In the past few months, one of the hottest topics in the intersection of politics and business has been President Joe Biden’s and the Democrats’ proposal for a historically large-scale infrastructure bill. Talks about Biden’s infrastructure plan have sparked intense debate for the majority of the Biden administration’s term in office, with fights over the definition of infrastructure and the magnitude of proposed spending. The latest version of the proposal, which is estimated to include over $1.2 trillion in spending over 8 years, is designed to concurrently help the American economy recover from the effects of the COVID-19 pandemic and invest in America’s crumbling infrastructure to create the “economy of the future”.
Biden’s plan includes investments into repairing roads, fixing bridges, modernizing drinking water systems (particularly removing lead piping), nationwide internet broadband networks, projects that tackle climate change by cutting emissions and supporting clean energy, spurring research and development in electric vehicles, and building over half a million electric vehicle charging stations. Other related plans tackle what is being called “human infrastructure” items like paid leave, child care, health care, affordable housing, and education.
While this sounds like great news for the country overall, small business owners are interested in how this infrastructure plan could directly affect them and their business. In this article, we discuss how the infrastructure could impact your small business as well as its potential consequences for the broader economy.
The tangible effect of this spending on small businesses
Fixing America’s economic foundation
It’s been over a decade since there has been such overwhelming demand for an infrastructure package, and that’s for good reason. In 2017, the American Society of Civil Engineers gave America’s overall infrastructure a grade of a D+. That grade has been deteriorating from a C, still a poor grade, since 1988. Roads, bridges, water systems, parks, railroads, energy, dams, broadband internet access, and ports are all pieces of infrastructure included in this evaluation and each has a long laundry list of issues when it comes to maintenance, status, and deterioration.
What does this mean? The foundation upon which American business is conducted is not up to snuff. Every business, from Amazon to the corner store where you get the occasional snack, is suffering from an infrastructure that is not serving them to the best of its ability, which hinders their ability to do what they do best – conduct commerce by and for Americans.
For example, in Wisconsin, more than 1,000 bridges are structurally deficient. What does that mean? If you operate a business that either engages in shipping and distribution or uses those bridges to transport people and equipment, the poor status of the bridges is putting your business at significant risk. Large-scale spending on America’s infrastructure will do wonders to improve the state of America’s economic foundation, which will be felt across the board no matter what kind of business you engage in.
Another tangible example is how ports and rail line status quality impacts small businesses. Small businesses that rely on shipments of materials and inventory from international or domestic partners, whether they realize it or not, have a supply chain that is heavily dependent on the ability of ports and railroads to reliably run to deliver on-time orders. America’s ports are unable to handle consumer demand. Train tracks in the US haven’t been updated in years which has resulted in a greater level of reliability issues and railroad congestion, which delays shipments and stalls economic activity.
To sum all of this up, economists often state that for every dollar invested in infrastructure, two to three dollars of economic activity is generated. Government spending on infrastructure will make existing commerce more efficient, allow it to operate at a greater scale, and reduce costs in terms of time loss and lost materials for many types of small businesses.
Generating business for small businesses focused on infrastructure
Small business owners in industries like manufacturing, construction, site planning, and related fields are in luck. These services will be in massive demand over the next 8 years as the funding allocated for infrastructure spending is used on the associated projects. Small businesses are very often contracted or subcontracted to support large-scale infrastructure projects and portions of government spending are often earmarked for contracts given to small businesses.
Small business owners in these sectors should take steps now to network with their local and state government officials and learn the ins and outs of their associated contracting systems. This is a massive and direct revenue opportunity that will pay off both in terms of financial reward and the knowledge that you’re making very direct moves to improve the physical state of the United States.
Possible consequences of Biden’s infrastructure proposal
Paired with commentary about how helpful the infrastructure bill could be for economic recovery are concerns about how massive government spending, especially right after the passage of stimulus packages of similar magnitudes by Congress like the CARES Act, could actually HURT the economy.
Ever-increasing levels of government debt
As with any proposed increases in government spending, so-called “debt hawks” have raised concerns about how increased government spending will contribute to the United States’ ever-increasing level of government debt, especially if protests by the GOP prevent the inclusion of tax increases in the bills. While it’s easy to see government debt as a bad thing, especially with respect to how we as consumers and business owners think of debt, it’s often a misunderstood concept. While this is an expansive topic that we can’t fully cover in this article, we’ll highlight some of the main points.
Runaway debt can absolutely be a huge issue. If a country accumulates too much debt it will no longer be able to borrow money to cover deficit spending, its currency will likely destabilize, and its economy will collapse. However, the total amount of government debt is much less important when compared with a country’s debt-to-GDP ratio. The United States debt-to-GDP ratio is 127%, which is relatively healthy when compared to other developed countries. When using a method called “discounted cash flow analysis”, which is a financial technique that measures the value of an investment based on future cash flows, the Bank of America’s economic research team measured the ratio at just 0.7%. The takeaway here is that total debt should always be measured against the productive output of the entity holding that debt. The world’s largest companies all hold significant amounts of debt, but no one is worried about it because they’re almost certainly good for it. The same goes for the United States, though a watchful eye on budget deficits is an important part of the policy discussions had by the public and by lawmakers.
We encourage all small business owners to read up on the economic discussion surrounding government debt to get a better understanding of how it can affect the economy and how it’s related to government spending.
Possible inflationary effects
Another worry is that the “rampant” government spending being proposed by the White House could induce a higher level of inflation than is healthy for the economy. Inflation is the phenomenon of purchasing power of a given currency over time or in other words the increase in the average level of prices over time in an economy. Governments are constantly issuing more currency as economies grow, which contributes to inflation. Low levels of inflation are actually a good thing and are a sign of a healthy and growing economy.
When discussing inflation in relation to government spending, economists often use the phrase “more money chasing fewer goods”. When people say government spending will cause inflation they’re referring to the idea that the money being spent isn’t actually matching real demand in the economy, so more money will be floating around to purchase the same set of goods and services, which will increase their prices. With recent government spending, they may have a point.
While the Federal Reserve thinks that inflation worries are overblown, financial institutions and others have correctly noted and predicted higher than normal levels of inflation as the country recovers from COVID-19. It’s hard, though, to pin this “inflationary pressure” on the set of stimulus packages passed during the pandemic and it’s not certain that the proposed infrastructure package will have this effect. Part of the reason we are seeing high levels of inflation is due to the strong rebound from the coronavirus crisis. Consumers are spending wildly as the economy reopens, which is contributing to record economic growth.
It’s unclear whether stimulus spending in response to the economic crisis caused by COVID-19 will cause unhealthy levels of inflation, and it’s difficult to predict.