Why Joe Biden’s $2 Trillion Infrastructure Plan May Fail

April 5, 2021 Updated: April 6, 2021

Commentary

President Joe Biden has announced the American Jobs Plan, which is summed up in the headlines as a $2 trillion investment program in infrastructure and green energy that’s expected to boost job creation, strengthen the manufacturing sector, and drive innovation.

However, most of it goes to subsidies and current expenditure and comes with one of the largest tax increases in U.S. history. It has been hailed as a new “New Deal,” and much like its predecessor, it’s basically a massive increase in subsidies to nonproductive areas of the economy against a series of protectionist and misguided tax hikes on the productive.

The program, according to the Financial Times, can be divided into the following areas:

$621 billion for infrastructure, transportation, and electric vehicles aimed at strengthening the manufacturing sector and communications in the United States. However, this figure doesn’t even start to address the infrastructure and transportation needs of the United States, which have been estimated to exceed $2.1 trillion, according to McKinsey. Instead of giving tax benefits and incentives to the private sector to fund the real infrastructure requirements of the country, the plan will spend less than a third of the needed figure in investments, which will be directed by politicians, generating important efficiency risks.

Furthermore, the plan lags, for example, what the European Union or China have done. Electric vehicle investment doesn’t require more government programs, as it’s thriving globally and around the United States. In fact, the tax hikes announced by Biden will likely hurt those electric vehicle companies that are making a profit and proving to be sustainable only to subsidize the ones that can’t make a profit.

$561 billion for green housing, schools, power, and water upgrades. This part makes sense but seems to be adding elements that could be included in any normal budget. This should not be an off-budget part and should be funded with tax incentives, not subsidies.

$480 billion for subsidies to the manufacturing sector and research and development. This isn’t only likely to be counterproductive but also a net loss, as Biden aims to fund it with the largest tax increase in years. Again, likely to drive resources from the productive sectors to loss-making and nonproductive areas.

$400 billion for elder and disability care. This shouldn’t be an off-budget item and shouldn’t be included in an infrastructure plan. There is plenty of room in the Federal Budget to boost elder and disability care by improving efficiency and building public-private partnerships.

$200 billion for broadband and job training. These are important items where efficiency and transparency are essential. Broadband extension should be a tax-incentive-driven public-private partnership initiative at worst, and a private sector capital expenditure plan initiative at best. Same with job training.

The plan looks ambitious, but it isn’t likely to generate a significant improvement in the job creation trend, as most of the funds will go to businesses that are working today at 60 to 80 percent capacity, and where new jobs won’t be particularly required. In the eurozone, for example, the Green Energy Directives, Juncker Plan, and other national initiatives haven’t created the type of employment that was promised, with little variation in the historical trend of employment despite trillions invested. IndustriALL, a federation of trade unions in the EU, has warned that the European Green Deal will likely destroy 11 million jobs, without making clear how these losses will be offset.

According to a 2016 study, “Towards a green energy economy? Tracking the employment effects of low-carbon technologies in the European Union,” the EU’s energy transition between 1995 and 2009 created 530,000 jobs. One-third of the jobs created in the EU were a consequence of spill-over effects, and in 21 of the 27 member states, the total effect in employment was positive. The question is whether the large investment, estimated at more than $500 billion, justified a 530,000-job creation in a workforce of more than 210 million. It’s also worth noting that the EU median unemployment and youth unemployment rates haven’t fallen significantly considering the intense investment.

In the United States, however, green energy and technology jobs thrived due to tax incentives while bringing unemployment to a record low in 2019. There are clear factors of labor rigidity in Europe that impact these job trends, but there seems to be a clear conclusion: Green energy and infrastructure jobs rise faster and stay longer when policy is driven toward tax incentives rather than subsidies.

The main problem of Biden’s plan is that it’s largely politically and public-sector driven. It includes almost 40 percent of subsidies to local corporations and the public sector, which can reduce productivity and efficiency, as already happened in the past.

Revenue

On the revenue side, figures are wildly optimistic. A $695 billion increase in corporate tax revenues from the current level is fantasy and doesn’t even consider any negative effects from raising corporate tax to a rate that would be the highest in the Organization for Economic Co-operation and Development, considering effective and nominal rates for most companies.

A $495 billion global income tax increase. Again, an extremely optimistic figure since a similar figure for extraordinary income has never been reached for this concept and because it doesn’t assume any negative impact.

A $217 billion increase in taxes by closing loopholes for “intangible” income. This figure is simply made up and comes from assuming that all corporations are evading taxes, but the main risk is generating uncertainty in companies with several divisions and shared margins.

$54 billion for the elimination of tax benefits for fossil fuels and “anti-inversion deals” measures. The energy industry is already on its knees; to think that these measures will be revenue positive is simply not understanding the industry. On the “anti-inversion-deal” measures (when a U.S. company transfers its fiscal headquarters to the country of a company it merged with or acquired), this mistake was already made by Biden with President Barack Obama. Between 2007 and 2014, more companies left the United States to more business-friendly countries than in the entire period from 1981 to 2003, according to the Congressional Research Service. It even took Burger King, which moved out of the country.

Obviously, the plan will be rejected by Republicans and some Democrats for the tax increase, but we can’t ignore the risks of such a massive transfer of wealth from productive and tax-paying sectors to subsidize government spending.

The Biden administration states that the plan is revenue-neutral, but it’s not. First, it includes wildly optimistic estimates of new revenues. Second, those revenues are to be generated over 15 years, while the spending is planned for the next eight years; in net present value, there’s no neutrality. Third, even if we believed the optimistic revenues, it doesn’t even start to address the large deficits built up by past administrations due to rising mandatory spending.

Democrats say that this isn’t important because deficits can be financed at all-time-low costs and supported by the Federal Reserve. However, if deficits don’t matter, why the need for a large increase in taxes?

The spirit of this plan is good but should be done with tax incentives and lower subsidies. The execution is likely to be political and flawed. The risks? We have already seen the results of similar programs in the EU and Japan.

Daniel Lacalle, Ph.D., is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.”

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.