President Trump has long–since touted a “$1trn” infrastructure plan, but that has meant just $200bn of federal government money over 10 years, with $200bn from state and local governments, and the rest from the private sector.
Biden on the other hand has tabled $1.3trn of federal spending on infrastructure, matched by another $5trn from state and local governments and the private sector. Trump makes their scale sound similar, but they are quite different, although it is unlikely Biden could find enough shovel–ready projects in his first term.
Since July, Biden has also referred to plans to oversee $2trn of spending on clean energy and infrastructure over the course of his first term. It’s unclear how these plans interact. Of course, a succession of presidential candidates and congressmen and women have promised federal infrastructure investment. It’s an increasingly rare bipartisan issue, and some investors question whether it will ever arrive. But various Washington policy-watchers have said that an infrastructure bill was ready to be signed into law last year: Trump torpedoed it in retaliation to the House Democrats’ gimcrack impeachment trial. In June, the Department of Transportation outlined a $1trn plan that focused on projects such as roads and bridges. I would expect this to come to fruition whoever is chosen as the next president.
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Biden’s green infrastructure push would require a Democratic clean sweep. It’s designed to bring the US to net zero emissions by 2050, and by 2035 in the electricity sector. Designed correctly, such a bold target could boost the economy. For starters, energy revolutions have preceded the great productivity revolutions of the modern era (coal in the 18th century, advanced steam in the 19th, and then the advances in electrification that enabled the mega– factories of the early 20th). Economists at Citi, using Oxford Economics’ model, find that a global green–oriented policy strategy could improve growth and debt trajectories while also reducing carbon emissions, so long as carbon tax proceeds are redistributed in a way that reduces income taxes.
Electric vehicles are prominent in Biden’s plans: he envisages a cross–country network of 500,000 charging stations. He proposes rebates and incentives to swap older, fuel-inefficient vehicles for new, clean models (so long as they are American–made, of course — see below), and would offer the auto industry various other subsidies and investment credits. He plans to restore the full electric vehicle tax credit and modify it to target middle–class consumers. Conversely, Trump plans to remove the plug–in electric vehicle credit.
The construction sector could also get a boost from Biden’s pledges. He has called for two million homes to be weatherised and four million buildings to be upgraded to higher efficiency standards. He will restore the tax credit for residential energy–efficiency improvements. US housing subsidies currently make up 25% of domestic private investment in housing, according to BCA, and Biden’s government would roll out a significant expansion of these programmes. Construction would get a further multi–year boost from public spending on transit, and affordable housing. Trump talks little of housebuilding, but did discuss cutting regulation around permitting in 2019.
Biden wants to use the tax code to promote alternative energy. He proposes permanently extending the investment tax credit for residential solar energy, deductions for emissions–reducing investments, and creating new incentives to encourage the development of a low–carbon manufacturing sector. He will also allow development of renewables on federal lands and waters, with the goal of doubling offshore wind by 2030. Needless to say, fossil fuel producers won’t be treated kindly. Biden will repeal certain tax incentives that the industry enjoys. But we note that a plank of the Democratic party platform calling specifically for eliminating all such provisions was deleted before ratification at the Democratic National Convention. Biden advocates limits on new fossil fuels production, especially on federal lands and waters. But, again, these are limits not outright bans, and he recognises the sizable contribution to jobs and the economy from the sector.
Biden’s position papers never mention fracking. At a recent CNN town hall in Pennsylvania, he said that fracking will continue as the US transitions to net zero by 2050 and banning fracking would cost too many jobs. We could expect much more stringent reporting and penalties for methane emissions and a zero tolerance for flaring, which could mean higher costs and possibly shut–in oil production in the short term, particularly in the Permian Basin. Of course, it will take time for the US to wean itself off oil. If Biden’s policies will increase the cost of US oil at the margin, driving up household fuel bills, the flipside may be a more lenient, Obama– like stance on Iran, which could increase the supply of oil and ease those extra costs a little.
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Conversely, Trump has stated “the golden era of American [fossil fuel] energy is now underway”. His budget blueprints for fiscal years 2019, 2020 and 2021 all called for repealing prominent alternative energy tax incentives, including accelerated depreciation for renewable energy property (although qualifying property would remain eligible for the bonus depreciation allowance included in TCJA), the energy investment tax credit, the credit for residential energy–efficient property, and the income exclusion for utility conservation subsidies. He has already repealed many Obama–era regulations on coal.
If private and public entities outside of the US focus more and more on decarbonising consumption and investment, an American loosening of climate standards could constrain the competitiveness of US exports, particularly energy–intensive ones. As global investment managers increasingly incorporate ESG criteria into their investment strategies, US companies’ cost of capital may also rise. Some of Trump’s plans upend decades of investment strategies by US companies, for example those of auto companies to meet the Corporate Average Fuel Economy (CAFE) standards. With an eye towards the global marketplace and to their long–sunk costs, some US companies have already pushed back on Trump’s relaxations.
Over the long term, this could compromise US productivity relative to the rest of the world and push down the dollar. But it’s a long–term risk and not one likely to move markets over the next year or two.
