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Season 2

Episode 1: What infrastructure spending means for you

Episode 1: What infrastructure spending means for you

Transcript: Season 2, Episode 1: What infrastructure spending means for you

Disclosure: The opinions expressed by Eurasia Group analysts in this podcast episode are their own, and may differ from those of Citigroup Inc and its affiliates.

Caitlin Dean: Welcome to Living Beyond Borders, the podcast from Citi Private Bank and GZERO Media that examines the risks and opportunities in our rapidly changing world—from global politics to economics—and what it all means for you. I’m Caitlin Dean, Head of the Geostrategy Practice at Eurasia Group.
It was a day like many others in Minneapolis. August 1, 2007. Parents headed to work, kids headed to summer camp, and trucks carried goods through the city on their way to other locations across the U.S.

Then: disaster hit.
News tape:
“One of the main iconic bridges in the Twin Cities has collapsed”

“The entire bridge is in the water, the 35W bridge is in the water”

“A tragedy that has horrified this community but perhaps put in everyone’s mind the question is the bridge I drive over every day stable”

“In America, a bridge just shouldn’t fall down. Especially not an 8 lane interstate highway, especially not one of the most heavily traveled bridges in the state, especially not at rush hour in the middle of a metropolitan area”

The I35-W Mississippi River bridge collapsed during evening rush hour, killing 13 people and injuring 135. The bridge was 50 years old, and the collapse was blamed on a design flaw. At the time, people demanded action and investment to improve the dire circumstances around infrastructure in this country.

But that disaster was nearly 15 years ago – and, like many other disasters around the world since – the motivation soon fizzled.
Since then, the picture hasn’t improved much – with the U.S. Government Accountability Office recently finding that almost one out of every four bridges in this country are deficient. Many of our roads, railways and airports were built at a time when the country’s population was HALF of what it is today.

And today’s infrastructure means a lot more than just building roads. President Biden’s infrastructure plan is poised to pump a trillion dollars into the economy to help not just modernize bridges, roads - but also manufacturing, R&D, clean energy, climate resilience and more.

And all of those projects are likely to have far reaching impacts.

Joining me now to talk about those impacts are Jon Lieber, Managing Director at Eurasia Group. Hey Jon.

Jon Lieber: Hey, Caitlin. Thanks for having me.

Caitlin Dean: We also have with us David Bailin, Global Head of Investments and Chief Investment Officer at Citi Global Wealth. Welcome David.

David Bailin: Thanks, Caitlin.

Caitlin Dean: And we’re joined by Adam Minehardt, Director of Federal Government Affairs at Citigroup. Thanks for joining us Adam.

Adam Minehardt: Hi, Caitlin. Thanks for having me.

Caitlin Dean: So, let's start with the news and what's going on in the U.S. Adam, you've been close to this process. What do you find interesting about this infrastructure bill compared to others in the past?

Adam Minehardt: Well, I think the first thing to point out is that this bill is just not as big or transformative as President Biden and his supporters had hoped for. You may remember that the president's original plan called for $2.3 trillion in infrastructure spending, and that this bill comes in at just over half of that number.

That of the bill's trillion dollar price tag, only $550 billion of it is new federal spending. The negotiations were tough and required many compromises at every step of the way. But the end result is a package that is much smaller and less impactful than it was originally hoped for, particularly when it comes to climate related infrastructure investment.

Looking at the bill holistically, its focus remains on traditional infrastructure, roads, bridges, rail, ports, and airports. And it fails to truly look to the future comprehensively. For instance, the rail investment is historic by itself at $66 billion, but it focuses on Amtrak, our existing rail network, rather than new high speed rail projects.

A second point is that while the bill itself is not as big or transformative as was hoped for, there's a much bigger takeaway, and that is the president and congressional Democrats' attempt to redefine America's understanding of what infrastructure is. This, in fact, could be the lasting legacy of this effort. To this point, the president and Democrats spent a great deal of effort on broadening how we think of what infrastructure is, away from the traditional concept of roads, bridges, and tunnels, to now include other capital-intensive areas such as housing, climate resiliency, and broadband.

What I would say is that when leaders are able to change our understanding of what something is, in this case infrastructure, and what the government's role should be in providing it, it can institutionalize a new menu of values.

Caitlin Dean: Can you clarify for us the difference between the two infrastructure bills?

Adam Minehardt: So, there are two bills, one, more of the traditional infrastructure bill, and the second bill, which many are calling the human infrastructure bill, that that will go through the reconciliation process in the next month.

The bill that is referred to as the infrastructure bill is a $1 trillion bill that includes funding for traditional types of infrastructure, roads, bridges, tunnels, as well as broadband investment and public transit. This bill has bipartisan support in the Senate, it has passed already, and it is now pending in the house where we also expect it to have strong bipartisan support.

The second bill that there's a lot of discussion on in DC is actually much larger. It could be as large as $3.5 trillion, and its parameters were set by what's known as a budget resolution which sets the structure for consideration of this bill. This bill is being put together now in the House and the Senate, and will likely go through a process known as reconciliation, which expedites voting in the Senate, protecting it in many ways from the filibuster.

And in this bill, we're going to see items such as education in terms of universal pre-K, free community college, funding for childcare and elder care, fundings for veterans hospitals, several healthcare initiatives, and some sizable climate change projects included as well.

Caitlin Dean: Jon, how do you think this falls out?

Jon Lieber: I think that if they're successful in passing the $4 trillion in new spending that's been put on the table, they'll have considered themselves successful beyond their wildest dreams. I mean, as Adam pointed out, There's the much smaller $550 billion in new funding for physical infrastructure, and then there's the very large $3.5 trillion in spending on social services programs, subsidies for healthcare and education, subsidies for green energy, direct transfer payments to low income families. Most of these things have been longstanding Democratic priorities. I don't think anybody suspects they're going to pass the full $3.5 trillion due to objections from moderate Democrats in Congress. But let's say they get $3 trillion. That's still going to be considered a lot of money and will be a big legacy item for President Biden.

Caitlin Dean:When we think about how big of a bill this is, I'm curious where the greatest need is and where a lot of the money's going to go. So, how desperate is the need for infrastructure right now?

Jon Lieber:It's really hard to quantify that. So, one of the estimates that are generally relied on come from the American Society of Civil Engineers, who obviously have a dog in the infrastructure fight, and they estimate that there's a need for about $6 trillion over the next 10 years in physical infrastructure investment. Now, of course, again, I want to focus, we're talking only about the $550 billion piece of this program, and not about the much larger $3.5 trillion piece, which is going towards what they're calling human infrastructure.

So, this estimate from the engineers, it touches on things like airports, roads, bridges, tunnels, water projects, wastewater projects, electrical grid resiliency, transit. And these are all areas where the U.S. gets relatively low grades from the American Society of Civil Engineers. If you put the United States up against in an international context, the U.S. does a little bit better.But a lot of the needs for this project is going to be things like deferred maintenance, there are a lot of bridges that are considered structurally deficient that could be brought up to speed, and other projects that are going to take years to get off the ground because of permitting delays, environmental reviews, and other things that make it very difficult for the U.S. to launch new projects. And that's one of the reasons that there is this big backlog is because of the fact that the American system has a lot of veto points when it comes to deploying new infrastructure assets, that even if you do make this $550 billion commitment, a lot of this money is going to end up being spent out over a long period of time as a result of that.

Caitlin Dean: Let's talk about the economic implications of that much money being spent over such a period of time. So, David, big picture, what kind of impact does an infrastructure push have on the national economy, in the short term and in the longer term?

David Bailin: These types of bills have a really long life. Lots of the spending will take between four and eight years. And in the first set of spending, it takes quite a bit of time just to get a project to go from shovel-ready to actually shovel in the ground. The U.S. doesn't do a particularly good job of actually having a list of ready projects for some of the more traditional infrastructure that they're talking about.

So, the answer to your question is relatively little. And from an investment standpoint, obviously the direct beneficiaries are the companies that are going to provide engineering, going to provide supplies, and of course, labor and oversight in order to actually do these projects, and they are broadly distributed across the United States. So, the largest direct implications will be unemployment, and obviously that's very good for the economy. But in terms of overall GDP, we're talking about literally one-10th of 1% type of numbers, not very significant.

The second bill, which really deals much more with forward-looking projects, I think is where it's probably more interesting from an investment standpoint. Because in that second bill, and again, these are initial estimates, you have nearly $200 billion for clean energy, more than $130 billion for areas of agricultural conservation, having to do with everything from carbon emissions reductions to dealing with things like the drought. Then there are investments literally in research for technology associated with coastal resiliency and then clean energy programs, including a clean energy technology accelerator to really deal with funding of low-income solar projects and the like.

And in that way, it's groundbreaking. And for me, that's exciting because government investment usually parallels a lot of private investment. And so, those are areas where I think we will see an acceleration in both the development of technology in these areas, but also in the fact that there will be parallel private funding.

Caitlin Dean: And Jon, you had also mentioned the human infrastructure piece. So, how economically impactful do you think those portions are going to be?

Jon Lieber: It's tough to say. I mean, I think that the biggest piece of the human infrastructure part that's going to be the most meaningful are probably the transfer payments going to low income families and families with children, which is about $800 billion of the size of the proposed package. It probably ends up smaller than that. But these would be really transformative in the lives of a lot of low income Americans, giving them more flexibility to spend on food, education, and basic needs. And so, I think that's obviously going to be very, very important to those families.

You look at other parts of this plan, and it subsidies for community college, subsidies for universal preschool. And those things, in theory, could be productivity enhancing in that they increase the supply of labor available to work. If you don't have to worry about who's going to take care of your kid, you can go back to work, you can work more hours, you could invest in your education with community college, and then over time become a more productive worker. And the productivity growth is, of course, in the long run the thing that matters most for the path of economic growth in the United States and around the globe. These are all really complicated questions that are going to get answered over the next 10 years. So, it's really difficult to give an estimate of that right now.

Caitlin Dean: And Adam, let's try to put all these investments in perspective. How do they compare to previous moments of big infrastructure building in our history?

Adam Minehardt: They don't compare very well. Many economists agree that even with this package, total U.S. investment in infrastructure will still be less than 1.5% of GDP. This deal, as David mentioned, will contribute less than three-tenths of a percent per year over the next decade. Some even suggest much smaller gains.
In comparison, according to analysis done by the Brookings Institution, peak infrastructure spending under the New Deal occurred in 1933, which came in at nearly 3% with the launch of the Public Works Administration. And as some with a historical bent may recall, the PWA funded and oversaw more than 30,000 projects, including generational icons such as the Lincoln Tunnel in New York city and the Hoover Dam in Nevada.

In addition, further analysis done by the Eno Center for Transportation found that the Federal Aid Highway Act of 1956, which created the interstate highway system, authorized about $25 billion over 13 years. That amounted to about 6% of GDP in 1957 alone. Thereafter, infrastructure spending declined in the following decades before increasing again in the '70s and '80s to about 2% of GDP. So, as you can see, even with this infrastructure bill, the U.S. will still lag behind its historic investment in infrastructure.

Caitlin Dean: Jon, a lot of us think about infrastructure investment as more damage control or preventing negative impacts, but there's also a positive, even catalytic impact this can have, right?

Jon Lieber: Yeah, absolutely. And I think David made a really important point there. I mean, we are spending more money on infrastructure today, but we're getting less out of it because the transformative effects of, say, the Eisenhower interstate system that connected cities in a very efficient and fast manner for the first time ever in the '40s and '50s and '60s, it's hard to come up with those kind of transitional, transformational investments today. I mean, a lot of this money is going to go towards maintaining existing roads, maintaining existing bridges.

The average time that it takes to build a new infrastructure project in the United States is extended because of what's on average about seven years of pre-construction review. So, the U.S. has one of the strictest standards for building transit in the whole world. That tends to makes projects more expensive.

You're moving a lot of the highest impact investments in very densely packed urban areas where there's a lot of people who are going to be affected by the construction, and also, a lot of people who can complain and slow down the process.
This is a really important dynamic in the U.S. today. And the U.S. seems to lack a kind of national plan for what would be the most high impact investments. Yes, it's possible building high-speed rail to connect Washington DC and New York and get people from place to place, or building new transit systems that make commutes from the exurbs into the urban core, would increase productivity and increase economic growth in a similar manner to the Eisenhower interstate system. But those projects are expensive, they're subject to overcrowding once they're online, and they seem to not deliver on the promise of planners the way they were hoping to.

And then, Caitlin, to your point about resiliency. I mean, I think a lot of the infrastructure that's done today, you look at wastewater projects or sewage projects. I mean, these are not about getting able to work faster or moving goods across interstate lines faster. These are about just simply making sure we're not polluting the rivers with sewage. And so, those projects in particular are important, they're expensive, they take a long time to do, but they're probably going to have a minimal economic impact outside of the direct economic gains from the jobs they create.

Caitlin Dean: David, what does this mean for investing and for markets? What are some of the direct and indirect impacts?

David Bailin: I'd like to put some of what we just talked about in context. So, if you think about the competition between the U.S. and China, a lot of this infrastructure is stuff that China does all the time. It's constantly investing in its physical infrastructure. It is putting direct government investment into technology development. And this, in my mind, represents a shift in U.S. priorities in a sense to compete with China.

You can see why this is competitively a necessity. So, when we talk, for example, about green energy, when we talk about clean water, when we talk about different investments that address climate change, and especially when we talk about access to broadband, all of these are the types of infrastructure investments that the U.S. needs to be competitive in the future and to address known future threats to our economy.

And then when we look at those areas of the bill, and we think about what we call unstoppable trends, places in the market where if you look out 10 years or 20 years, you're going to see growth rates well in excess of what we are experiencing today, this bill touches a lot of those.

Let me give you another example of that. When you talk about preschool education or when you talk about community college, in addition to getting people skilled up for the changes in what our economy needs in terms of future skills. The other thing is that all of those capabilities, certainly community colleges, are going to be delivered digitally when we look out five or 10 years. Education will be put online. And this type of change of how we actually do business, which has been accelerated by COVID and the pandemic, is something that's going to be benefited by these bills.

So, when I advise people about how to invest when Citi Global Wealth talks to clients, we don't talk to them just about the direct impact of the bill, but to the fact that the government is prioritizing this, and private dollars will be next to it, that's important. And of course, there are many public companies, both new and existing ones, that are actually in these areas of investment where you can identify every one of these topics that we've talked about, every one of these subjects, can be identified in a publicly-held portfolio.

Jon Lieber: And I actually think one of the most interesting and meaningful aspects of the physical infrastructure bill is that Congress has really departed from what's known as the user pay principle. So, traditionally in the U.S., highways, transit, and other forms of major physical infrastructure items are financed through what's called the Highway Trust Fund, which is funded by a per gallon tax on gasoline. And that per gallon tax hasn't been raised in over a generation, and cars are more fuel efficient today. So, what you're seeing is the Highway Trust Fund started to dry up. And as the trust fund dries up, there's less money available for highway investment in particular.

And in the last highway bill done in, I believe, 2015, and in this one, what they're doing is they're departing from the user pay principal and they're using things, at least today, like repurposing Coronavirus relief funds. They're relying on some budget gimmicks like the gains from economic growth. They're extending future spending cuts outside the end of the budget window. And they're extending some tax increases that were set to expire, as well as things like cryptocurrency reporting requirements.

This is really a new era for U.S. infrastructure development as we move away from relying on these trust funds and towards new sources of revenue. And of course on the much larger human infrastructure bill, the $3.5 trillion, a lot of this is going to rely on tax increases. Those tax increases are not cost-free. Increasing the corporate rate from 21% to 25% will have an impact on U.S. investment patterns. Same with increasing the capital gains rate. And a big part of this is going to be increasing taxes on American companies that operate overseas, potentially making them less competitive. So, when you think about the economic impact of this bill, you've got to look at it in terms of on both sides of the ledger, the benefits that are going to come, but also the costs that will be imposed.

Caitlin Dean: And in addition to looking at the benefits and the costs, there are other externalities or other interactions between infrastructure and broader global issues. David, how does this interact with global issues like climate change?

David Bailin: These are the types of actions that are part of a solution because they represent only a little bit of what the U.S. needs to do in terms of addressing climate issues. But on the other hand, it does represent primary action in that regard, certainly as to regards agriculture, water, and green energy. I think that there will have to be other spending that takes place that will have to be funded more directly by the government or by tax incentives associated with specific activities.

And one of the other functions that the government can do is to actually provide tax incentives to make it more economic to change over to solar, to add more wind, to change the grid, things like that. As they did with cars initially, with EVs, where they actually gave direct credits for purchasing them. That's what governments can do to facilitate or speed up the ability to address climate change. But that is going to be a global issue. If it isn't addressed globally, the success that any one country will have is going to be extremely small. And so, we'll have to see what happens now that the U.S. has rejoined those efforts.

Caitlin Dean: And David had also mentioned how China has consistently been investing in their infrastructure and the U.S. had fallen a bit behind. Jon, can you give us some examples of why infrastructure is important in terms of geopolitics?

Jon Lieber: I think of infrastructure as being about two things, productivity, which we addressed earlier, and quality of life. And I think that quality of life is important for attracting people who want to work in the U.S., build companies in the U.S., create jobs in the U.S., and innovate in the U.S. And productivity is important because it determines the long run path of a country's economic outlook. And the Chinese are investing a lot of money in their infrastructure today. They're trying to make it easier to move goods from one place to the other; they've invested a lot in their port infrastructure as a major exporter to the rest of the globe. That's a huge piece of the Chinese economic development strategy.

And the U.S.'s strategy has been a little more haphazard. I mean, I think that there's no real logic to the way the U.S. invests in its roads and bridges. We have a heavily politicized process. And a lot of it's decentralized to the states where the U.S. government provides money to state governments who then make determinations about which roads and bridges and so forth should be funded.

So, all of these things suggest that the U.S lacks a central strategy here. But I think if you compare the U.S. system to the Chinese system, you can see the U.S. system relies much more on innovative private sector companies continuing to raise standards of living and create jobs, and the Chinese system looks a lot different than that. So, from that perspective, infrastructure is secondary to providing the kind of environment where the U.S. can have the right kind of human capital and the right rules of the road that allow financial capital to flow to the highest productivity investments.

Caitlin Dean: Adam, how does infrastructure domestically affect our foreign policy or our relationships with other countries?

Adam Minehardt: Clearly the U.S. is well behind in terms of how much it invests as a percent of GDP when it comes to a comparative analysis. China's over 5%. Australia, over 3%. India, over 3%. Japan, over 3%. In the U.S., we're still well below 2% of GDP. I think one insight I’d like to put a pin in that Jon alluded to is that much of this is due to how we actually structure the financing of infrastructure in the U.S. And in that regard, we really differ from most other industrialized countries in the extent to which we rely on local and state spending to meet infrastructure needs. And while most European countries fund the bulk of their own infrastructure development at the national level, only 25% of U.S. public infrastructure funding comes from the federal government.
And this has been a downward trend over time, this federal contribution peaked at about 38% in 1977, and now it's down to about 25%. So, what does this mean? It means that these cash strapped state and local governments have to bear more and more costs of investment in infrastructure. It also means that we're looking to more private sector partnerships when it comes to infrastructure investing. So, I just wanted to put that out there as a potential explanation of why we may lag our peers internationally when looking at this through the lens of a percentage of GDP comparisons.

David Bailin: And I'm not sure that percent of GDP comparisons about the direct impact is really the best calculation. When you take up a group of people and you give them education, when you remove them from poverty enabling them to participate in the workforce, when you provide them with broadband, all of which is built into these bills, this has a pretty profound impact on the economy in the sense that your ability to actually grow tax revenues, but the ability also to save. And what happens to those families, their ability to actually have their children then become educated and participate in the economy, these are all of the benefits that are attendant to what these bills are trying to achieve beyond the direct fiscal impact.

And the other thing I would talk about is that when we compare ourselves to China, remember, we built the country's infrastructure. China just finished building majority of its infrastructure. And once you've built the infrastructure, then you have to maintain it, which is a portion of this bill. But also, you have to find other productive uses for those who had previously been involved in building it.

Caitlin Dean: And infrastructure can also have a very clear foreign policy effect when countries invest in infrastructure overseas. So, we saw it with the U.S. and Europe under the Marshall Plan. Now we see it with China investing in countries across Asia, Africa, even Europe, with the Belt and Road Initiative. So Jon, what are some of the main motivations we see when countries invest in infrastructure overseas?

Jon Lieber: It seems like a lot of overseas infrastructure investment is about projecting influence. And so, China develops projects across the Belt and Road system in order to give Chinese firms a leg up on other projects in those areas, entrench Chinese ways of doing business there, create some dependency on Chinese financing mechanisms. And the U.S. is doing a little bit this as well. There was talk at the G7 about a kind of global Build Back Better program that would be a kind of democratically an investment program led by democracies to help other countries build out their infrastructure. And the end result of that is probably going to be better trade linkages. And also, U.S. and European firms would have an advantage there for future projects. So, these are all important things for projecting influence, projecting power, creating future relationships, and in some cases, dependencies for countries that are less developed.

Caitlin Dean: And David, what do you see there in terms of global economic growth and global economic competition?

David Bailin: Well, I don't think this bill necessarily is going to change the competitive situation for the U.S. relative to China. I do think that the tax aspects of the bill will have a competitiveness detriment to us, but not a significant one as I expect the moderate Democrats to really limit that impact. Overall, what I do think that this does for the U.S. is put us back on track to address some of the delinquencies in things that had not been properly handled over the course of the last two decades with any major legislation.
When you look at the U.S. position relative to the rest of the world when it comes to the use of technology and how technology is going to influence all industries in all sectors, there our leadership remains very, very strong. And so, I don't think this bill was really meant to address that as meant to address deficiencies.

Adam Minehardt: As David said, I think the standalone infrastructure bill by itself will only have a modest impact. But if the second human infrastructure bill, which could be as much as $3.5 trillion, is passed, we expect it to be much lower. But if they both end up passing together, that could really be a game changer economically and could significantly raise GDP growth and job creation.
And to this point, Moody's has done a projection for both the infrastructure and reconciliation packages together. And what they've put forward is that both became law this year, the job gains would rise to nearly one million in 2023, and peak at about 2.6 million extra jobs in 2027. By the 10th year 2031, the two plans would end up adding 2.2 million jobs with the second package, this larger human infrastructure bill alone accounting for 2.1 million of these jobs. So, I just wanted to emphasize while the standalone infrastructure bill is modest, if we do pass the second human infrastructure bill, the economic gains could be significant.

Caitlin Dean: Let's get some closing thoughts from Jon as well. Do we think these bills will really be able to change the trajectory for the U.S.? Does the U.S. stand a chance of competing better over the next 50 years?Jon Lieber:I completely agree with David on this. I think on the physical infrastructure side, assuming this bill passes, in five years we're still going to be talking about deficiencies in our financing system, our rail, our bridges, and so forth. Probably make some differences around things like broadband deployment and wastewater and maybe airports and other areas where they'll be getting a lot more money than they are today. But it's not going to be a transformative physical infrastructure investment on the human side, however. This is a lot of significant amount of money.

And I think particularly one thing we didn't talk a lot about is on the green energy side. There's significant investment incentives for green energy and changes in the way the U.S. does procurement to make sure that the U.S. is moving towards a greener economy. And so, I think those things probably end up being among the more transformative as well as something we mentioned earlier, which is the transfer payments that will be significant for a lot of low income families.

David Bailin: Absolutely. I mean, it's a rare moment when you see bipartisanship for the first smaller bill. And certainly, the boldness of the second portion of the bill is something that is notable because it has not happened in the last two decades. So, we have a coalition in the sense of progressive and moderate Democrats coming together to address areas that have not been successfully addressed in that period of time. And as Adam talked about, the impact on employment could be considerable. And the redistribution of wealth, meaning that taxes going from richer corporations or individuals to pay for some of those programs, is significant, and potentially addresses a very small amount of the income inequality issue that the country faces as well.

Caitlin Dean: Jon Lieber, managing director at Eurasia Group, David Bailin, Global Head of Investments and Chief Investment Officer at Citi Global Wealth, and Adam Minehardt, Director of Federal Government Affairs at Citigroup. It's been so great to hear all of your perspectives on this. Thank you so much.

That’s it for this episode of Living Beyond Borders. Stay tuned throughout the fall as we look at the biggest issues impacting your world and your money. Next time, a look at interest rates, inflation, and economic policy. I’m Caitlin Dean, thanks for listening.

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