Can the Democratic Market Makers Deliver on Infrastructure?

America is turning 245 this July 4th weekend, which feels like the same length of time “Infrastructure Week” has lasted in American politics (the math is a little fuzzy).

The questions on everyone’s mind are just how much longer Infrastructure Week will last and how will it end. We see things being in the third inning. There has been some legislative movement, the strategy for passage is coming into view, but that strategy has yet to be fully tested and the big legislative ticket items are still outstanding. My base case is that there will be approximately $4 trillion in infrastructure spending and $1–2 trillion in tax hikes this year. This won’t necessarily come in just one legislative vehicle but a potential combination of budget reconciliation and bipartisan legislation.

As Democrats hold unified control of DC, the most important item to watch is how party leaders move forward on the reconciliation process. That starts with developing and agreeing to an FY22 budget resolution that lays out the gross and net spending parameters for a reconciliation bill. A successful July for Democrats is if they can get the votes in the Senate and House for the resolution, with the drafting of the reconciliation bill coming in the fall. A successful July for the rank-and-file moderates is to turn the bipartisan infrastructure framework into actual legislation without losing explicit support from Democratic or Republican party leadership. But getting legislation drafted does not mean a bipartisan bill will pass both chambers of Congress later this (or early next) month. House Speaker Nancy Pelosi (D-CA) and her leadership team are firm in their commitment to hold off a vote on a bipartisan bill until there’s a reconciliation bill in place. A successful July for the entire Congress is if the House and Senate can conference the R&D and China competitiveness legislation and send a bill to President Biden’s desk before the August recess. Failure on these infrastructure fronts in July doesn’t necessarily spell doom, although that depends on why action didn’t occur. But it will push back the timeline for infrastructure passage, likely to the end of the year.

What Do We Have So Far?

In short, nothing signed into law. But there are some irons in the fire.

Bills signed into law: none

Bills that passed both the House and Senate: none

Bills that passed the House:

• INVEST in America Act — $715 billion bill over five years with $547 billion for surface transportation (roads, transit, rail, and safety) and $168 billion for water infrastructure (wastewater, drinking water, lead pipes replacement). It includes no pay-fors but does have a $148 billion general fund transfer to the Highway Trust Fund (HTF) to plug the revenue gap for the next five years. Passed with a largely party-line vote, 221–201.
• National Science Foundation for the Future Act — $80 billion over five years for R&D activities of the National Science Foundation (NSF). Passed with large bipartisan support, 345–67.
• Department of Energy Science for the Future Act — $50 billion over five years for R&D activities of the Department of Energy’s (DOE) Office of Science. Passed with large bipartisan support, 351–68.

Bills that passed the Senate:

• Drinking Water and Wastewater Infrastructure Act — $35 billion over five years for water infrastructure. Passed with large bipartisan support, 89–2.
• US Innovation and Competition Act (USICA) — $250 billion bill over five years with $190 billion for R&D and $52 billion appropriated for US semiconductors and $1.5 billion appropriated for US telecommunications. Passed with bipartisan support, 68–32.

Bills that passed out of House committees:

• EAGLE Act — China competitiveness bill with no cost estimate as of now. Expected to pass out of the House Foreign Affairs Committee after the July 4th recess.

Bills that passed out of Senate committees:

• Surface Transportation Reauthorization Act (STRA) — $312 billion over five year for roads. Passed out of the Senate Environment and Public Works (EPW) Committee unanimously.
• Surface Transportation Investment Act (STIA) — $78 billion over five years for rail, freight, safety and transportation-related R&D. Passed out of the Senate Commerce Committee with large bipartisan support, 25–3.
• Clean Energy for America Act — $259 billion for clean energy tax incentives. Passed out of the Senate Finance Committee with party-line vote, 14–14.

Frameworks:

• Infrastructure framework — $579 billion in new spending and $973 billion in total spending over five years on surface transportation and other “hard” infrastructure. It’s “fully” offset with non-tax pay-fors. Framework supported by White House and group of 10 senators (five Democrats and five Republicans).
• Biden’s American Jobs Plan (AJP)/American Families Plan (AFP)/FY22 budget request — $4.4 trillion in new spending for “hard” and “human” infrastructure and $3.6 trillion in revenue offsets. White House proposals meant to guide Congress.
• International tax framework — Suggested framework for reworking international tax provisions from three Democrats on the Senate Finance Committee.
• FY22 budget resolution framework — $6 trillion in spending and $3 trillion in revenue offsets for a preliminary FY22 budget resolution proposal by Senate Budget Committee Chair Bernie Sanders (I-VT).

What Are We Waiting For?

In short, a lot.

Surface transportation:

• Transit provision from Senate Banking Committee
• Revenue provision from Senate Finance Committee and House Ways and Means Committee

Bipartisan infrastructure:

• Legislation based off of the bipartisan infrastructure framework

Partisan infrastructure:

• FY22 budget resolution from the House and Senate
• FY22 budget reconciliation bill from the House and Senate

What Can Get Enacted Over Next Month?

In short, not much.

The House is scheduled to be in session two weeks next month before the August recess. The Senate is scheduled to be in session for four weeks. Even if the House postpones its recess by two weeks, that’s not enough time for introducing legislation, passing it out of the relevant chamber, reconciling different legislation from the two chambers, and passing a final bill for President Biden to sign.

Importantly, Democrats are explicit that the two-track process for infrastructure is really a one-track process. Despite some grumblings from moderates, Pelosi and House Democratic leadership are so far unified in the position of not voting on a Senate-passed bipartisan infrastructure bill until the Senate also votes on a budget reconciliation bill. They see that as by far the best strategic route of keeping the party as unified as possible to pass their infrastructure agenda. Even if the Senate passes a bipartisan infrastructure bill, the House will want to conference, even if informally, what the Senate has passed with what the House has passed. This likely pertains to both the broader infrastructure framework and the narrower surface transportation provisions. That buys more time for the reconciliation process to move forward.

The exception to this infrastructure two-track, one-track linkage is the R&D and China competitiveness bills. The House and Senate will work together this month to reach an agreement on a single legislative bill that can pass both chambers. This is an “infrastructure” component that could very well end up on Biden’s desk before the August recess.

The goal for July is to make progress on the yet-to-be-released legislative items. That includes creating legislative text for the bipartisan infrastructure framework. The most important piece is creating the text and passing the budget resolution with just Democratic support in both the House and Senate. House Budget Committee Chair John Yarmuth (D-KY) said the current goal is for the Senate Budget Committee, under the leadership of Sanders, to produce a budget resolution framework next week. This framework would include potential spending allocations for each committee as well as the top-line number. The Senate is moving first because Democrats see it’s more important to know what can get all 50 Democratic votes in the Senate before moving forward to seeing what can get all but three or four Democrats in the House. If the framework can pass both the Senate and House, then Democrats will move forward, if it can’t pass one or both chambers, they will continue to negotiate.

Thoughts on the Broader Outlook and Reconciliation

When looking at total new infrastructure spending being passed this year, our base case is approximately $4 trillion. How that $4 trillion is divided in legislative vehicles is still TBD. It could be in the form of a $250 billion R&D/China bill + $579 billion bipartisan infrastructure bill + $3.2 trillion reconciliation bill. It could be in a $250 billion R&D/China bill + $3.7 trillion reconciliation bill if bipartisan negotiations fall apart. The benefit of having a bipartisan infrastructure bill is that it allows for authorization legislation to be included (something that seems to run afoul of the Senate Byrd Rule). This compares to the approximately $4.4 trillion that Biden proposed in the AJP/AFP. When it comes to tax hikes, my base case is something in the $1–2 trillion range. All of those hikes would be in the reconciliation bill and excludes non-tax pay-fors (i.e. drug pricing reform and increased IRS enforcement and reporting requirements).

I understand this is a view that’s out of consensus with investors, who are well-below my projections. To understand why I have a different outlook, it’s helpful to think of the policy world as a market. Democrats are looking to make a market for a reconciliation bill. The buyers are moderates, the sellers are progressives, and the market makers are Democratic leadership. Right now, moderates like Senator Joe Manchin (D-WV) are offering a bid of $1–2 trillion for a deal. Others like Rep, Kurt Schrader (D-OR) seem disinterested in a deal altogether (House Democrats currently can have four party defections, but that will go down to three after the Republican-only TX-06 special election runoff on July 27th). Meanwhile, progressives are asking for $6+ trillion.

The market makers of Democratic leadership need to find an intersection of the maximum bid and minimum ask. Investors are more focused on the question of ‘what’s the maximum amount moderates will accept?’ But the market makers are equally focused on the question ‘what’s the minimum amount progressives will accept?’ To make a market, leadership needs to find middle ground. They are intentionally not putting out details of how they are thinking, but Pelosi’s insistence that passage of a bipartisan infrastructure bill be contingent on passage of a reconciliation bill shows she’s listening to both ends of her caucus. Despite the minimum required public lip service to the contrary, Pelosi has little interest in sealing a bipartisan deal — she’s the one who insisted Democrats push forward on a reconciliation bill for healthcare in 2010 back when Democrats lost their Senate supermajority in a special election. She and progressives know that this reconciliation bill may be the last chance for a long time in getting a litany of progressive priorities passed into law. They are not willing to sell their priorities short just yet.

Then there’s Biden, whose time in DC since 1973 could be best characterized as having a keen sense of knowing where the middle of the Democratic Party is and largely adhering to that middle. Biden released a $1.9 trillion American Rescue Plan (ARP) and Democrats in Congress passed a $1.9 trillion ARP via reconciliation. Biden’s AJP/AFP is approximately $4.4 trillion. Biden and his White House team did not come at that spending figure willy-nilly. It was a spending figure they thought could get support from the bulk of the Democratic Party. However, they are not completely wedded to that number. The White House is willing to exclude AJP provisions in a reconciliation bill that are included in bipartisan infrastructure legislation, even though the bipartisan legislation has less spending than the relevant AJP provisions. The $579 billion in new spending from the bipartisan infrastructure deal compares to $833 billion in relevant spending. Then there’s the USICA, which has $250 billion focused on R&D and manufacturing. It’s unclear if the White House would exclude its entire $479 billion in R&D, manufacturing, and small business or just $250 billion. Assuming they exclude the entire amount, subtracting the $479 billion and $833 billion still leaves an AJP/AFP of approximately $3.1 trillion. Of course, there’s the non-negligible chance the bipartisan infrastructure deal falls through, leaving Democrats looking to add as much of the $833 billion back as possible. That would put the AJP/AFP at around $3.7–3.9 trillion.

Then there are the non-AJP/AFP provisions congressional Democrats will look to be pushing. A group of rank-and-file House members, both Democrat and Republican, met with Pelosi this week to make the case of defending the state and local tax (SALT) deduction. Senate Budget Committee Chair Sanders, no SALT defender, even allocated $120 billion in SALT relief in his draft budget resolution. It’s not a matter of if but how much SALT relief will be provided in a reconciliation bill, with our base case being in the $100–200 billion range. There’s also a push by progressives to expand Medicare coverage for dental, vision, and hearing ($300 billion) and lowering the qualifying age of Medicare to 60 ($200 billion) There’s reportedly some real momentum on the expanded coverage, but far less on lowering the eligibility age. So in trying to make a market, we believe Democratic leadership views $3–4 trillion as the sweet spot for topline spending in a reconciliation bill.

Of course, spending is only half of the equation. Reconciliation rules require adhering to a certain net spending limit within a budget window. That means coming to an agreement on the pay-fors and the willingness for deficit spending. The Treasury green book laid out $3.6 trillion in proposed pay-fors over 10 years, of which, $2.8 trillion was in actual tax hikes (the rest was from increased IRS enforcement and compliance). While the spending of the AJP/AFP was meant to be a middle ground, Biden’s tax proposals were more a buffet of payment options. In reality, the market for tax increases is more in the $1–2 trillion range. But even that range could allow for $3–4 trillion in total spending.

You don’t have to look any further than the bipartisan infrastructure deal to understand why. Deficit hawks like Manchin are extolling their fiscal responsibility by saying the deal is completely paid for. But many of the pay-fors are not really pay-fors. If Manchin is willing to use creative accounting to “pay for” the bipartisan deal, there’s no reason to think that creative accounting can’t be employed in a reconciliation bill. Manchin wouldn’t be the first deficit hawk to bend his fiscal responsibility for reconciliation. Senator Bob Corker (R-TN) was a self-proclaimed deficit hawk who was vocally pushing back against Republicans deficit spending on tax cuts in reconciliation back in 2017. Despite his vocal fiscal responsibility ethos, he found a way to support a budget resolution that allowed for $1.5 trillion in deficits. His explanation for such support was that Republicans could rely on non-traditional budget estimates (i.e. dynamic scoring) to say the bill would pay for itself. Importantly, that $1.5 trillion was net spending, with the gross amount of tax cuts at about $5.5 trillion. To Corker’s credit, while he ended up voting for the Tax Cuts and Jobs Act (TCJA), he voted against the Bipartisan Budget Act of 2018 a couple months later, which paved the way for a large fiscal stimulus via appropriations. Manchin meanwhile voted for it.

Other moderate Democrats are showing their own flexibility while adhering to fiscal responsibility principles. Rep. Stephanie Murphy (D-FL), who is a co-chair of the moderate Blue Dog Caucus, doesn’t want to add $4 trillion or more to the national debt, according to Punchbowl News. But a $3–4 trillion spending bill with $1–2 trillion in tax offsets doesn’t add $4 trillion to the debt. Murphy indicated she’s also open to some deficit spending. “I believe as we look forward to infrastructure spending and other types of spending, we should be fiscally responsible and it is somewhat paid for,” Murphy said. Rep. Josh Gottheimer (D-NJ), another Blue Dog Democrat and co-chair of the bipartisan Problem Solvers Caucus, has said he will not commit to supporting a reconciliation bill until he sees what’s in it. Of course, what he most wants in it is SALT relief.

None of this is to underscore the difficulty Democratic leadership will have in making a market for reconciliation with razor-thin majorities. The Senate Byrd Rule could knock some spending off the table and creative pay-fors may only go so far. But I believe leadership has a good understanding of the bid-ask spread and where the market can be formed, and that number is meaningfully above the current Wall Street consensus of $1–2.5 trillion in gross spending. As Yarmuth said, “It’s going to be tough, but I think the people I’ve talked to — moderates and liberals — are all in the same boat and saying we’ll get there. …Ultimately, the speaker said, there’s not many Democrats who will want to vote against childcare, early childhood education, extended child tax credit, climate change, jobs. There’s just not many Democrats who are gonna vote against that.”