The Infrastructure Investment and Jobs Act Explained

Last week was an auspicious one for the Biden administration, with the President signing the Infrastructure Investment and Jobs Act (IIJA) into law on Monday, and the House of Representatives passing the Build Back Better bill (BBB) on Friday. The press coverage around the two Biden administration legislative centerpieces has been intense and somewhat confusing. With both bills winding their way through Congress at the same time, it’s hard to keep them straight, so here is an attempt to provide some clarity, with a focus on the IIJA. I will cover the BBB bill in a subsequent article.

While the two bills were originally linked, they were separated to facilitate congressional approval. The IIJA is a standalone spending bill, while the Build Back Better Bill is incorporated into the US’ overall 2022 fiscal year budget. Every year the US Budget has a tagline, and for 2022 it’s “Build Back Better”, just as the 2021 budget was called “Building a Better Tomorrow” and the 2019 budget was called “A Budget for a Better America”. Apparently, including “better” in the title is a popular way to sell government budgets.

Two spending levels have been widely reported, which are $1 trillion and $550 billion. While the total spending covered by IIJA is actually $1.2 trillion, $550 billion of this is “above baseline” spending. Baseline spending is a government planning concept that makes economic projections on the assumption that current laws governing federal revenues and spending will remain the same. This implies that about half the total IIJA appropriation would have been spent anyway, since the government spends money every year on infrastructure.

The primary beneficiary of the bill is the transportation sector, which would receive about half the above-baseline spending, or $284 billion out of $550 billion.

Other major infrastructure allocations are:

• $65bb to broadband internet access
• $65bb to power generation and grid improvements
• $55bb for clean water initiatives
• $47bb on resiliency, which is a new category of spending, aimed at hardening infrastructure to withstand the impact of extreme weather events, droughts, and rising sea levels.
• $21bb for pollution cleanup
• $8bb for Western States’ water management.

Two other relatively new spending categories are carbon reduction, which receives $6 billion of the transportation money for bicycle and pedestrian trails, and other energy efficient transport, and electric vehicle chargers and electric buses, which receives $15 billion.

The bill will be very challenging to implement. Major capital improvements like bridges and road expansions require years of planning and approvals, and are often subject to pushback from local groups who oppose the changes. This quote from a Brookings Institute paper sums up the challenge:

“Now the action shifts. Federal agencies like the Departments of Transportation and Energy have the enormous responsibility to implement the law, standing-up new programs and finding safe ways to quickly get money out the door. State and local officials carry an even greater burden. As the owners and operators of most infrastructure, they must design and build new assets, hire more workers, and even mobilize their own financial resources.”

To put this spending in perspective, the estimated federal government debt at the end of 2021 is $24.2 trillion, with an estimated deficit of $3 trillion. This is $130 billion less than the 2020 deficit, but triple the pre-pandemic deficit of 2019. Assuming no other offsets, the $550 billion in new spending commitment in the IIJA is 18% of the 2021 deficit, and boosts the national debt by 2.3%. Since the spending will occur over many years as projects are funded, the impact on the deficit for any one year is difficult to estimate.

So now that we have had a look at the spending, what impact can we expect from investing in US transportation, carbon reduction, resilience, clean water, and broadband? Only time will tell, but academic research does broadly support infrastructure investment. A recent blog post by Wharton’s Budget Model program, which employs sophisticated dynamic modeling to estimate economic impacts of various programs, highlights the following outcomes of infrastructure spending:

• Public capital increases the productivity of private capital. Higher private capital increases the productivity of labor and leads to higher wages and lower rates, and incentivizes additional investment, creating a virtuous cycle.
• The project modeled a $2 trillion plan, spending $200 billion per year for 10 years.
• The model identifies two major impediments to infrastructure spending impact, which are offsets to state and local government spending, where they spend less as the federal government spends more, and time to spend and build.
• For state and local offsets, the study discusses that not all infrastructure money allocated to the states gets spent on infrastructure,
• For time to spend, while “shovel ready” projects can be spun up quickly, some of the investment for long term projects like basic research can take more than 20 years to turn into productive capital.
• Looking out to 2050, the $2 trillion plan shows an improvement of .3% improvement in both GDP and average hourly wages, increases in the private capital base of .5% and in public capital of 2.5% as the spending is converted into infrastructure assets.

With the Infrastructure Investment and Jobs Act signed into law, the administration’s focus will now turn to the Build Back Better program, with an estimated price tag of $2 trillion. In addition to spending, Build Back Better includes a number of changes to the tax code designed to collect more revenue.

Watch for my Even Better Article article on the Build Back Better Bill soon.

Sources: Brookings, WSJ, Bloomberg, Wharton Budget Model, OMB