President Joe Biden's infrastructure program is tellingly named "The American Jobs Plan." Jobs are always a winner, while infrastructure quickly sounds dull and the numbers rarely speak for themselves. For example, what does it really mean when the U.S. investment rate is only half that of Europe? And isn't a declining investment rate, as shown in our Chart of the Week, almost logical for an industrialized country?
More convincing than figures are narratives. For example, taking a train ride in Japan or Switzerland can quickly become an instructive experience. Or the memory of the burst dam in New Orleans and the major power outages in New York or, most recently, Texas. And in general, schools and hospitals, the broadband network and the water supply need improvement. These are deficiencies that many Americans experience on a daily basis.
Biden conjures up some of these failures in his presentation of the infrastructure program and at times almost laments the state of the nation. But he seems to know that infrastructure projects do not often score many political points in the short term, even if the country may benefit from them for decades, as it did after the big infrastructure programs of the 1950s and 1960s. Perhaps that is why he goes further still and brings in China: "The American Jobs Plan is an investment in America that will create millions of good jobs, rebuild our country's infrastructure, and position the United States to out-compete China."
Mentioning China so prominently might serve several purposes: First, reference to the country with the famously high investment ratio in infrastructure illustrates how investment can increase a country's potential growth sustainably and may do so significantly. Second, China’s success might also serve to allay some of the electorate's fears of more government intervention. Third, mention of the United States' "strategic opponent" might help to get some Republicans on board and encourage his own party to close ranks. Finally, it might also help to highlight the competitive urgency of the program. After all, one problem with such major projects is that they tend to get torn apart in Congress because of the numerous conflicting goals they arouse in the two parties. We believe Biden’s aim will be to avoid being ambushed and push the package through Congress as quickly as possible.
It might nonetheless be a rocky road that demands many compromises. But Biden has several points in his favor right now. First, citizens are likely to welcome the President’s injection of optimism after more than a year of pandemic gloom. Second, relatively little attention is currently being paid to rising debt. Third, the need for infrastructure investment is evident. And unlike in 2009/10, enough projects are likely to be ready to roll. That the focus of the package is very much on environmental sustainability may also be a further plus. We believe that should not only please the progressive wing of his party, but also suggests the United States may be taking the lead on the issue. Therefore, we think most external observers of America might want it to succeed – though perhaps not his strategic opponent(s).
* Federal, state and local gross investment (in structures)
Sources: U.S. Bureau of Economic Analysis (BEA) and DWS Investment GmbH as of 4/6/21
4. https://www.nber.org/system/files/chapters/c14366/c14366.pdf: “In sum, the macroeconomic approach to government investment provides strong support for the long-run benefits of infrastructure spending. However, the same approach raises questions about the suitability of investment in infrastructure and other public capital as a short-run stimulus.”
5. Obviously, a lot of research on this has also been published in the U.S., for example University of Maryland, 2014: infrastructure investments add as much as USD 3 to GDP growth for every dollar spent.