and capital gains for wealthy Americans (those with taxable incomes over $400,000). Recent polls indicate that there is robust voter support across party lines for tax increases on both corporations and high-income earners.
A recent report by Moody’s Analytics concludes that over the next decade, the $3.5 trillion budget along with the IIJA would accelerate the economy’s recovery to full employment, increase employment by 20 million, and boost long-term growth, the benefits of which would mostly accrue to lower- and middle-income families. Moreover, even if these plans increase the deficit more than anticipated, this is still an especially propitious time for the federal government to borrow to increase investments in infrastructure, given the anticipated returns and extraordinarily low-interest rates.
Infrastructure investment is a twofer: in the short run, it stimulates demand through strong fiscal multiplier effects, and it strengthens the supply foundations of economic growth and competitiveness over time. The infrastructure plans being debated this month would generate these macroeconomic benefits in ways that would also foster greater equity and climate resilience. Congress holds the keys to a future of inclusive and sustainable growth for America. Now it needs to muster the courage to use them.
Laura Tyson, former chair of the US President’s Council of Economic Advisers, is Professor of the Graduate School at the Haas School of Business and Chair of the Blum Center Board of Trustees at the University of California, Berkeley. Lenny Mendonca, Senior Partner Emeritus at McKinsey & Company, is a former chief economic and business adviser to Governor Gavin Newsom of California and chair of the California High-Speed Rail Authority.