President Biden’s Infrastructure Investment and Job Act is a bipartisan law that was passed in November 2021. The law is referred to as once-in-a-generation investment in the U.S. public infrastructure and competitiveness (The U.S. White House, 2021), providing $500 billion to rebuild, renovate, and expand the U.S. public infrastructure systems across the country for five years. This law is essentially equivalent to a 5-year capital improvement program financed by the federal government and implemented by state and local governments.
Starting in FY 2022, the half trillion infrastructure bill distributes public capital budgetary resources to state and local governments in the forms of formula and specific-purposed grants, requiring state and local government agencies to develop specific grant proposals in renovating, rebuilding or expanding their infrastructure systems. The spending under this bill will be annually authorized and appropriated during the period of FY 2022 to 2027, financing state and local infrastructure provision in various types including water and sewerage, public transportation, public transit, airports, ports, passenger rails, network of electric vehicle charging stations, power grids, fiber optic cables, and environmental remedy systems.
Specifically, the U.S. White House (2021) expects that its half trillion capital improvement program will yield:
- Better roads and bridges across America
- Better public transit systems, especially for yellow school bus fleets that will be replaced with American-made, zero emission buses
- 700,000 new jobs, among which 450,000 are in manufacturing, transportation and construction
- zero lead pipes and safe drinking water across the country
- reliable and fully accessible high-speed internet for all Americans
- the country’s first ever electronic vehicle charging networks and clean energy transmission systems
- effective infrastructure systems protecting against drought, floods, and wildfires, and
- modernized airports, ports, and water ways
As can be seen, the federal government’s 5-year capital improvement program is ambitious, expecting that the benefits will be way above the $500 billion cost. In general, the benefits will be received in the form of total productivity growth (i.e., better Gross Domestic Products) resulting from better public infrastructure that supports private productions and investment. Whether the results will be as expected depends on two main factors:
(1) how the federal government finances its capital improvement program and
(2) how the state and local governments implement the program.
The first question is answered by Congressional Budget Office – CBO (2021). CBO (2021) projects that if the capital improvement bill is financed by borrowing, the country’s GDP will rapidly increase to 0.08% by 2024, but then the GDP growth effects will decline after 2024, resulting in 0.06% increase at its peak point in 2036. After 2036, the GDP increase will decline and gradually diminish to the original level in 2051. Note that the 0.06% GDP increase 14 years later is the pure effect of public infrastructure investment on private production and investment; unfortunately, the effect is transitory, returning to the 2022 GDP level in 2051. CBO (2021) further predicts that under the debt financing scenario, the federal budget deficit will be reduced by about $6 billion by 2036. This deficit reduction results from a combination of GDP growth and debt accumulation.
On the other hand, if the capital improvement bill is financed by tax revenue in which either tax rate must be increased or other non-investment spending must be decreased, the country’s GDP will gradually but steadily increase to its peak point at 0.12% in 2036. And after 2036, the GDP growth effects will not decline. This suggests that the pure effect of public infrastructure investment on economic growth under this scenario is permanent, causing the U.S. to enter the new economic standard. Under this tax finance scenario, CBO predicts that the federal budget deficits will be reduced by about $11 billion by 2036. Same as the above scenario, this deficit reduction results from a combination of GDP growth and debt accumulation.
For the second question, CBO (2021) suggests that the public infrastructure effects on growth depend on state and local governments’ response to the grants. Basically, if state and local governments substitute the federal money with their own investment, the effects predicted above would not be fully seen since state and local governments will invest in the infrastructure that would otherwise be financed by state and local governments. This has an implication to state and local policy makers and practitioners in that they must be sure that the infrastructure grant proposal is not the same as those prepared prior to the bill enactment and that the projects are pertinent to the federal governments’ expected outcomes listed above. This point is not only important to the federal government but also to the regional economy and could not be accentuated more for the following reason.
Research by Srithongrung and Kriz (2017) investigating the effects of state government capital financing methods on regional growth during 1989-2012, suggests that at the state level, fiscal substitution does occur; and hence, it is very important to not substitute federal grants with their own capital improvement budget. If states do not comply with this rule, regional economic growth will hardly be seen. Specifically, Srithongrung and Kriz (2017) find that federal grants used to finance state infrastructure reduce growth by about 0.006%; meanwhile, state general revenue funds and long-term debts used to finance state infrastructure enhances growth for about 0.13% and 0.005%, respectively. In 2013, Srithongrung found that for state highway financing, state governments tend to use federal grants to substitute general revenue funds since they are trying to maintain tax rates and avoid cutting non-investment spending. This suggests that, in practice, general revenue and federal funds are fungible.
Another policy implementation advice is that the state government must be keen in selecting public projects and applying priority to specific infrastructure types if the states were to see regional economic growth as an outcome of the infrastructure bill. Research by Srithongrung-Kriz (2019) suggests that not all public infrastructure types result in economic growth. At the state level, investment in water and sewerage, public utility, and transportation tend to result in regional economic growth while investment in education and public safety facilities do not result in regional growth (Srithongrung-Kriz, 2019). This makes sense since public utility and transportation subsidize private productions’ cost. Meanwhile the benefits of education and public safety facilities can be difficult to be quantified and captured by quantitative estimation.
Thus, if the state governments are to kill two birds with one stone in complying with the federal government’s infrastructure bill and enhancing regional economy, they must put priorities on public infrastructure types that enhance regional growth. This means that the state governments should use the federal funds to finance their public utility, transportation, and water and sewerage projects, and use their own resources (e.g., general revenue or special revenue funds) to finance education facility and public safety projects.
To summarize, this blog outlines the main substances of the Infrastructure Investment and Job Act, especially in terms of the size of the bill and administrative process which is unique in that the bill is financed by federal government but implemented mainly by state and local governments through formula and specific grants. The blog also discusses the effect of the bill on macroeconomic growth at the country and regional levels. For the country’s level, the bill will result in permanent economic growth if the federal government will finance the bill with tax revenue. Borrowing to finance the bill will result in temporary economic growth since the positive effects on infrastructure spending is offset by public investment’s crowding out. For the regional level, the effects of the infrastructure bill on growth can be seen if the state governments (1) use federal grants for the newly identified projects that fit the purposes of the bill and do not substitute their own capital spending with federal grants, and (2) put priorities in productive types of public infrastructure (i.e. public utility, water and sewerage, and transportation systems) in using federal grants to invest in their new and expanding infrastructure projects.
Reference
The U.S. White House (December 2021). President Biden’s Bipartisan Infrastructure Law. Retrieved from https://www.whitehouse.gov/bipartisan-infrastructure-law/ dated February 28, 2022.
Congressional Budget Office-CBO (August 2021). Effects of Physical Infrastructure Spending on the Economy and the Budget Under Two Illustrative Scenarios. Retrieved from https://www.cbo.gov/system/files/2021-08/57327-Infrastructure.pdf dated February 28, 2022
Srithongrung, A. and Kriz, K. (2017). “Does the Methods of Financing Public Infrastructure Affect Growth?” paper presented at the 39th Annual Fall Research Conference for Association for Public Policy Analysis and Management—APPAM, November 2-4, 2017, Chicago, IL.
Srithongrung, A. (2013). “The Dynamic Impacts of State Revenue Capacity on Highway Investment,” Journal of Public Works Management and Policy 18(2), 108-126.
Srithongrung-Kriz (2019). “Does State Infrastructure Spending Attract Business Relocation?” paper presented at the 30th Annual Conference of Association for Budgeting and Financial Management, September 26-28, 2019, Washington, DC.
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Dr. Arwi Kriz is a Visiting Assistant Professor of Public Administration in the UIS School of Public Management and Policy. Her areas of interest are Public Budgeting & Finance, Fiscal Policy & Economic Growth, and Government Efficiency Measurement.
