WORKING PAPER

by Steven L. Byers, PhD, and Jeff Ferry

DECEMBER 2020

Supercharging Infrastructure Spending with Strict Buy America Rules

A $1.5 Trillion Infrastructure Spending Plan Would Add 2 Million Jobs to US Economy; But With a Strict Buy American Rule It Would Add Over 3 Million Jobs and Boost Vital Industries

By Steven L. Byers, PhD, and Jeff Ferry

A Congressional five-year $1.5 trillion infrastructure investment plan could create 2.5 million jobs by 2025 while bringing sorely needed improvement to the nation’s deteriorating infrastructure, according to a new CPA analysis.

However, leakage of the spending into imported supplies would restrict the growth potential of the spending plan. CPA has previously outlined how the Buy American laws developed over the past 90 years operate as a price preference program that nominally encourage buying American but allow many loopholes for federal agencies or local government bodies to choose to buy imported goods. These laws could be strengthened either through administrative rulemaking or legislation to turn them into strict Buy American mandates, i.e. requirements. Such a strict Buy American framework would ensure that every dollar in an infrastructure plan was spent exclusively on American goods, with substantial benefits to the US economy, including jobs. Our analysis of an infrastructure plan implemented under strict Buy American provisions shows it would generate a 33 percent larger boost to gross domestic product (GDP) and job creation, adding a total of 3.3 million jobs to the US economy in 2025.

The analysis is based on the infrastructure plan contained in the Moving Forward Act, which was spearheaded by Democrats on the House Transportation and Infrastructure Committee and passed by the full House on July 1, 2020. Republican political leaders including President Trump have also spoken in favor of trillion-dollar infrastructure plans. Joe Biden has spoken in favor of a $2 trillion infrastructure plan. While the details of each plan would be very different, the same macroeconomic analysis applies, namely that strict application of Buy American principles would increase the economic benefit substantially. Democratic plans like the Moving Forward Act include investment in areas such as renewable energy and electric vehicles, industries where import penetration is likely to be high over the forecast period, so a strict Buy American framework would be especially beneficial.

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Figure 1: Lower bars show benefit in Year 5 (2025) of Moving Forward infrastructure plan under current Buy American rules. Upper bars show additional benefit of Strict Buy American framework: an additional 840,000 jobs and additional $603 billion in GDP. The Moving Forward plan with Strict Buy American would deliver a total benefit of 3.3 million additional jobs and $2.4 trillion of additional GDP to the US economy.

Key results of this analysis are:

• A five-year $1.5 trillion infrastructure plan modeled on the Moving Forward Act will boost GDP by $352 billion a year in the first year (2021 in our model), rising to $1.8 trillion of additional GDP in the fifth year (2025 in our model).

• The five-year $1.5 trillion infrastructure plan would create 2.3 million additional jobs in the first year, rising to 2.5 million in the fifth year.

• Approximately $75 billion or 25% of the total $300 billion of annual spending would go to imported goods, under the most likely application of current Buy American laws, which contain many loopholes. Sectors that would see large volumes of imports include electric vehicles, broadband equipment, and basic commodities like steel and cement.

• If a strict Buy American rule were applied to all spending under this infrastructure plan, in the first year it would boost GDP growth by an additional $117 billion and create an additional 780,000 jobs, an increase of about 33 percent over and above the benefits of the Moving Forward plan under the present Buy American framework.

• Further, a strict Buy American plan would make a meaningful contribution to the re-shoring of large US industries we have lost such as broadband equipment manufacturing.

• Strict Buy American would support the growth of new industries in the US including electric vehicles, batteries, and renewable solar energy.

• Purchases of US-manufactured medical equipment and devices under the strict Buy American application of Moving Forward’s investment program in hospitals would add well-paid manufacturing jobs and restore American capabilities in the critical health care sector where the US has suffered from severe shortages during the COVID pandemic.

• Effects on inflation would be minimal, adding less than half a percentage point to annual inflation throughout the five-year forecast period. At no point would inflation rise above 2 percent a year according to the forecasts.

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Moving Forward Act: Spending Breakdown

The Moving Forward Act is intended to address the country’s failing transportation infrastructure as detailed in the American Society of Civil Engineers (ASCE) 2017 report card on the state of America’s infrastructure system. The ASCE found that the cumulative grade for America’s infrastructure was a D-plus, reflecting deteriorating roads and bridges, many of which are in need of upgrading or replacement. The plan goes beyond traditional infrastructure to call for billions of dollars of spending in many other areas. Some, like schools and new drinking water systems, attract bipartisan support. Some areas, like large-scale investment in renewable energy, are more popular with Democrats. This analysis focuses on the Moving Forward Act because it is the most detailed trillion-dollar-plus infrastructure proposal available. Our methodology could be applied to other infrastructure proposals too.

The Moving Forward Act includes:

o Nearly $500 billion devoted mainly to highways, roads, bridges, and transit. o $130 billion for school infrastructure o $10 billion to invest in and upgrade child-care facilities o $100 billion for affordable housing infrastructure to create or preserve 1.8 million affordable

homes o $25 billion for safe drinking water o $40 billion in wastewater infrastructure o energy infrastructure including renewable energy, support development of an electric vehicle

charging network, support energy efficiency, weatherization, and smart communities’ infrastructure.

o $100 billion for high-speed broadband Internet access o $30 billion for health care infrastructure modernization including hospitals, labs, and the Indian

Health Service o Dredging operations in America’s harbors, ports, and channels as well as structural

improvements o Incentivizing the development of wind and solar on public lands o Spurring private investment through a revitalized Build America Bonds program, expansion of

Private Activity Bonds, and other tax credits. o $25 billion to modernize United States Postal Service infrastructure, including a zero emissions

postal vehicle fleet Much of the spending in the bill is in the form of tax credits or commitments to fund state programs with federal dollars. The ultimate breakdown of the spending is not easy to forecast, due to the discretion of local officials over allocation and timing. We have made estimates based on research, and discussions with congressional officials. To simplify the modeling, we assume the funds will be spent in a timely fashion, equally across the intended five-year period. Our estimates of the spending breakdown are shown in Table 1. The largest spending categories include highways, bridges, schools and child-care, transit systems, greening of the automobile fleet, expansion of the availability of broadband, and affordable housing.

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Table 1 – Moving Forward Act: Spending Allocation

Spending Category % of Annual

Spending Total Spending

Over 5 -years Spending (Annual)

Highways 12.5% $187.0B $37.4B Bridges 16.6% $249.3B $49.9B Schools and Child Care 11.6% $174.5B $34.9B Transit 8.3% $124.7B $24.9B Greening of Vehicle Fleet (EV's) 8.3% $124.7B $24.9B Broadband 8.3% $124.7B $24.9B Affordable Housing 8.3% $124.7B $24.9B Smart Grid 5.8% $87.3B $17.5B Drinking and Wastewater 5.4% $81.0B $16.2B Hospitals and Healthcare 2.5% $37.4B $7.5B Rail Investment 2.4% $36.2B $7.2B U.S. Postal Service 2.1% $31.2B $6.2B Solar 1.9% $29.0B $5.8B Wind 1.9% $29.0B $5.8B Ports/Harbors (Dredging) 1.9% $29.0B $5.8B Building Weatherization 1.7% $24.9B $5.0B Environment & Public Lands 0.2% $3.7B $0.7B Alternative Fuel Charging Stations

0.1% $1.7B $0.3B

Total 100% $1.5T $300.0B

Next, we made some broad estimates as to how these spending priorities will translate to spending in specific sectors of US industry. All these spending programs will involve substantial spending on construction and management services. In addition to those services, roads, highways, and bridge programs will require spending on cement and steel. Broadband programs will involve large purchases of communications equipment. Development of the smart energy grid will see large spending in electrical equipment and communication equipment. Upgrading and expanding the nation’s hospitals and healthcare facilities will require spending on medical devices and equipment.

Buy American and Import Penetration

Past infrastructure spending programs have involved substantial amounts of spending on imported goods. The Buy American law of 1933 and the Buy America law of 1982 both have many loopholes which are often exploited by local governments or private contractors when implementing infrastructure projects. For example, the state-funded San Francisco Bay Bridge was rebuilt with inferior Chinese steel, leading to investigations by the California state legislature. New York’s LaGuardia Airport was renovated with Chinese materials. More recently, the Washington DC public transit authority, WMATA, opted for Hitachi Rail to fulfill an upcoming $1 billion contract for new

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railcars for the city metro. According to press reports, Hitachi will not need to meet Buy American requirements for 70 percent of the content to be made in the US because WMATA will use state and city money for the contract, reallocating its federal dollars to other programs. The Federal Transit Authority has said the WMATA strategy violates current Buy American rules, but other local transit authorities have successfully used such strategies to buy Chinese railcars and other foreign infrastructure products.

It is clear that current Buy American laws are largely ineffective. The cost to the American economy runs into the billions of dollars. If these federal (and state and local) funds were spent on US manufactured goods, the effect would be to create thousands of jobs and bring new life into many moribund industries. There is reason to hope for a more aggressive enforcement of Buy American principles. On his campaign website, Joe Biden said if elected he would “make “Buy American” real and make a $400 billion procurement investment that together with the Biden clean energy and infrastructure plan will power new demand for American products, materials, and services and ensure that they are shipped on U.S.-flagged cargo carriers.”

Accordingly, we estimate here the likely import share of a Moving Forward infrastructure program. Table 2 shows that our total estimate of import content comes to $75 billion a year, or 25 percent of the $300 billion annual spend. Our estimates are based on current import market shares in the relevant sectors, as well as projections. For example, in steel we have assumed that import penetration continues at the present level of about 20 percent. For communications equipment, we assume import penetration to remain at 90 percent throughout the five-year forecast period, because little to no broadband systems have been manufactured in the US since Lucent, Nortel, and Cisco shut down, outsourced, and offshored manufacturing in the years after 2000.

In many sectors, our estimate of import penetration is based on the import penetration levels from the federal government annual industry accounts available on the Bureau of Economic Analysis website. In general, these are conservative estimates.

Electric vehicles are one case where we estimate import penetration, low today, will rise dramatically over the forecast period. Today, electric vehicle sales are dominated by Tesla, which does most of its manufacturing in the US. Over the coming years, it seems likely that General Motors, Ford, Volkswagen, and other major auto producers will take a share of the electric vehicle market and all of them are likely to rely more on imported parts than Tesla does today. Further, there are more than a dozen Chinese electric vehicle manufacturers, and many have plans to address the US market with low-priced vehicles. In addition, batteries represent a large part of the value of an electric vehicle and in the battery sector today, import penetration is 88 percent. Our conservative estimate is that in Year Five (2025), 50 percent of the value in the Moving Forward plan’s spend on electric vehicle will go to imports.

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Table 2 – Spending by Sector, Import Penetration

Sector

Total Spending Over 5-years

Annual Spending

Import Penetration

2021

Value of

Imports

Import Penetration

2025

Construction $631B $126.29B 0% $0.0B 0% Steel $102B $20.46B 20% $4.1B 20% Cement/ Concrete $177B $35.32B 20% $6.9B 20% Solar Modules $23B $4.65B 90% $4.2B 80% Electric Vehicles $128B $25.55B 9.0% $2.3B 50% Electric Trucks and Buses $50B $9.97B 85% $8.5B 50% Wind Turbines $20B $4.07B 80% $3.3B 80% HVAC Systems $66B $13.21B 50% $6.6B 50% Batteries $22B $4.36B 88% $3.8B 80% Communications Equipment $79B $15.87B 90% $14.3B 90% Industrial Pumps $16B $3.24B 40% $1.3B 40% Railroad Stock $42B $8.40B 12% $1.0B 12% Mail Handling Equipment $6B $1.25B 63% $0.8B 63% Electrical Machinery Equipment $90B $17.93B 63% $11.2B 63% Computer Equipment $34B $6.71B 71% $4.7B 71% Medical Equipment $13B $2.62B 38% $1.0B 38% Total $1.5T $300B $75B

For purposes of this study, we impose a strict Buy American rule for all Moving Forward spending, meaning that all inputs to the projects are supplied 100% by domestic suppliers.

Modelling

To determine the economic impact of each plan, we utilize the REMI Policy Insight Model1 to generate estimates for the economic benefits of the proposed spending plan beginning in 2021 and ending in 2025. In Case 1, we assume that 25 percent of the federal spending on infrastructure goes to imports. In Case 2, we assume that a strict Buy American rule requires that all $300 billion of annual infrastructure spending goes on domestically produced goods.

We measure each case relative to a baseline forecast based on the University of Michigan’s RSQE2 national forecast for the US economy from August 2020 and the CBO September 2020 outlook3. The baseline forecast reflects the economic contraction due to the Covid-19 outbreak beginning in March 2020. GDP contracts by 3.94 percent this year and employment falls by 6.52%. Growth rebounds in 2021 in the baseline forecast, reflecting a sharp recovery from the pandemic.

1 https://www.remi.com/model/pi/. 2 Research Seminar in Quantitative Economics, Economics – University of Michigan 3 The 2020 Long-Term Budget Outlook, Congressional Budget Office (September 21, 2020), https://www.cbo.gov/publication/56516

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Economic Impact of the Infrastructure Plan The economic effects of the infrastructure spending plan are shown in table 3. In Case 1, the $300 billion in annual spending increases GDP by $352 billion and employment by 2.3 million in the first year.

In Case 2, with a strict Buy American rule, all $300B in annual spending goes to domestic production and none goes to imports. Under this assumption, the plan would generate an additional $117 billion of GDP over Case 1 and $469 billion over the Baseline Case. The strict Buy American case yields an additional 778,000 jobs over Case 1 and 3.1 million additional jobs as compared to the Baseline Case. By Year 5, the strict Buy American case delivers 840,000 more jobs than Case 1 and 3.4 million more jobs than the Baseline Case.

In both cases, inflation is slightly higher in the first two years by 30 to 40 basis points but is effectively the same as the baseline in years 2023 through 2025.

The effects of both Cases on the US economy are strongly positive. Millions of jobs would be created and many manufacturing sectors would enjoy increased demand for a minimum of five years. Basic materials like steel and cement would see double-digit increases to demand, leading to thousands more jobs. Case 1 adds over one percentage point to GDP growth, so in 2025 GDP growth would be 3.6

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percent instead of the 2.3 percent forecast for the baseline case. Case 2 adds a further 0.4 percent, bringing the annual growth rate up to 4.0 percent in 2025.

A strict Buy American rule increases the benefits in both GDP dollars and jobs by about a third. The 3.4 million jobs created under strict Buy American would bring more better-paid jobs to an economy that has been struggling with too many low-quality service sector jobs for a couple of decades. Of the 3.4 million additional jobs, 12 percent or 408,000 would be in manufacturing sectors. The affected manufacturing sectors tend to pay higher annual incomes than either the average manufacturing wage or the average service sector wage.

Transformational Change Under Strict Buy American

The effects of Case 2, infrastructure spending under a strict Buy American rule, go well beyond the quantitative numbers. Spending in many of the categories identified above would be transformational. The insistence on US-manufactured products for broadband communications would induce a sea-change in that industry, with US companies like Cisco and foreign companies like Ericsson rushing to build a US manufacturing capability to meet the needs of what would be one of the world’s largest customers for broadband equipment. In the solar power industry, US solar module manufacturing has enjoyed a rebirth in the last two years but under unremitting Chinese competitive pressure (subsidized with tens of billions of Chinese government money), the industry’s future is still uncertain. Federal government spending of $4.65 billion guaranteed to go to US-manufactured equipment would give a durable boost to the US industry.

The electric vehicle case is perhaps the most interesting. In China and many other nations, government support for electric vehicles and/or battery manufacturing is widespread and in the billions of dollars. Although Tesla’s success today suggests the US will be a big player in this industry, the future is highly unclear. US multinationals, foreign car makers, and new Chinese entrants are in the early stages of an assault on the global electric vehicle market. An infrastructure spending program channeling $25 billion a year for five years to US-made electric vehicles would provide a significant boost to the industry and an incentive for US-based and foreign-based carmakers to locate production sites in this country.

Conclusion

The infrastructure spending proposed in the Moving Forward Act addresses many of the nation’s most pressing infrastructure needs. Few would argue that US roads, bridges, highways, schools, water facilities, electrical transmission system, and other key components of our national infrastructure need a large-scale multi-year investment program. While other sectors like renewable energy and electric vehicles are politically more controversial, there is general agreement that these industries will grow larger in the next decade or more. A US investment program could give US producers the shot in the arm it needs to succeed in these industries.

A strict Buy American rule would add teeth to the many ineffective Buy American laws and guidelines on the books today. It would prevent some $75 billion of US spending going on imported products, many of which are already supported by foreign government subsidy and other unfair trading tactics. If redirected into US industry, that spending would turn infrastructure spending into a 3 million job-creation program and make a long-term enduring contribution to the rebuilding and re-shoring of vital American industries.