Lucas W. Mansberger, CFA®, CAIA®

Vice President, Investment Strategist, Senior Manager Selection Analyst

By the Time You Read This, Everything Will Have Changed

It’s highly likely that by the time you’re reading this, the US Congress will have spent the final week of September 2021 debating two momentous spending bills: the Infrastructure Investment and Jobs Act, a budget reconciliation bill (what is being called the “Build Back Better Act”), not to mention a $1.6 trillion continuing resolution to fund the US government that includes an increase in the federal debt ceiling. It’s not often that in one week we would see Congress tackling a “once-in-a-generation investment in our infrastructure” along with “the most consequential piece of legislation passed since the Great Depression,” all while negotiating to stop a government shutdown!

From where we sit here on September 27, the full scope and scale of the Build Back Better Act is yet to be determined, and there is no telling of the varied political shenanigans that undoubtedly will have occurred during negotiation. However, there are some things that we do know about the bills and their economic impact. In the following paragraphs, we summarize the things that we know – as well as the things that we believe will remain unclear, even after this week.

The Infrastructure Investment and Jobs Act (IIJA)

What we know:

This Act passed the Senate on August 10 by a wide margin of 69-30, with 19 Republican senators joining all 50 of the Senate Democrats to vote in favor. This Act, which approved total spending of $1.2 trillion, including new spending of $550 billion, is focused on a wide array of physical infrastructure needs.

Below are the areas in which funding was approved as well as the amount:

Transportation: $284 billion

Water: $55 billion

Broadband: $65 billion

Energy & Power: $73 billion

Environmental remediation: $21 billion

Western water infrastructure: $8.3 billion

Resiliency: $46 billion

There is general agreement around which sectors stand to see the biggest impact from spending authorized by the IIJA. The analysis below of total economic impacts by consulting firm IMPLAN is representative of the consensus:.

Maintenance and repair construction of highways, streets, bridges and tunnels

Electric power transmission and distribution

Internet publishing and broadcasting/web search portals

Rail transportation

There is also general consensus around the timing of the economic impact of this bill. In “hard” infrastructure, expected economic impacts are expected to be relatively modest in the short-term but to improve long-term economic growth. This is due in part to the timing and nature of the initial investment, as there is not a huge number of “shovel-ready” projects and the authorized funds will be spent over the next several years.

What will remain unclear:

Ultimately, large infrastructure spending leads to the concern of potentially “crowding out” private investment, which could lead to negative impacts on growth over the long term. There are also some concerns that infrastructure investment at this magnitude may lead to inflationary pressure in certain sectors over the nearer term, though any pressure will not be seen immediately.

The reconciliation bill, or the “Build Back Better Act”

What we know:

On August 10, 2021, the Senate passed a budget resolution in the amount of $3.5 trillion that was intended to allow the Senate to pass a reconciliation bill along party lines. This budget resolution is primarily focused on new social spending that has been termed “soft” or “human” infrastructure, though it includes significant additional funding for hard infrastructure projects as well. The amount of spending ultimately approved is expected to shrink due primarily to the now well-known reservations of Senators Joe Manchin and Kyrsten Sinema about the size of the bill.

Much of the reconciliation bill’s specific proposals have been intensely debated, largely behind closed doors, for the past several weeks and will continue to evolve up until passage. However, below are the primary focus areas of the reconciliation bill and the “Build Back Better” agenda, including several of the most meaningful proposals being debated.

Healthcare: Adds vision, dental, and hearing benefit to Medicare; reduces prescription drug costs; creates a federal health program for those in the “Medicaid gap”; extends expansion of Affordable Care Act

Families: Establishes universal pre-K and new childcare benefit; community college

Jobs and Infrastructure: public housing and green/sustainable housing, establishes Civilian Climated Corps, provides green cards to large number of immigrants

Environment and Climate: Establishes the Clean Electricity Payment Program, introduces new polluter fees, creates new tax incentives and grants regarding clean energy and manufacturing, electrifies the federal government (fleet and buildings)

What will remain unclear:

The reconciliation bill is significantly more resistant to general economic analysis than the IIJA. One obvious reason for this is that most aspects of the bill have been changing and up for negotiation since passage of the budget resolution, including the scale and scope of the new policies and spending. However, if the Act passes it will remain difficult to analyze its probable economic impacts due to the Act’s sheer expected size, the large number of differing policies it contains, and the varied timing impacts of the spending that will be authorized. It will take some time before the policies are widely analyzed and understood.

It is also important to note that some of the most potentially impactful areas of spending represent new policies and spending for which there are few (if any) historical precedents. For example, some of the most significant expected costs in the bill include the provision of two years of universal preschool and a sliding scale limit on child care costs. These new benefits will affect millions of families with the impact being determined by numerous factors, including speed of the uptake of preschool, the capacity of our childcare system to absorb new children, and whether parents will participate more fully in the job market.

Additionally, what remains to be fully explicated is the wide variety of tax changes that will be made to help pay for this bill, including a likely increase in corporate tax rates, an increase in taxes for high individual earners, and changes to estate tax rules. Not only are the final changes yet to be determined, but their economic impacts will not be known for some time.

Summing up the unsummable

Many of us will have been breathlessly following the twists and turns of the legislative process the historic week of September 27. And while we don’t know now how things ultimately will shape up this week, we DO know what our clients should do after such a breathless week. Our recommendation is simple: take that breath you’ve been putting off, go top off your morning coffee – and then check in with your trusted advisors and let them guide you through the new landscape.