President Biden unveiled the first leg of his infrastructure plan this week, a $2.25 trillion proposal incorporating upgrades to highways, bridges, ports, airports, the electrical grid, and the housing stock as well as funding for worker retraining and electric vehicle incentives. The corporate tax rate would be lifted from 21 percent to 28 percent. The price tag is likely to be whittled down as it makes its way through Congress, but should still be large enough to have a noticeable impact on real GDP in 2022 and beyond.
More importantly, infrastructure investment will lift the economy’s long-run potential growth rate by bolstering productivity (McKinsey estimates, for example, that road congestion alone costs the U.S. economy more than $100 billion per year). Not that this is a panacea; Japan traditionally ranks high on the global infrastructure tables and has an infrastructure stock that accounts for more than 150 percent of its GDP (nearly triple that of the U.S.) and it of course has still been among the world’s limper economies over the much of the last three decades (this is a clear case of overbuilding, as Japan’s bridges to nowhere and empty soccer stadiums will attest). Moreover, high costs mean that the U.S. will get relatively modest bang for the buck (as we noted in this space in mid-February, New York’s East Side Access project, at $3.5 billion per mile, is on track to cost roughly five to ten times the global average for rail expansion). That said, the plan laid out yesterday is at least a step toward diminishing a longstanding structural headwind.
At the same time, it would also lessen a more recent structural tailwind. The U.S. corporate tax rate is now below the developed world average, but would move to the top end of the range under the infrastructure proposal. It is telling that there is a revenue component here — perhaps an early hint that debt concerns are growing again in Washington — but this also, of course, means an offsetting headwind to the tailwind of the investment itself.
Manufacturing remains in boom territory
The ISM manufacturing index came in better than expected for March, rising by 3.9 points to a 37-year high 64.7. All five components moved to the upside while the customer inventory metric slumped to an all-time low. There were further signs of bursting near-term inflationary pressures — the prices paid index came in north of 80.0 for a third straight month while delivery times continued to grow at a quickening pace — but the overarching takeaway here is that a very cyclical sector is already booming and is pointing to sizeable gains in the months ahead for the economy at large.
What was the chief trade product that early Viking explorers took from North America given that it was in short supply near their settlements in Iceland and Greenland?
What famous slogan first appeared on a billboard featuring a Minnesota minor league baseball team in the 1930s?
“Breakfast of Champions”