Chris Walker: Biden’s infrastructure plan is green, but at a price…

While there are many good things promised, it pays to look this ‘Trojan Horse’ in the mouth.

There is no shortage of hyperbole around Joe Biden’s $2.25tn initiative. The President himself proclaimed it a “once-in-a-generation” investment and said that “this is the moment when America won the future.” Comparisons are being made to the “New Deal,” and even to the Moonshot.

But this hyperbole risks stretching the meaning of words to breaking point. Republican critics dismissed the initiative as a “Trojan Horse,” a return to big Government and high taxation, which sneaks in a Green New Deal. The high taxation point is stretching it, but the other two criticisms stand examination.

It is true that only about a quarter of the money being spent ($621bn) is on what is traditionally thought of as infrastructure (roads, bridges, railways etc). $650bn is to be spent on ‘modern infrastructure’ (which is mainly alternative energy initiatives), $400bn on ‘care infrastructure’ (i.e., welfare programmes), and $580bn on Biden’s Trump-esque ‘industrial heartland’ programme (surely employment welfare). 

There is a second plan coming in a few weeks which will talk about ‘infrastructure’ in childcare, education and healthcare (i.e., more welfare). I must try telling my bank manager my overdraft is funding my ‘infrastructure’ spending.

This is a shame because everyone agrees US traditional infrastructure is in urgent need of repair. As Emily Blanchard (a Professor at Dartmouth) said "the US has basically been coasting along on a wing and a prayer, juicing every last bit out of very, very old infrastructure." The American Society of Civil Engineers(ASCE) gave the US infrastructure a C- grade, and even that seems generous. They rate 22% of roads as being in poor condition, and 8% of bridges in need of repair or even replacement. There’s an average of one derailment for every 100 miles of train track. 2,300 dams are considered “high hazard potential,” and with a water main breaking every two minutes, some six billion gallons of water is thrown away every day.

Indeed, one is left with the sneaking suspicion that even more money should be spent on these things. The ASCE, perhaps not an unbiased witness, nevertheless calculates a total of $6tn is needed to get infrastructure up to scratch. And if you want to add in social ‘infrastructure’ build, and indeed the small matter of fighting climate change, then this really doesn’t go far enough.

Alexandria Ocasio Cortez (AOC), doyenne of the Democratic Left, certainly feels this. She was quick to point out that while even she was surprised at “the scope” of the plan (goodness, the hyperbole was too much even for AOC) the price tag was just too low. As she rightly observed on Twitter, $2.25tn sounds impressive, but it is being spread over eight years (compared to the $1.9tn US Covid relief bill that is money upfront). Of course, AOC welcomes all the welfare spending, but she wants a lot more of it. She pointed out that the $40bn allocated to public housing would barely cover the needs of New York alone (her fiefdom, of course). Plucking a number from the air, AOC said she wants $10tn.

I do welcome the climate change initiatives, which are significant. Indeed New York magazine concluded "Biden’s infrastructure bill doubles as his climate bill." The manufacturing tax credit (ITC) is being revived (a major aim of the alternatives industry). As Recharge News observed "the proposed multi-year extension would provide investors the long-term window they have been seeking to ramp up capacity expansions for both onshore and offshore wind and solar." Qualifying offshore wind projects are now eligible for the ITC at 30% of Capex, and large solar projects can qualify for the ITC at 26%.

There are also generous federal grants to “accelerate storage technologies,” and a new Grid Deployment Authority is being established. Then there are the various initiatives in public transport and electric vehicles ($174bn is being spent and some 500,000 charging stations established). Pete Buttigieg, the new Transport Secretary, and Washington’s most popular dinner party guest, thanks to all the largess he’s handing out, said he wanted to “make the 2020s a turning point in the story of American transportation” and make it “a primary driver of solutions on climate change.”

All these initiatives will have an effect, and will be welcomed by responsible investors. In stock market terms most of these changes had long ago been priced into alternatives share prices, though this didn’t stop analysts rushing out their ‘Infrastructure Stock lists’ such as Stifel’s, which promoted Dycom, Quanta, MasTec, MYR and Atlas Technical Consulting. Energy analysts at Truist advocate Enphase Energy and Sunrun. 

But the bond market was a lot less impressed with prices falling as it continues to price in inflation risk – the big story of this Spring. Even before this plan was announced, the unfunded $1.9tn Covid Relief giveaways were causing dyspepsia, and the IMF had concluded that the US deficit would reach 133% of GDP by the end of 2021.

This is my main worry about ‘Bidenomics.’ So much of current economic thinking has been influenced by an academic movement which has given intellectual cover to an abandonment of inflation vigilance, or indeed its complete mockery. This is exemplified by Mariana Mazzucato, economics professor at UCL who recently published “Mission Economy.” She argues: “logic confuses household finances with those of a Government.” The reason is “simple” – governments “print money, they have a sovereign currency.”

Part of this administration’s hyperbole is the frequent references to the “a once in a generation investment in America, unlike anything we’ve done…since the space race.” Bridges might be investment, welfare is not. With this thinking in the ascendancy no wonder bond markets have inflation fears.

This misty-eyed thinking certainly crept into the way the Covid Relief bill was unfunded. Bill Clinton’s Treasury Secretary, Larry Summers, called it “the least responsible macroeconomic policy” in decades. Fortunately, the infrastructure initiative is funded, with proposed tax hikes on corporations (from 21 to 28%) and on individuals earning more than $400k a year. Both clever political moves with widespread popular support. And the White House got Summers back on side.

But we must be aware of the stimulative, inflationary effect of the Covid Relief Bill, which has yet to be fully seen. Add in an infrastructure bill hot on its heels, (and, of course, a second welfare bill in the wings). All these multi-trillion dollar wishlists are pointing in one direction. Commodity prices are certainly rising fast. Copper, at over $4 a pound now, is not just above pre-Covid levels, but getting close to an all-time high. The Independent Commodity Intelligence Services brought out a report which said that this plan would light a fire under chemicals and commodity prices.

Investors are going to have to keep a close eye on this administration.

 

Christopher Walker is a writer on business and politics. He sat for several years on the asset allocation committee of a major asset manager.