On the Big Bipartisan Breakthrough

Editors’ Note: MarketMinder favors no politician nor any political party and assesses developments solely for the likely impact on markets, economies and personal finance.

After years of chatter, months of debate and, more recently, day after day of watching for a floor vote, the US Senate passed the bipartisan infrastructure plan on Tuesday by a fairly decisive 69 – 30 margin.^[i] With the vote came a torrent of headlines presuming the passage meant the much-delayed “stimulus” was now rolling—with big implications for growth and productivity. But there are still hurdles left to clear, and even if this bill does pass, we doubt the implications for the economy or stocks are as huge as many think.

Depending on what source you read, the Senate passed a $1.2 trillion infrastructure bill,^[ii] a “roughly” $1 trillion bill^[iii] or a $550 billion one.^[iv] Why the wide disparity? While the bill itself allocates $1.2 trillion in funding, only $550 billion is actually new spending—the balance, some $650 billion, is funding annually slated for infrastructure under previously approved spending plans. Obviously, no matter how you size this up, it is a significant reduction from the Biden administration’s early proposal, the $2.3 trillion American Jobs Plan offered in March—one example of how narrow margins, internal policy divides and looming midterms can water down legislation.^[v]

The Senate’s newly passed, 2,700-page bill would drip out the funds over the next 5 years. The CBO projects it will add $256 billion to the federal deficit.^[vi] The rest of the funding comes from a few major sources: One, it repurposes unspent COVID relief funds and federal unemployment aid. Two, it pencils in some sales of Federal Communications Commission spectrum licenses and oil from the Strategic Petroleum Reserve. Lastly, the bill includes provisions requiring cryptocurrency brokerages to report transactions to the IRS, akin to how typical brokerages report on stock trades in taxable accounts. The beefed-up cryptocurrency tax enforcement is another key source of funds for this spending.

On the outlays side, the biggest tranche of the new spending is $110 billion on roads, bridges and similar projects. Other major allocations include $73 billion to electrical grid upgrades, $66 billion on passenger and freight railroads, $65 billion to broadband improvements and $55 billion for water infrastructure. The balance is scattered across public transit, airports and seaports, environmental cleanup, cybersecurity and addressing infrastructure threatened by droughts, flooding and wildfires. Oh, and one final provision: $15 billion on electric vehicles, such as busses and a national plug-in charge network. (We saw pundits hyping this last point, but it was among the smaller provisions, oddly enough.)

Now, perhaps that all sounds grand, and we have no particular quibbles with the government electing to allocate money to modernize or upgrade infrastructure. But the economic impact? In our view, that is likely very, very small. Much smaller than so much of the coverage seems to presume.

Even if we assume the plan passes and actually doles out $110 billion annually for the next five years, that isn’t saying much. $110 billion is no doubt a lot of money to us personally, and we would welcome anyone who wished to donate even 10% of that to the MarketMinder Editorial Staff Discretionary Fund for Massive Personal Enrichment.^[vii] But to the US economy? Not so much. US GDP clocked in at $22.72 trillion annualized in Q2.^[viii] $110 billion is about 0.48% of that. Further, there is very little chance the government realizes that pace. No matter how “crumbly” the highway, it takes significant time to deploy funding on any project, given the array of assessments, planning, permitting and approvals required.

As for the economic or productivity gains from the new roads once completed, the law of diminishing returns is worth weighing. When you first connect two towns via a roadway, like some Emerging Markets infrastructure buildouts did not so long ago, the economic gains are vast. It facilitates a flurry of economic activity and productivity enhancements. One could argue the same of when the Eisenhower interstate system connected large swaths of America via highways in lieu of meandering roads.

Now? It is hard for us to see how you can reap material economic gains from resurfacing roads, replacing one highway with another or other similar action. Perhaps there are some gains to reap from seaport or airport improvements, but we doubt they are giant and, again, it would take a good deal of time to see them.

For markets, we are even more skeptical of any material impact. Government spending plans play out under a bright media spotlight, as this one exemplifies. That gives stocks ample time to weigh and price whatever little potential impact there may be, in our view. For markets, this doesn’t seem like a game changer.

Beyond that, all of these estimates, projections and general fun assume the law passes. Yes, it cleared the Senate. But it still has to pass the House, and there the journey has added wrinkles. The Democratic Party’s House majority is presently 220 – 212.^[ix] That means they can afford no more than three defections to pass legislation. The House Progressive caucus aren’t huge fans of this bipartisan bill and have stated they will vote for it only in concert with a larger, multi-trillion dollar budget that funds things like health care, renewable energy and more. House Speaker Nancy Pelosi has said she won’t even advance the bipartisan bill for a vote until the Senate passes the budget.

Presently, that budget is a mere plan: a list of bullet points expected to total some $3.5 trillion and includes an array of tax hikes and spending plans. There will likely be no GOP support for this plan, so getting it through the Senate and to the House will probably necessitate the Democratic contingent passing it under budget reconciliation rules requiring a simple majority.

That is possible, but it would require unanimity among the Democratic senators—and that is in doubt. Senator Kyrsten Sinema (Arizona) went on the record as opposing the size and scope of this plan two weeks ago.^[x] The tax hikes included could raise further objections from West Virginia’s Joe Manchin and Montana’s Jon Tester, among others, if their recent statements are any indication.

The Senate passing an infrastructure bill today is notable, but it really strikes us as the easy part. Now the Democratic Party must figure out a way to keep unanimity in the Senate on a related bill that stirs internal divisions before both bills go to the House. It is all going to be quite challenging. Doable, maybe, but not a done deal.