Why Joe Biden’s $2 Trillion Infrastructure Plan May Fail

President Biden has announced the American Jobs Plan, which is summed up in the headlines as a $2 trillion investment program in infrastructure and green energy plan is expected to boost job creation, strengthen the manufacturing sector, and drive innovation. However, most of it goes to subsidies and current expenditure and comes with the largest tax increase in United States’ history. It has been hailed as a new “New Deal”, and much like its predecessor, it is basically a massive increase in subsidies to non-productive areas of the economy against a series of protectionist and misguided tax hikes to the productive.

The program can be divided in the following areas:

. $621 billion for infrastructure, transportation and electric vehicles aimed at strengthening the manufacturing sector and communications in the United States. However, this figure does not even start to address the infrastructure and transportation needs of the United States, which have been estimated to exceed $2.5 trillion according to McKinsey. Instead of giving tax benefits and incentives to the private sector to fund the real infrastructure requirements of the country, the plan will spend less than a fourth of the needed figure in investments that will be directed by politicians, generating important efficiency risks. Furthermore, the plan lags, for example, what the European Union or China have done. Electric vehicle investment does not require more government programs, as it is thriving globally and around the United States. In fact, the tax hikes announced by Biden will likely hurt those electric vehicle companies that are making a profit and proving to be sustainable only to subsidize the ones that cannot make a profit.

. $561 billion for green housing, schools, power, and water upgrades. This part makes sense but seems to be adding elements that could be included in any normal budget. This should not be an off-budget part and should be funded with tax incentives, not subsidies.

. $480 billion for subsidies to the manufacturing sector and Research and Development. This is not only likely to be counterproductive but a net loss, as Biden aims to fund it with the largest tax increase in years. Again, likely to drive resources from the productive sectors to loss-making and non-productive areas.

$400 billion for elder and disability care. This should not be an off-budget item and should not be included in an infrastructure plan. There is plenty of room in the Federal Budget to boost elder and disability care by improving efficiency and building public-private partnerships.

$200 billion for broadband and job training. These are important items where efficiency and transparency are essential. Broadband extension should be a tax-incentive-driven public-private partnership initiative at worst, and a private sector capital expenditure plan initiative at best. Same with job training.

The plan looks ambitious, but it is not likely to generate a significant improvement in the job creation trend, as most of the funds will go to businesses that are working today at 60-80% capacity, and where new jobs will not be particularly required. In the Eurozone, for example, the Green Energy Directives, Juncker Plan and other national initiatives have not created the type of employment that was promised, with little variation in the historical trend of employment despite trillions invested. IndustriAll, a federation of trade unions in the European Union has warned that the Green Deal will likely destroy 11 million jobs without making clear how these losses will be offset.

According to a recent study (Towards a green energy economy? Tracking the employment effects of low-carbon technologies in the European Union), the EU’s energy transition between 1995 and 2009 created 530,000 jobs. One third of the jobs created in EU were a consequence of spill-over effects, and in 21 out of the 27 member states the total effect in the employment was positive. The question is whether the large investment, estimated at more than $500 billion, justified a 530.000 job creation in a workforce of more than 210 million. It is also worth noting that the European Union median unemployment and youth unemployment rates have not fallen significantly considering the intense investment.

In the United States, however, green energy and technology jobs thrived due to tax incentives while bringing unemployment to a record-low in 2019. There are clear factors of labour rigidity in Europe that impact these jobs trends, but there seems to be a clear conclusion: Green energy and infrastructure jobs rise faster and stay longer when policy is driven toward tax incentives rather than subsidies.

The main problem of Biden’s plan is that is largely politically and public-sector driven. It includes almost 40% of subsidies to local corporations and the public sector, which can reduce productivity and efficiency, as already happened in the past.

In the revenue side, figures are wildly optimistic. A $695 billion increase in corporate tax revenues from the current level is science fiction and does not even consider any negative effects from raising corporate tax to a rate that would be the highest one in the OECD, considering effective and nominal rates for most companies.

A $495 billion global income tax increase. Again, an extremely optimistic figure since a similar figure for extraordinary income has never been reached for this concept and because it does not assume any negative impact.

A $219 billion increase in taxes on loopholes for “non-tangible” income. This figure is simply made up and comes from assuming that all corporations are evading taxes, but the main risk is to generate uncertainty in companies with several divisions and shared margins.

$54 billion for the elimination of tax benefits for fossil fuels and “anti-inversion deals” measures. The energy industry is already on its knees, to think that these measures will be revenue positive is simply not understanding the industry. On the “anti-inversion-deal” measures (when a US company transfers its fiscal headquarters to the country of a company it merged with or acquired), this mistake was already made by Biden with Obama. Between 2007 and 2014 more companies left the United States to more business-friendly countries than in the entire period from 1981 to 2003, according to the Congressional Research Service. It even took Burger King, which moved out of the country.

Obviously, the plan will be rejected by Republicans and some Democrats for the tax hike, but we cannot ignore the risks of such massive transfer of wealth from productive and tax paying sectors to subsidize government spending.

The Biden administration states that the plan is revenue neutral, but it is not. First, it includes wildly optimistic estimates of new revenues. Second, those revenues are to be generated in a decade, while the spending is planned for the next two years, in net present value there is no neutrality. Third, even if we believed the optimistic revenues, it does not even start to address the large deficits built in the past administrations due to rising mandatory spending. Democrats say that this is not important because deficits can be financed at all-time low costs and supported by the Federal Reserve. However, if deficits do not matter, why the need for a large increase in taxes?

The spirit of this plan is good but should be done with tax incentives and lower subsidies. The execution, likely to be political and flawed. The risks? We have already seen the results of similar programs in the European Union and Japan.