Is the infrastructure bill a bridge too far?

Are Republicans and Democrats capable of compromising to make sound public policy decisions?

Based on the extreme partisan wrangling over the past decade, the odds appear slim to none. But the negotiations over public infrastructure spending raised hopes that a compromise might be reached.

The basis for optimism is that the difference in the proposed spending for the two sides has narrowed from the original offers: The Biden administration has lowered its tally from $2.3 trillion to $1 trillion over eight years, while the Republicans upped theirs from $568 billion to nearly $1 trillion. But only about $300 billion of the Republican offer would fund new projects, as the remainder was already budgeted in baseline transportation spending.

Meanwhile, several formidable obstacles stand in the way. One is that Republicans insist that the scope of any infrastructure plan should be limited to “hard infrastructure,” such as roads, bridges, rails and transport. Democrats, by comparison, are committed to funding clean energy investments and a $400 billion program to support care for the elderly and disabled.  

Another hurdle is that President Biden wants to pay for the plan by raising corporate taxes, which Republicans oppose on philosophical grounds. They propose instead using unspent funds from the $1.9 trillion American Rescue Plan, which provides relief from the COVID-19 pandemic, along with various user charges. 

With these issues unresolved, Biden met with Sen. Shelley Moore Capito (R-W.V.) last week to see whether the differences could be ironed out. Previously, Transportation Sec. Pete Buttigieg said that the Biden administration needs to have “clear direction” on the infrastructure bill by June 7. Meanwhile, a group of lawmakers from the two parties has been preparing a plan if talks between the GOP leadership and the White House break down.

This begs two questions. First, why is a compromise on infrastructure spending important? Second, what would constitute a “good” bill?

My answer to the first question is that infrastructure spending is one area where both sides want a bill enacted. The reason: There is widespread recognition that current spending to maintain roads, bridges and waterways, as well as to build out broadband, is inadequate. For example, the American Society of Engineers assigned a “D+” rating in assessing the quality of U.S infrastructure in 2017 after President Trump assumed office. The rating has since been upgraded to “C-.”

Trump was unsuccessful in enacting infrastructure legislation because he spent much of his political capital trying to overturn ObamaCare and then to pass corporate tax cuts. By comparison, President Biden has moved infrastructure near the top of his list of legislative priorities. But if he is unable to reach agreement with Republicans, compromise on other issues – where differences are considerably greater – is highly unlikely.

As regards the substance of the legislation, my critique of the original Biden proposal was that it was overly ambitious and not targeted at meeting the greatest priorities. Only one-quarter of the proposed spending dealt with traditional infrastructure, while another 10 percent went for high-speed broadband, the electric grid and clean energy. 

While $600 billion in proposed spending was eliminated in the second proposal, there was still room to make additional cuts. Following the first meeting with Sen. Capito, Biden lowered his spending request to $1 trillion above what is projected in the baseline budget. Yet, this is still considerably higher than what the Republicans have put forth after adding another $50 billion to their offer. Biden also floated the idea of raising the minimum corporate tax to 15 percent to pay for the spending in lieu of hiking the marginal rate from 21 percent to 28 percent.

Some liberals, however, think this is too big of a concession. For example, Columbia University economist Jeffrey Sachs views the GOP infrastructure offer as a “sham.” He calls the added funding by Republicans a “pittance” and argues that Republicans are trying to squeeze the working-class by paying for infrastructure with user fees. In his view, it’s time for Biden to push through his plan on a party-line vote using the reconciliation process. 

The problem with this assessment is it views infrastructure in isolation and does not consider the totality of government spending presented in the White House budget proposal last week. It calls for about $4.5 trillion in federal spending that would be offset by $3.5 trillion in tax increases over the next decade. If enacted, it would raise spending as a share of GDP to an average of 24.5 percent over the next decade, well above the 50-year average of about 20.5 percent, and the highest in U.S. peacetime history. 

Even with favorable economic assumptions, the Biden administration acknowledges that deficits would average just over 5 percent of GDP in the coming decade, for a cumulative increase of $14.5 trillion. This would boost the ratio of publicly-held government debt-to-GDP to 113 percent, well above the peak of 107 percent following World War II.

The bottom line is the fate of the infrastructure bill will determine whether any part of Biden’s agenda can be passed with bipartisan support. While President Biden has demonstrated flexibility in paring down proposed spending, the gulf between the two parties may be irreconcilable. If so, it would signal that policy gridlock is still business as usual in Washington, D.C.

Nicholas Sargen, Ph.D., is an economic consultant and is affiliated with the University of Virginia’s Darden School of Business. He is the author of “Investing in the Trump Era; How Economic Policies Impact Financial Markets.”