For decades politicians on both sides of the aisle have hailed infrastructure as the solution to many of America’s problems.

Studies show that infrastructure spending generates 13% to 17% returns on investment, boosts economic productivity, long-term growth rates, and of course, creates lots of jobs.

Well finally, after more than a decade of Bush, Obama, and Trump promising and failing to deliver game-changing infrastructure bills, we now appear poised for up to $4 trillion in infrastructure spending over the next decade.

Here are three things investors need to know about the potential $4 trillion infrastructure bonanza, and how to cash in on the gold rush.

Fact 1: What’s In The Proposals

There are two infrastructure bills working their way through Congress.

The bi-partisan bill which may be voted on this week represents $550 billion in new spending and a total of $1.2 trillion in spending over eight years.

The $150 billion per year would go into hard infrastructure, such as $65 billion for broadband, and $110 billion for roads and bridges.

The larger reconciliation bill, which House Speaker Nancy Pelosi and other Democratic leaders have said is required for them to vote yes on the bi-partisan plan, is $3.5 trillion in size, and makes the combined package about $4 trillion in total new spending, over the next decade.

It should be noted that Arizona Senator Kyrsten Sinema has said that the $3.5 trillion bill will need to be trimmed down for her to be able to vote for it.

Here’s what the “human infrastructure bill” would include.

Investments in child care paid leave and education and expanded tax credits that this week will begin providing a monthly check to most families with children…

The proposal includes some measures that go beyond what Mr. Biden has envisioned, like expanding Medicare to cover dental, vision and hearing benefits.

Democratic leaders also left it to the Senate Finance Committee to decide whether to include a measure that would lower the Medicare eligibility age to 60. That is a priority of Senator Bernie Sanders of Vermont, the Budget Committee chairman…

The plan would also create what would effectively be a tax on imports from countries with high levels of greenhouse gas emissions. That could violate Mr. Biden’s pledge not to raise taxes on Americans earning less than $400,000 a year if the tax is imposed on products such as electronics from China.

Democrats on Mr. Sanders’s committee must produce a budget resolution in the coming days that includes so-called reconciliation instructions to other Senate committees. They will in turn draft legislation detailing how the $3.5 trillion would be spent, and how taxes would be raised to pay for it.” – NYT

The bi-partisan bill is 2700 pages long, and the human infrastructure bill would certainly be much longer and can be expected to take several months to actually craft by Congressional staffers.

The bi-partisan bill is paid for (all but about $270 billion worth) through a variety of methods such as redirecting unused stimulus funds and taxing cryptocurrency capital gains.

The $3.5 trillion bill is expected to require significant tax increases, and the initial proposals on that call for a 28% corporate income tax rate, a return to pre-Trump tax cut tax rates for the upper tax bracket, and various other proposals targeting Americans making over $400,000.

With zero margin of error in the Senate, Democrats will need all eight conservative blue-dog Democrats to vote “yes” to pass it.

Moody’s Estimates For What $4 Trillion In Infrastructure Spending Would Do To The Economy

According to MarketWatch Moody’s is one of the 16 most accurate economist teams in the world, part of the “blue-chip consensus”.

Moody’s Chief Economist Mark Zandi, with help of Bernard Yaros have crunched the numbers about what the proposed $4 trillion in infrastructure would mean for the US economy.

The Congressional Budget Office estimates that the $1.2 trillion bill would ultimately add about $250 billion in debt while Moody’s estimates about $30 billion.

Given that the US government is borrowing at negative real rates right now, and hard infrastructure has a return on investment of 13% to 17%, even if it were entirely funded with new debt, it would actually make America’s long-term debt/GDP lower, not higher.

The $3.5 trillion proposal would add approximately $600 billion in debt according to Moody’s.

Both the Congressional Budget Office and Fed estimate that America’s baseline long-term economic growth is 1.8%, factoring in the demographic drag of 75 million retiring baby boomers, slower immigration, and modest productivity growth.

The bipartisan infrastructure deal is small and thus supports only a modestly stronger economy (see Table 3).

The most immediate impact in early 2022 is to reduce growth since the pay-for’s take effect right away while the increased infrastructure spending does not get going in earnest because of lags in starting infrastructure projects until late in the year.

The apex in the boost to growth from the deal is expected in 2023, when real GDP increases 2.9%, compared with 2.3% when assuming only the ARP is passed into law.

The deal creates close to 650,000 jobs at its peak impact in the middle of the decade, reducing the unemployment rate a couple of tenths of a percentage point.

The unemployment rate never falls below 4%, and the economy never returns to the full-employment conditions experienced pre-pandemic (see Chart 1). Longer-term, the economy receives a bump to productivity growth due to the increase in the stock of public infrastructure, but it is small given the modesty of the infrastructure deal (see Chart 2).” – Moody’s

The reconciliation package is large and thus meaningfully lifts economic growth and jobs and lowers unemployment.

The boost to growth occurs quickly, with real GDP increasing 5.4% in 2022, more than a percentage more than if only the ARP is passed into law.

The tax cuts for lower-income individuals in the package are mostly spent quickly, while the tax increases on corporations and high-income and wealthier households have a much smaller and slower impact on investment and consumer spending.

The increased social investments in the package, particularly related to child and elder care, healthcare, and housing, also quickly support stronger GDP and jobs.

There are more than 2 million more jobs by mid-decade and the unemployment rate is at least a 0.5 percentage point lower. The unemployment rate returns to its pre-pandemic lows in the mid-threes, although labor force participation never fully recovers.

Longer-term, the economy’s growth enjoys a measurable increase due to stronger productivity gains given greater educational attainment and higher labor force participation.

The economy performs best in the final scenario, in which both the bipartisan infrastructure deal and the reconciliation package become law. However, the economy’s performance falls well short of how it would do under Biden’s proposed American Jobs Plan and American Families Plan. Under his policies, real GDP growth would average 4.2% per annum during his presidential term and 3% over the next decade compared with 3.8% and 2.8% per annum under the infrastructure deal and reconciliation package.

In terms of employment, Biden’s proposed policies contribute to the creation of 14.4 million more jobs during his term and 20.1 million through the end of 2031. Under the infrastructure deal and reconciliation package, employment increases by 12.9 million during his term and 19.1 million by year-end 2031. Unemployment is similar under both policies, but only because labor force participation is measurably higher under Biden’s policies than under the infrastructure deal and reconciliation package.” – Moody’s

No proposal ever passed Congress intact, but Moody’s estimates the $4 trillion plan that has a decent chance of becoming law could boost US growth by 1% annually for the next decade, and help us create 19 million jobs over the next 10 years.

For context, from 2009 through 2020 we created 20 million jobs.

The jobs would largely be front-loaded, with an estimated 7 million jobs created in 2022 and 2023.

Unemployment would return to the 3.5% pre-pandemic level in 2024, before gradually rising to 3.9% by the end of 2031.

According to the Atlanta Fed, it takes approximately 125,000 monthly net jobs to keep up with population growth and sustain 3.5% unemployment over time.

Moody’s is not concerned about soaring inflation.

The bipartisan infrastructure deal and reconciliation package will deliver less than a percentage point of GDP growth in 2022 and closer to 2 percentage points of GDP growth each year from 2023 to 2025. Given the fiscal support still in train, mostly from the ARP, this would be just enough to provide the added GDP needed to get the economy back to full employment.

Moreover, much of the additional fiscal support being considered is designed to lift the economy’s longer-term growth potential and ease inflation pressures. For example, consider the additional spending on new rental housing supply for lower-income households, which is critical to reining in rent growth and housing costs, or the efforts to reduce prescription drug costs.

Others are concerned that the included tax increases to help pay for the legislation will have serious negative economic consequences. To be sure, all else being equal, higher taxes will weigh on economic growth, but the impact on the economy from the higher proposed taxes will be small. In part, the tax increases being considered on high-income and wealthy households would be the first meaningful tax hike on individuals since the early 1990s. And from a historical perspective, they are, on net, modest. Effective tax rates will remain close to historical norms.” – Moody’s

The bond market agrees with Moody’s assessment.

In part two of this series, we’ll explore what 1% stronger GDP growth could mean for stocks, and how to best cash in on this potential $4 trillion bonanza.

SPY shares were trading at $443.08 per share on Wednesday afternoon, up $0.40 (+0.09%). Year-to-date, SPY has gained 19.29%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author: Adam Galas

Adam has spent years as a writer for The Motley Fool, Simply Safe Dividends, Seeking Alpha, and Dividend Sensei. His goal is to help people learn how to harness the power of dividend growth investing. Learn more about Adam’s background, along with links to his most recent articles. More...

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