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President Joe Biden’s proposed $2.3 trillion spending package unveiled March 31 should have come a day later, as an April Fool’s exercise.
Labeled an infrastructure package, it offers just $447 billion for transportation infrastructure over eight years. That’s less than a quarter of the most widely accepted estimates for the US infrastructure deficit.
On February 21, Biden told a group of US senators, “If we don’t get moving, [the Chinese] are going to eat our lunch. They’re investing billions of dollars dealing with a whole range of issues that relate to transportation, the environment and a whole range of other things. We just have to step up.”
Biden might as well instruct Secretary of State Blinken to ask the Chinese if they want fries with that.
Most of the $2.3 trillion will buy votes rather than infrastructure, including $400 billion for “elder and disability care,” $213 billion for “green and affordable homes,” $174 billion for electric vehicles, $137 billion for “school and childcare infrastructure,” $100 billion for “job training” and so forth.
It’s a smorgasbord for Democratic Party urban constituencies that leaves $180 billion for “R&D in tech of the future” and $300 billion in manufacturing subsidies as an afterthought.
Most incongruous of all is the accompanying corporate tax hike, to a 28% base rate from the present 21%. Corporations fund most of the R&D that turns into new products. That will suck $695 billion out of corporations, according to the Biden calculus, or three-and-a-half times as much as the $180 billion in additional proposed R&D spending.
And that $180 billion will go mainly to universities, with an emphasis on climate research and other fluff. That’s $180 billion over eight years, or an average of $22.5 billion a year in new money. China’s National People’s Congress last year mandated $560 billion per year of funding for new technologies.
The cost of hiring R&D staff in China is a third to half the comparable cost in the US, so China’s tech spend is closer to $1 trillion a year in terms of purchasing power parity.
Under the Carter and Reagan Administrations, federal R&D spending reached about 1.4% of GDP, or the equivalent of $300 billion a year in 2021 dollars. Today the US spends just 0.6% of GDP, or about $130 billion, on federal R&D.
To restore federal R&D to the level that prevailed when the United States created the digital economy, it would have to spend each year the $180 billion that Biden proposes to ladle out over eight years.
And the proposed corporate tax increase will wipe out much more R&D funding than the Biden plan would provide. The best way to encourage investment in high-tech innovation, argues Robert Atkinson of the Information Technology and Innovation Foundation, is to cut taxes for corporations that make such investments.
“The tax code,” Atkinson wrote last year, “should be focused on company demand for capital. It should reduce the effective tax rate for companies, including large corporations, when they invest in research and development, capital equipment and workforce training.
” In other words, the tax code should incent American companies to support the three main building blocks of productivity growth, innovation and competitiveness.”
The 2017 Trump tax cut for corporations, observes Atkinson, cut the base tax rate, but reduced tax breaks for R&D and capital expenditures. The result was a decline in capital spending. In 2019, US corporations spent more money buying back their own shares than they spent on capital equipment.
Whatever the defects in the Trump legislation, Biden’s proposed corporate tax increase will make things worse. US corporations will be left with a higher base rate, without the incentives for R&D and capital spending that the Trump legislation removed.
Biden’s proposed infrastructure budget is small compared with America’s requirements, and it will be cut down even further by waste and corruption.
American infrastructure is more expensive than in any other country in the world, largely because entrenched political interest and construction trade unions crowd the public trough.
New York’s Second Avenue Subway extension cost $6 billion, or $2 billion a mile, the most expensive urban mass transit ever built. The average cost of underground subway lines outside the US is $350 million a mile, or a sixth of New York’s cost.
Boston’s “Big Dig” project, originally budgeted in 1998 for $7.2 billion in today’s inflation-adjusted equivalents, will cost $22 billion.
Without comprehensive regulatory reform, Biden’s $447 in transportation infrastructure spending will make barely a dent in America’s requirements. China meanwhile builds 10,000 kilometers of new highways and 4,000 kilometers of new rail lines a year.