Special Briefing on the Biden Infrastructure Plan: Unmet Needs and State of Play

With President Joe Biden chopping key programs from his Build Back Better bill in order to win support in Congress, a panel of public finance and economic experts weighed the nation's physical and human infrastructure needs against the risks of injecting trillions of dollars into a tight economy.

"The pandemic laid even more bare the need for infrastructure spending," Carolyn Coleman, executive director and CEO of the League of California Cities, said at an Oct. 21 Special Briefing, hosted by the Volcker Alliance and the Penn Institute for Urban Research (Penn IUR). While cities have been spending American Rescue Plan Act (ARPA) money on public health, tackling social systemic inequities in broadband access and housing, reopening businesses, and rewarding the heroics of grocery and health care workers, Coleman said, "there is still the need that existed pre-pandemic for greater federal investment in our infrastructure."

She said state, local, and tribal employment remains about 800,000 jobs below pre-pandemic levels and cited a 2020 report that $118 billion is needed to upgrade California's local transportation infrastructure—$64 billion more than the state is providing under SB 1, a 2017 road repair act.

“Special Briefing: Unmet Needs and the State of Play,” was the 24th in a series of 60-minute online conversations featuring experts from the Volcker Alliance’s national research network and Penn IUR, along with other leading academics, economists, and federal, state, and local leaders. The discussion came as Biden closed in on a deal that would reduce his Build Back Better bill to about $2 trillion of social and climate programs, from $3.5 trillion. Democrats hope to pass that bill through the budget reconciliation process, which doesn't require any Republican senators to sign on, and to move forward with the related $1 trillion infrastructure bill, which has bipartisan support and has already passed the Senate.

Moderated by William Glasgall, Volcker Alliance Senior Vice President and Director of State and Local Initiatives, and Susan Wachter, Co-Director of Penn IUR, the panel discussion also featured: Torsten Slok, Chief Economist at Apollo Global Management’s executive office in New York; Andy Haughwout, a Senior Vice President and Policy Leader in the Research and Statistics Group at the Federal Reserve Bank of New York, and a Penn IUR Fellow; and Annie Linskey, a Washington Post White House reporter.

"We are leaving the pandemic behind," Slok said. "More people have been flying on airplanes, more people have been going to restaurants, more people have been staying at hotels. So in that sense we should expect to see the data on the economy get better and better."

Slok said, however, that new risks have appeared, in the form of supply chain bottlenecks and rising energy prices and labor costs. "The challenge could be that if labor costs and inflation go up too quickly, then it can become a problem, particularly for financial markets and the Federal Reserve."

Slok said he agreed with the consensus view of economists that inflation will decline over the coming year from the current rate of between 4 to 5 percent, but that it is unlikely to fall to the Fed's target of 2 percent.

Haughwout said a typical infrastructure spending program of $1 trillion would be expected to add 0.15 to 0.2 percent to gross domestic product by 2031. In this case, he said, spreading the investment over 10 years, rather than spending the $1 trillion all at once, will mitigate the inflation risk.

"Many of the aspects of this plan are emphasizing repairing infrastructure versus building new infrastructure, or reducing uncertainty by increasing safety or increasing resilience to climate change. And so this is a different kind of infrastructure package," Haughwout said. "In many ways, it's intended to reduce risk—reduce the risk that I will break my axle running into a pothole, or that the bridge I go over on the way to work will collapse, or that my road will flood because of climate change."

While construction employment is down by 200,000 from before the pandemic, job openings are up by 40,000, to 350,000, he said. The producer price index for construction materials is up 36 percent from 2020. "That means these additional dollars are slated to come into a market that is currently very tight," Haughwout said. However, "these supply bottlenecks are likely to have abated" by the time most of the infrastructure money comes to the market.

The municipal bond market, where states and localities can borrow at low interest rates, is "very favorable" to financing infrastructure investments, Haughwout said.

The Special Briefing came with Biden in the midst of meetings with two Democratic Senators who have indicated the proposed $3.5 trillion of spending in the Build Back Better bill was too much: Joe Manchin, of West Virginia, and Kyrsten Sinema, of Arizona. All 50 Senate Democrats have to be on board to pass the bill, with Vice President Kamala Harris casting the deciding vote in the evenly divided chamber.

With pressure building on Biden to deliver on his agenda, "the sense is that there is a deal that's coming into focus," Linskey said. "There are three major dates coming up that serve essentially as a deadline: Oct. 31, federal highway money runs out if legislation is not passed; Nov. 1, the president will be standing shoulder to shoulder with a hundred other world leaders in Glasgow, hoping to deliver his climate change agenda and lead the world on an issue he cares deeply about. His climate agenda is wrapped with these two pieces of legislation, and he does not want to go the Glasgow empty-handed; [and] Nov. 2 when Terry McCauliffe is up for election in Virginia; that gubernatorial race has become a proxy for the Democratic agenda."

Linskey said Biden probably won't include a long-promised two years of free community college in the bill, and is open to removing a clean energy standards provision. He is offering a reduction of the child tax credit to one year rather than making it permanent, and also would cut back a paid family leave provision, she said. The administration has also indicated a willingness to scale back corporate and income taxes to pay for the reduced spending plan.

The administration takes inflation risk seriously, she said, but officials argue that this legislation will drive down health care and housing costs, which they see as drivers of inflation.

In a question and answer session, Wachter asked Coleman what California cities are doing to avoid the pressure to continue programs they can't afford once federal support runs out.

"In terms of managing for a potential 'fiscal cliff,' it's very good news that the ARPA dollars will be invested over time," Coleman said. "They arrive in our communities in two tranches and cities have until 2026 to expend those funds. So we have the opportunity to make good decisions based on a longer term, rather than rushing to spend them all at once."

She added that cities are focused on "restoring their reserves and making other wise investments to get us through this period of uncertainty." She added: "The state may be focusing its own fiscal cliffs in outlying years, but we've worked very hard at cities to have some constitutional protections in place to prevent the state from borrowing or raiding—or stealing, some people say—local revenues. So hopefully there are some assurances there that will help stabilize our revenues."

Asked to name the one thing she wouldn't want to see dropped from the bill, Coleman named four.

"I love all of my children," she said. "So—investments in broadband, transportation, water, and our human capital."

Special Briefings are made possible by funding from The Century Foundation, the Volcker Alliance, and members of the Penn IUR Advisory Board.