Celebrate the Facts!
Now is an ideal time to increase infrastructure investment since the return on that investment is substantially more significant than the government's cost of financing. Thirty-year Treasury yields are less than 2%, while the return on almost any public infrastructure project is likely to be 5%. Rationales for opposition to that measure include hobbling the current administration on ideological grounds and the possibility that foreigners would gobble up debt securities necessary to fund it, giving them undue leverage over the United States. Joe Biden's legacy depends on the passage of the American Jobs Plan.
The American Jobs Plan is a sweeping bill incorporating a variety of actions:
Traditional infrastructure definitions include the fundamental physical and organizational structures and facilities (e.g., buildings, roads, power supplies) needed to operate a society or enterprise. That definition leaves much wiggle room for interpretation, and the American Jobs Plan certainly takes some liberties by including non-traditional items on the menu. Presumably, the Biden administration included some of these items as sacrificial lambs during negotiation necessary to ensure passage of the bill.
The American Jobs Plan, as proposed initially, included an increase in the corporate tax rate from 21% to 28%. Biden administration officials presented calculations concluding that a tax increase would pay for the plan's costs in 15 years. According to the Committee for a Responsible Federal Budget this would result in a 10-year deficit of $900 billion. Moody’s Analytics came up with a slightly lower estimate 10-year deficit of $850 billion, although when accounting for the projected economic benefits of the plan, Moody’s predicted an even lower $625 billion deficit.
It does not seem like a massive leap of logic to conclude corporations will benefit by improved transportation, ports, airports, power grids, and subsidized child care for workers, and so should help shoulder some of the costs of such. Regardless, corporations and their corporate lobbyists will resist tax increases and instruct politicians of both parties financially beholden to them for campaign contributions. Thus, the proposed funding by a corporate tax increase is a political football and will be an item of negotiation to achieve some bipartisan consensus.
Federal, state, and local government spending on infrastructure peaked at about 6% gross domestic product (GDP) in the 1950s and 1960s with construction of the Interstate Highway System. It fell sharply in the 1970s and after the financial crisis of 2008. Infrastructure investment as a share of GDP is currently well below 2% of GDP, the lowest in the data available since World War II.
Policymakers have worked to limit any increase in government spending as a share of GDP, and as non-discretionary government spending has increased, most significantly on healthcare, it has squeezed out discretionary spending, including infrastructure. In addition, the federal gasoline tax, an essential source of revenue to fund transportation infrastructure spending, has remained at 18.3 cents per gallon since 1993. Inflation-adjusted to 2021 values that gasoline tax would be 35 cents per gallon in June 2021, coincidentally a subsidy for the hydrocarbon industry, who can sell the product more cheaply as a result.
Some indicators of the state of United States infrastructure:
America’s roads, bridges, and tunnels are critical components of the economy and American quality of life, but the country has not maintained them. At least $170 billion of annual capital investment would address deterioration, performance, and highway congestion, but the United States currently spends a little more than half that amount. The need for additional spending is intensifying.
Economic models predict that implementing the American Jobs Plan (using the initial plan as a basis for modeling) would result in a much stronger economy over the coming decade, with higher GDP, more jobs, and lower unemployment. The most immediate impact in early 2022 would be to marginally reduce growth, as the proposed higher corporate taxes would take effect right away while the government would not spend the until later in the year.
However, by 2023 and the midpart of the decade, the ramp-up in infrastructure spending would significantly lift growth. The apex in the boost to gain would be in 2024, when real GDP would increase to 3.8%, compared with 2.2% if there were no plan.
According to the same models, as the plan's cost would exceed the revenue return from tax increases, deficits and debt load would increase. On a static basis, the 10-year cumulative deficit would increase by nearly $850 billion. On a dynamic basis (accounting for the benefits of the more robust economy on government revenues and expenditures), the 10-year cumulative deficit would be about $625 billion, adding about five basis points to 10-year Treasury yields on average over the next decade.
The United States debt is composed of debt held by the public and intragovernmental debt held by federal trust funds. To finance the publicly held debt, the United States Treasury sells securities:
Foreign holdings consist of official (governmental investment) and private sources. Foreign governments hold about 59% ($4.1 trillion) of United States federal debt, and foreign private investors own the other 41% ($2.8 trillion).
As of December 2020, there was $21.6 trillion of publicly-held United States debt, up from $14.4 trillion in December 2016, a $7.2 trillion increase. During that time, foreign holdings of debt increased by $1 trillion to about $7 trillion. After rising for several years, overall foreign holdings were relatively flat from 2013 to 2018 before rising again in 2019 and 2020. Because the total United States debt has increased faster than the debt held by foreigners, the share of federal debt held by foreigners has declined in recent years. In December 2020, foreigners owned 33% of the publicly-held debt with interest payments of about $137 billion.
Including private investors and governments, the top three foreign holders of federal debt by country, as of December 2020, were:
The federal government must send United States income abroad to foreigners to finance that debt. If the overall economy is larger because of federal borrowing (because the borrowing stimulated economic recovery or increased productivity), the United States is better off despite the transfer of income abroad. Without foreign borrowing, the United States income would be lower than it currently is net of foreign interest payments, so the foreign purchase of United States debt has some good elements.
United States debt securities are a safe and portable investment for foreign investors. After the 2008 financial crisis and then again during the COVID pandemic, demand for Treasury securities increased as investors undertook a flight to safety. The low default risk and greater liquidity than virtually any alternative asset help make Treasury securities even more attractive. Foreign investors also view the threat from exchange rate changes of holding dollar-denominated assets lower than alternative assets.
Since 1986, the United States has had net foreign debt, and by theory, the growth in net foreign debt should not continuously grow faster than GDP, as it has done in recent decades. This net foreign debt has not imposed any burden on Americans thus far, however, because the United States has consistently earned more income on its foreign assets than it has paid on its foreign debt, even though foreigners owned more United States assets than Americans owned foreign investments.
The foreign-held portion of the United States debt is a substantial portion of the total and likely a positive aspect in several respects. First, interrelation increases global cooperation as the debtor and the note-holder have some mutual interests in economic health. Second, the spread of nations who hold United States securities is broad, and China, with only 15%, does not possess enough to provide significant leverage.
Thoughts posed by this investigation:
Michael Donnelly investigates societal concerns with an untribal approach - to limit the discussion to the facts derived from primary sources so the reader can make more informed decisions.