Building a bridge to recovery?

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Is the US set for a new wave of infrastructure spending following Joe Biden’s US Presidential election win? Here, Mellon portfolio manager Jim Lydotes explains why a Roosevelt style “New Deal” may be on the horizon to help stimulate the economy.

With over 40 million Americans now out of work and one in five households now deemed food insecure,¹ the US economy finds itself severely challenged. As the nation struggles to get back on its feet due to the economic shock of Covid-19, some wonder if new infrastructure initiatives can help restore the domestic economy and get Americans back to work.² Historically speaking, infrastructure projects have been used as economic medicine in the past, according to Lydotes.

Franklin D. Roosevelt’s New Deal, which kicked off in 1933 and helped the US recover from the Great Depression, was nothing but infrastructure focused. The Works Progress Administration (WPA), created by the Roosevelt administration, covered the US with 650,000 miles of road, built 78,000 bridges, erected 125,000 civilian and military buildings, and constructed or improved 800 airports.³

With eyes set on building and repairing roads, bridges and airports, President-elect Joe Biden and the Democratic Party have proposed an environmentally-focused infrastructure plan, which has been compared to the Green New Deal Resolution, pitched to Congress in February 2019 by Representative Alexandria Ocasio Cortez of New York and Senator Edward J. Markey of Massachusetts.⁴

Biden recently unveiled a US$2trn infrastructure program⁵ and it was very green and progressive in terms of not only putting people back to work but also doing it in a way that massively accelerated the reduction of our carbon footprint in the US,” Lydotes says.

“One aspect of the plan is to transition to carbon pollution free energy by 2035.⁶ A big part of this is to transition, or accelerate the transition, away from carbon-based energy sources.”

While Biden’s plan still focuses on rebuilding “crumbling infrastructure” like roads and bridges, it also mentions “low cost financing to upgrade and electrify home appliances and install more windows, which will cut residential energy bills”.

A Biden presidency is likely to have much more of a ‘green’ focus than was seen under the Trump administration according to Lydotes. His optimism stems partly from the fact that, despite deep US political divisions, infrastructure renewal is one area which enjoys wide cross-party support.

“Infrastructure development is something we tend to have bi-partisan support for in the US. Essentially the one thing America’s main political parties broadly agree on is that our bridges, roads, airports and other areas of infrastructure have been underinvested in for a long time and infrastructure spend is something that might stimulate the economy at this difficult time,” he says.

Major parts of US road infrastructure alone are in particularly bad shape. According to some estimates, up to 25% of US bridges need upgrading and 64% of US highways are also in need of repair.⁹ Lydotes sees key potential for infrastructure investment not just in roads and bridges but also areas such as airports and, potentially, power transmission networks.

“US roads could significantly benefit from new maintenance. The country has also previously underinvested in airport infrastructure and could use funds to modernize these facilities,” he says.

“There is also significant potential for investment in electricity grid systems. US states tend to have their own local dispatch networks and are therefore managed in a decentralized way – which can lead to some serious inefficiencies. We believe there is potential to invest, streamline and improve this system,” he adds

From a wider investment standpoint, Lydotes believes regulated utilities could benefit from any wider infrastructure investment push and sees promising potential in the broader application of renewable energy such as solar and wind power.

“Utilities can earn more money by growing their asset base. While it is normally hard to achieve this, any major new investment in renewables from wider infrastructure spend could expand the assets from which they are able to make a return. Any push to accelerate the growth of renewables should allow these utilities to grow faster than they have previously and could also lead to higher multiples for these companies.”

Whether or not the US government decides to dig deep and finance a major infrastructure overhaul and whatever the final political shape Congress takes, Lydotes feels there is still broad support for infrastructure renewal at both a political and public level.

“Given the chronic state of disrepair we see in US infrastructure today, and the seemingly endless willingness of the US government to currently stimulate the economy with fiscal spending, we think this is again going to be one area that both Republicans and Democrats can agree on.

“As we start to look beyond the Covid-19 pandemic, and with unemployment set to be increasingly elevated, there is no doubt more and more people are talking about infrastructure again and the potential for a Roosevelt type New Deal program for public works and investment,” he concludes.

¹Guardian. Jobless America: the coronavirus unemployment crisis. May 28, 2020.
²Express. Coronavirus breakthrough: How Trump could emulate FDR’s New Deal to rebuild US economy. April 6, 2020.
³American-made. The enduring legacy of the WPA when FDR put the nation to work. February 24, 2008.
New York Times: What Is the Green New Deal? A Climate Proposal, Explained. February 21, 2020.
New York Times: Biden Announces $2 Trillion Climate Plan. August 11, 2020.
Washington Post: Biden calls for 100 percent clean electricity by 2035. Here’s how far we have to go. July 30, 2020.
JoeBiden.com: The Biden plan to build a modern, sustainable infrastructure and an equitable clean energy future. Accessed September 9, 2020.

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https://www.bnymellonim.com/outlook/global-disclosure/

GE192681 EXP 25 May 2021

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