ANALYSIS04 NOVEMBER, 2021Prepared byMark [email protected] EconomistINTRODUCTIONBernard [email protected] DirectorContact [email protected]./Canada 1.866.275.3266EMEA 44.20.7772.5454 (London) 420.224.222.929 (Prague)Asia/Pacific 852.3551.3077All Others 1.610.235.5299Macroeconomic Consequences of theInfrastructure Investment and Jobs Act &Build Back Better FrameworkLawmakers in Washington DC continue to work feverishly on another massive fiscal plan,including a more than 1 trillion bipartisan infrastructure deal and a 1.75 trillion packageof social spending and tax breaks to lower- and middle-income households that the Bidenadministration and congressional Democrats hope to pass into law via the budget reconciliationprocess. While the legislation remains in flux, it is similar in spirit to the Build Back Better agendaPresident Biden proposed earlier this year. If this is close to what becomes law, it will strengthenlong-term economic growth, the benefits of which would mostly accrue to lower- and middleincome Americans. The legislation is more-or-less paid for on a static basis and more than paidfor on a dynamic basis through higher taxes on multinational corporations and the well-todo and a range of several other pay-fors. Concerns that the plan will ignite undesirably highinflation and an overheating economy are overdone, as the fiscal support it provides will ensurethe economy only returns to full employment from the recession caused by the COVID-19pandemic. Because the package includes a myriad of spending and tax initiatives, some ofwhich are new and uncertain, implementing this legislation as intended and in a timely way willtake deft governance. In this white paper, we assess the macroeconomic impact of both thebipartisan infrastructure deal legislation and the reconciliation package of social spending andtax OODY’S ANALYTICSMacroeconomic Consequences of the Infrastructure Investment and Jobs Act & Build Back Better Framework1

Macroeconomic Consequences of theInfrastructure Investment and Jobs Act &Build Back Better FrameworkBY MARK ZANDI AND BERNARD YAROSLawmakers in Washington DC continue to work feverishly on another massive fiscal plan,1 including a morethan 1 trillion bipartisan infrastructure deal and a 1.75 trillion package of social spending and tax breaksto lower- and middle-income households that the Biden administration and congressional Democrats hopeto pass into law via the budget reconciliation process. While the legislation remains in flux, it is similar in spiritto the Build Back Better agenda President Biden proposed earlier this year. If this is close to what becomes law,it will strengthen long-term economic growth, the benefits of which would mostly accrue to lower- and middleincome Americans. The legislation is more-or-less paid for on a static basis and more than paid for on a dynamicbasis through higher taxes on multinational corporations and the well-to-do and several other pay-fors (see Chart1). Concerns that the plan will ignite undesirably high inflation and an overheating economy are overdone, as thefiscal support it provides will ensure the economy only returns to full employment from the recession caused bythe COVID-19 pandemic. Because the package includes a myriad of spending and tax initiatives, some of whichare new and uncertain, implementing this legislation as intended and in a timely way will take deft governance.In this white paper, we assess the macroeconomic impact of both the bipartisan infrastructure legislation and thereconciliation package of social spending and tax changes.Infrastructure Investment and Jobs ActThe Infrastructure Investment and JobsAct, which has bipartisan support, includesmore than 1 trillion in transportation andother physical infrastructure spending overthe decade 2022 to 2031, of which close to 600 billion is additional funding (see Table1). Spending on roads and bridges, powersystems, rail, broadband, water systems, andpublic transit gets the largest boost.2To help pay for the legislation, lawmakers have pieced together several pay-fors,ranging from a delay in a rule affecting thetreatment of drug rebates to an extensionof the higher mortgage guarantee feescharged by Fannie Mae and Freddie Mac.MOODY’S ANALYTICSThe legislation adds modestly to budgetdeficits over the 10-year budget horizon ona static basis, but meaningfully less so on adynamic basis, as the increased infrastructure spending supports stronger economicgrowth, which in turn generates more taxrevenues and reduces other governmentspending on income support programs suchas unemployment insurance.Increasing infrastructure investment hassignificant macroeconomic benefits. Nearterm it has a large so-called multiplier—theincrease in GDP for a dollar increase in investment. It is among the highest comparedwith other types of federal governmentspending and tax policy.3 Long term, eco-nomic research is in strong agreement thatpublic infrastructure provides a significantlypositive contribution to GDP and employment. It lowers business costs and thusimproves competitiveness and productivity,allows workers to live closer to where theywork, and thus reduces commute times,improves labor participation, and reducescarbon emissions.There is more debate on whether publicinfrastructure spending boosts GDP by asmuch as private capital does. One reason forthis is that, unlike private investment, federalinvestment is not driven solely by market forces or maximizing economic returns. Federalinfrastructure also has the goal of improvingMacroeconomic Consequences of the Infrastructure Investment and Jobs Act & Build Back Better Framework2

Chart 1: Paying for BBBTo help pay for thepackage, lawmakersStatic federal budget impact, % of GDPare proposing higher2.5taxes on multinationOther pay-forsTax increases2.0Child & Earned Income Tax CreditsHealthcareal corporations andClean energy and climateInfrastructurewell-to-do individu1.5Childcare, education, housing & equityNet deficit impactals, and more reve1.0nues from closing the0.5tax gap. There is also0.0a new 1% excise taxon share repurchases-0.5or a stock buyback-1.0tax. Companies buy22232425262728293031back their stock to reSources: CBO, CRFB, JCT, White House, Moody’s Analyticsturn profits to shareJuly 20211holders and supportquality of life, reducing inequities, supportingtheir stock price. Repurchases have becomethe work of the federal government itself, andincreasingly popular among publicly tradedaddressing other objectives that policymakerscompanies and will total close to 800 billionmay have. The federal government also impos- this year. The package also raises meaninges various requirements that can increase thefully savings from repealing the Trump adcosts of the projects that it funds. We estimate ministration’s prescription drug rebate rule,the average return on private capital to bewhich would have raised Medicare Part Dclose to 10%—that is, a 1 increase in privateprogram costs.investment, all else being equal, increases GDPWhile the particulars of the reconciliationby 10 cents over a year—while it is almost 7%package are still unsure, it is fair to say it isfor public infrastructure.4paid for, both on a static, and particularly onEven so, this is an especially economicallya dynamic basis.5 This conclusion abstractspropitious time to increase public infrastrucfrom the considerable uncertainties overture investment, since the return on thatthe actual revenues that will be generatedinvestment is substantially greater than thefrom such policies as closing the tax gap orgovernment’s cost of financing given the eximplementing the new share repurchase tax.traordinarily low interest rates. Thirty-yearThere is also the possibility that policies inTreasury bond yields are close to 2%, whilethe package that are set to expire during thethe return on almost any public infrastructurebudget horizon (to ensure they do not addproject is likely to be meaningfully greaterto deficits outside the horizon and violatethan that.budget reconciliation rules) would insteadbe extended given likely political pressureBuild Back Better frameworkto continue funding. However, this does notThe 1.75 trillion reconciliation packagenecessarily mean that any future extension ofincludes increased spending on various sothese policies would not also be paid for.cial programs similar to those proposed inThe reconciliation package would provideBiden’s American Family Plan (see Table 2).a near-term boost to the economy given theThere are substantial funds in the packagetax cuts in the plan for lower-income indifor early childhood and higher education,viduals and as spending on the various socialchild- and eldercare, housing, healthcare,programs gears up. It also would have severaland climate change mitigation. There areimportant long-term economic benefits.also substantial tax breaks for lower-inFirst, it would increase the labor force particcome households, including an expansionipation and hours worked of mostly lower-inof the earned income tax credit and ancome women. It would do this by makingextension of the expanded child tax creditchildcare more affordable, and expanding thethat was included as part of the Americanearned income tax credit that encouragesRescue Plan passed into law in March; fam- low-income households to work. The packageilies will stop getting monthly checks atmakes it more cost effective for more parentsyear’s end unless lawmakers extend work, and the extra time and schedulingMOODY’S ANALYTICSflexibility created by childcare allows them towork more hours.Research on the labor supply impact oflower childcare costs shows there are meaningful advantages, and our own research isconsistent with this.6 Accessible childcarefacilitated by federal support to childcareproviders has especially strong employmenteffects for single mothers, mothers withyoung children, and lower-income moms.Moreover, the personal financial costs toparents who leave the workforce to care for ayoung child because of the high cost of childcare are high. They accumulate fewer skills,and their productivity is diminished, resultingin lower wages when the parent eventuallyreturns to the workforce. The effect tends tofade only after several decades. Further, awoman’s career progression is reduced evenmore if she has more than three children, andthe penalty to wages is never made up. Evenwhen women remain engaged through parttime work, their career progress is reduced.A second important macroeconomic impact of the reconciliation package is that itwould increase labor productivity by raisingthe educational attainment of the workforcevia universal pre-K, expanded funding forhigher education. Increased funding for workforce development would also lift the skilllevel of the workforce. The positive impacton educational attainment and productivitywould of course play out over many years—well beyond the 10-year budget horizon considered in this analysis.Stronger and fairer growthWe use the Moody’s Analytics model ofthe U.S. and global economies to quantify theimpact of the bipartisan infrastructure dealand the reconciliation package on the economy.7 We consider five scenarios. To providecontext, the first scenario assumes that Bidenwas unable to enact any major fiscal policychanges, including the American Rescue Planthat was passed into law in March. The second scenario assumes that lawmakers fail topass any additional fiscal policy legislationbeyond the ARP. The third and fourth scenarios assume the bipartisan infrastructuredeal and the reconciliation package are eachpassed into law, respectively, but not the other. And the final scenario assumes that boththe bipartisan infrastructure deal and the reconciliation package become law.Macroeconomic Consequences of the Infrastructure Investment and Jobs Act & Build Back Better Framework3

Chart 2: Employment Gets a Boost.Chart 3: And Unemployment DeclinesUnemployment rate under different policy scenarios, %Nonfarm employment under different policy scenarios, mil14131211109876543156152148144No additional supportAmerican Rescue PlanARP, IIJAARP, BBB frameworkARP, IIJA & BBB framework140136132192021222324July 2021MOODY’S ANALYTICSFull employment192021222324Sources: BLS, Moody’s AnalyticsSources: BLS, Moody’s AnalyticsThe Moody’s Analytics model is simulatedover the decade through 2031. This is consistent with the Congressional Budget Office’shorizon for the federal government’s budgetand policy analysis. The assumption is thatthe fiscal policies considered will become lawby the end of this year and be implementedbeginning in 2022. We also assume thereare no other significant fiscal policy changes.Monetary policy is determined in the modelbased on the Federal Reserve Board’s recently implemented framework for conductingmonetary policy in which the Fed has committed not to begin normalizing interest ratesuntil the economy is at full employment andinflation has been consistently above theFed’s 2% inflation target. We assume that theworst of the COVID-19 crisis and its economic fallout are over, and that the pandemic willcontinue to wind down.The bipartisan infrastructure deal providesa modest increase in infrastructure spendingand it thus supports only a modestly strongereconomy (see Table 3). The most immediateimpact in early 2022 is to reduce growth,since the pay-fors take effect right awaywhile the increased infrastructure spendingdoes not get going in earnest because of lagsin starting infrastructure projects until latein the year. The apex in the boost to growthfrom the deal is expected in 2023, when realGDP increases 2.9%, compared with 2.3%when assuming only the ARP is passed intolaw. The deal creates more than 800,000jobs at its peak impact in the middle of thedecade, reducing the unemployment rateby a few tenths of a percentage point (seeChart 2). The unemployment rate neverfalls below 4% and the economy neverNo additional supportAmerican Rescue PlanARP, IIJAARP, BBB frameworkARP, IIJA & BBB frameworkJuly 20212completely returns to the full-employmentconditions experienced pre-pandemic (seeChart 3). Longer term, the economy receivesa bump to productivity growth due to theincrease in the stock of public infrastructure,but it is small given the modest increase ininfrastructure spending.The reconciliation package is much largerand thus meaningfully lifts economic growthand jobs and lowers unemployment. Theboost to growth occurs quickly, with real GDPincreasing 4.9% in 2022, a percentage morethan if only the ARP is passed into law. Thetax cuts for lower-income individuals in thepackage are mostly spent quickly, while thetax increases on corporations and high-income and wealthier households have a muchsmaller and slower impact on investmentand consumer spending. The increased social investments in the package, particularlyrelated to child- and eldercare, healthcareand housing, also quickly support strongerGDP and jobs. There are 1.6 million more jobsby mid-decade at the peak of the boost toemployment, and the unemployment rate is0.75 percentage point lower. The unemployment rate returns to its pre-pandemic lows inthe mid-threes, although labor force participation never fully recovers given longer-termfallout from the pandemic. Longer term,the economy’s growth enjoys a measurableincrease due to stronger productivity growthgiven greater educational attainment andhigher labor force participation.The reconciliation package also helpsaddress the wide and growing disparity inthe nation’s income and wealth distribution.It targets most of the social investments tolower- and middle-income households and3taxes multinational corporations and thewell-to-do to help pay for these benefits.Moreover, high-income and wealthier households have arguably never been in a betterfinancial position given the long-runningskewing of the income and wealth distribution and surging stock values and houseprices. As measured by the Gini index of income inequality, if the reconciliation packagebecomes law, the income distribution wouldnot skew meaningfully further in the comingdecade.8The economy performs best in the finalscenario, in which both the bipartisan infrastructure deal and the reconciliation packagebecome law. Real GDP growth would average3.2% per annum during Biden’s term and2.2% over the next decade, compared withless than 2.8% and 2.1% per annum if thelegislation fails to become law. In terms ofemployment, under the infrastructure dealand reconciliation package, there are 2.4million more jobs at the peak of the employment impact by mid-decade, and unemployment is a full percentage point lower. Laborforce participation is also higher, althoughthe full boost to participation occurs after the10-year budget horizon.Inflation, higher taxes andexecution riskConcerns have been expressed regarding the substantial additional fiscal support being considered by lawmakers. Someworry that the proposed fiscal policy istoo expansive given support already provided to the economy during the pandemic, and this will exacerbate the inflationarypressures that are evident as the economyMacroeconomic Consequences of the Infrastructure Investment and Jobs Act & Build Back Better Framework4

recovers from the pandemic. Inflation willremain uncomfortably high even afterthe current disruptions to the supply sideof the economy caused by pandemic areironed out, and the economy could potentially overheat as the Federal Reserve isforced to respond by tightening monetarypolicy quickly.This concern cannot be dismissed, butit is likely overdone. With unemploymentstill near 5% and labor force participationwell below where it was pre-pandemic, theeconomy still has considerable slack, equalto an estimated approximately 6 percentage points of GDP. But the bipartisan infrastructure deal and reconciliation packagewill deliver only about a percentage pointof additional GDP growth in 2022 andcloser to 2 percentage points cumulativelyof additional GDP growth through mid-decade. Given the fiscal support alreadyprovided, this would be just enough toprovide the added GDP needed to get theeconomy fully back to full employment.Consumer price inflation is a few tenths ofa percentage point higher next year andin 2023 because of the stronger growthand faster return to full employment, butquickly settles near the Federal Reserve’sinflation target of just over 2% per annum.Longer term, much of the additional fiscalsupport being considered is designed tolift the economy’s longer-term growth potential and ease inflationary pressures. Forexample, consider the additional spendingon new rental housing supply for lower-income households, which is critical to reinin rent growth and housing costs, or theefforts to reduce prescription drug costs.The legislation is also specifically designedto ease the financial burden of inflation forlower- and middle-income Americans byhelping with the cost of childcare, eldercare, education, healthcare and housing forthese income groups.MOODY’S ANALYTICSOthers have voiced concern that the taxincreases included in the legislation to helppay for it will have serious negative economic consequences. To be sure, all else beingequal, higher taxes will weigh on economicgrowth, but the impact on the economyfrom the higher proposed taxes will be small.In part, the tax increases being consideredon high-income and wealthy householdswould be the first meaningful tax hike onindividuals since the early 1990s. And from ahistorical perspective they are, on net, modest.9 Effective tax rates will remain close tohistorical norms.There should also be no concern that thetax increases on large multinational corporations in the reconciliation package, includinga 15% minimum tax on large corporationsand a 15% country-by-country minimum taxon foreign profits of U.S. corporations, willmeaningfully hurt economic growth. Thisis based on the experience to date with thelarge tax cuts corporations received under theTax Cuts and Jobs Act in 2018, including thereduction in the top marginal corporate taxrate from 35% to 21%. There is little evidencethat the TCJA led to a meaningful sustainedincrease in business investment, hiring orwages, or prompted businesses to shiftproduction to the U.S. from overseas as intended. While it is difficult to disentangle allthat is going on in the economy to isolate theimpacts of the TCJA, it is difficult to concludethat the tax cuts in the TCJA have supporteda stronger economy. Therefore, it is difficultto think that the increases in corporate taxesin the reconciliation package will meaningfully hurt the economy.The most serious concern with the legislation is around execution risk. That is, the bipartisan infrastructure deal and reconciliationpackage are complex, with lots of massivemoving parts. Successfully organizing themwould be difficult even among the best-managed private companies. Scaling up existingprograms as envisaged in the legislation isone thing, but standing up new programsand tax policy is another. In our analysis, wetry to account for expected lags and delaysin implementation, but this could be trickierthan we are anticipating. This is especially thecase for much of the new policy related toaddressing climate change.Moreover, while the legislation is paid forand does not add to the nation’s deficits anddebt, there is a risk that future lawmakerswill not allow the increased spending and taxcredits in the plan to expire as legislated, andnot pay for their extension. Heightened taxenforcement on wealthy taxpayers and thetax on stock repurchases also might not raiseas much additional revenue as anticipated.Running large deficits is good economic policy during the pandemic, so those hit hardcan manage through. It also makes sense asthe pandemic winds down, to get the economy back to full employment. But, once theeconomy has returned to full employment,focusing on our long-term fiscal problems willbecome critical.ConclusionsThe nation has long underinvested in itsinfrastructure and social needs and has beenslow to respond to the threat posed by climatechange, with mounting economic consequences. The bipartisan infrastructure deal and reconciliation package help address these issues.Greater investments in public infrastructureand social programs will lift productivity andlabor force growth, and the attention on climate change will help forestall its increasinglycorrosive economic effects. Moreover, the policies being considered would direct the benefitsof the stronger growth to lower-income Americans and address the long-running skewing ofthe income and wealth distribution. Passageof legislation remains uncertain, but failing topass legislation would certainly diminish theeconomy’s prospects.Macroeconomic Consequences of the Infrastructure Investment and Jobs Act & Build Back Better Framework5

Table 1: Infrastructure Investment and Jobs ActStatic budget cost, bil202220232024202520262027202820292030Static budget 7398.9Total infrastructure spendingTransportationEnvironmental remediation and other authorizationsEnergy and waterBroadbandBond .0305.2129.688.447.61.2Total pay-forsDelaying rule affecting treatment of drug rebatesInformation reporting for brokers and digital Extension of enterprise guarantee feesChemical superfundRescission of COVID-19 appropriationsSpectrum auctionsExtension of direct spending deductions intofiscal 2031Termination of employee retention creditCustoms user feesStrategic petroleum reserveManufacturer rebates for unused drugs in MedicarePart BExtension of interest rate stabilization2031 2022-2026 2022-2031Note: These budget cost estimates do not include any dynamic benefits.Sources: CBO, CRFB, JCT, Moody's AnalyticsMOODY’S ANALYTICSMacroeconomic Consequences of the Infrastructure Investment and Jobs Act & Build Back Better Framework6

Table 2: President Biden's Build Back Better FrameworkStatic budget cost, 26 2021-2031Static budget .7-209.4458.5-245.0Total spending and tax cutsChildcare, education, housingand equityChild care and preschoolHigher ed and workforceEquity and other investmentsAffordable housingClean energy and combatingclimate changeHealthcareMedicare hearing benefitsHome careACA premium tax creditsChild Tax and Earned IncomeTax 16.6171.5200.0Total pay-forsTax increasesIRS investments to close thetax gapCorporate internationalreform15% corporate minimum taxon large corporationsClose Medicare tax loopholefor the wealthyAGI surcharge on the top0.02%Limit business losses for thewealthyOther pay-forsPrescription drugs: repealrebate ruleStock buybacks -12.4-12.5-12.5-12.6-12.6-62.3-125.0Sources: White House, Moody's AnalyticsMOODY’S ANALYTICSMacroeconomic Consequences of the Infrastructure Investment and Jobs Act & Build Back Better Framework7

Table 3: Macroeconomic Impact of the Build Back Better LegislationREAL GDPNo additional supportAnn.2012 bilgrowthARP & IIJAAmerican Rescue PlanAnn.2012 bilgrowth2012 bilAnn.growthARP & BBBframeworkAnn.2012 bilgrowthARP, IIJA & BBBframeworkAnn.2012 64524,136-

investment, all else being equal, increases GDP by 10 cents over a year—while it is almost 7% for public infrastructure.4 Even so, this is an especially economically propitious time to increase public infrastruc-ture investment, since the return on that investment is substantially great