By Sam Miller, CFA®, CFP®, CAIA®
Senior Investment Strategist
As we emerge from the pandemic, it’s important to reflect on the past year and acknowledge the essential role—for better or worse—that government must play in preparing for (and dealing with) similar events in the future. In much the same fashion, infrastructure is another area where government must take the lead.
An increase in federal funding could create millions of jobs, improve the quality of essential services such as water, transportation, and communication, and make the U.S. economy more adaptable to challenges going forward—from climate change to technological disruption.
But, what exactly is the current state of infrastructure in our country? And more topically, what are the prospects for President Biden’s infrastructure agenda?
The state of infrastructure
Talking heads in the media often cite our nation’s ‘crumbling infrastructure.’ In reality, there’s some truth to this talking point. Over the last 60 years, federal spending on infrastructure as a percentage of total spending has decreased from 5.8% to 2.5%.[1]
Federal Spending on Infrastructure (1962-2017)
Since 1998, the American Society of Civil Engineers has graded the condition of U.S. infrastructure by category, and attempted to estimate the cost of repairs and needed upgrades. In 2021, the nation received a C- (defined as ‘mediocre and requiring attention’). Categories receiving the lowest marks include dams, levees, roads, storm water, and transit. Ports and rail systems, on the other hand, received the highest marks.
A large percentage of U.S. infrastructure was built in the mid-20th century and simply doesn’t have the capacity or resilience to meet current demand. For example, the average age of our nation’s dams is 57 years. Similarly, most of the electricity grid was constructed in the 1950s and 1960s, and wasn’t engineered to meet today’s demand or sustain the effects of severe weather events.
Looking beyond our borders, the U.S. lags behind other major economies in both infrastructure quality and level of investment—ranking 13th globally as of 2019.[2] Of even greater concern is that in an increasingly internet-dependent economy, we currently rank 27th in information and communication technology adoption.[3]
Of course, infrastructure needs have evolved over time. In the 18th century, rivers and canals were the most important modes of transportation. Those were supplanted by railroads in the 19th century, which in turn gave way to highways and aviation in the 20th century. In the 21st century, however, physical travel has become less critical as 5G and telecommunications take center stage—requiring significant ongoing investment to remain globally competitive.
The American Jobs Plan
Spending on infrastructure is inevitably linked to politics. Most people agree that infrastructure spending is necessary, but there can be great disagreement around the details—which brings us to the proposed American Jobs Plan. The Biden administration introduced this $2.3T spending package back in March. The plan includes a combination of traditional infrastructure spending (for roads, transportation, and other shared public facilities) along with nontraditional infrastructure—projects not historically funded by the federal government or considered within the definition of infrastructure. These include expanding care for the elderly and people with disabilities, producing or retrofitting affordable housing, green initiatives, health insurance affordability, access to community college and more.
The Biden administration proposed paying for the American Jobs Plan by reversing large parts of the Tax Cuts and Jobs Act implemented during the Trump administration. In summary, the plan would bump up tax rates on corporations and make it more difficult for companies to avoid taxes by going abroad. Unlike other recent stimulus bills where the goal was to boost economic activity as quickly as possible, the proposed infrastructure spending would take place over the course of years rather than months and would extend well beyond Biden’s current term.
Change to US federal budget deficit as a percentage of potential GDP[4]
Negotiations are ongoing between the Biden administration and Senate Republicans. Recently, Republicans countered with an infrastructure proposal of their own carrying a much lower price tag and excluding all of the non-traditional infrastructure items. While we expect negotiations to continue through the summer months and many details to change between now and the passage of any legislation, the bottom line is that Democrats have unified control of government (albeit by a razor thin Senate majority) for the first time since 2010. There’s a good chance they may take advantage of this control while they have it.
As we know, few major proposals ultimately get done without a deadline or a sense of urgency to push the process along and force politicians to compromise. In this case, there are some key dates in late summer or early fall related to when recesses occur and current transportation funding expires.
Winners and losers
In a vacuum, increases in taxes reduce cash flows for corporations, so act as a headwind for stocks on the surface. But, the burden of tax increases will not be equal across companies. For example, pharmaceutical and semiconductor companies have the greatest tax risk from higher taxes on worldwide income. Conversely, companies already paying a high tax rate with most of their revenues generated domestically have the least to lose. This includes companies like railroads, financial exchanges, and apparel. Beyond immediate tax effects, traditional infrastructure companies involved in building materials stand to considerably benefit from increased investment. If we examine the big picture, infrastructure investment should boost the productive capacity of our economy as a whole. We believe over the long term, better prospects for future growth should help to outweigh any increase in corporate taxes.
In summary, there’s a great deal of room for improvement as far as our infrastructure is concerned. Not only do traditional roads and bridges need upgrading, but also technology, as we try to keep our systems safe from cyber-attacks, plan for the future, and try to remain competitive globally. Negotiations will continue to heat up in Washington over the summer months. There will certainly be some modifications along the way. The winners and losers will likely change depending on the ultimate details—so we will continue to closely monitor the situation and manage client portfolios accordingly.
[1] Congressional Budget Office, Goldman Sachs Investment Research
[2] World Economic Forum
[3] World Economic Forum
[4] Congressional Budget Office (CBO) and BNP Paribas
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