Don’t Claim the Infrastructure and Build Back Better Bills Will Help Us Outcompete China

With the United States facing stiff economic, military, and geopolitical competition with China, elected officials know it is good marketing to wrap any action in the mantle of “it helps us compete with China.” Even in today’s fiscally loose world, spending is still a bit suspect, but investment, especially to outcompete America’s core rival, is apple pie and motherhood.

To that end, President Biden regularly touts the recently enacted $1.2 billion infrastructure package and the proposed trillion-dollar-plus “Build Back Better” (BBB) package as being critical to maintaining our competitive lead over China. Indeed, in the signing ceremony for the infrastructure bill the president said, “I truly believe that 50 years from now, historians are going to look back at this moment and say, ‘That’s the moment America began to win the competition of the 21st century.’” Likewise, the White House tweeted that the BBB bill will “enhance U.S. competitiveness.”

Competitiveness is advanced when a policy helps firms in non-resource-based traded sectors to effectively compete in global markets. If these firms are not taking the actions they need to take, the United States will be less competitive. By that standard, the vast majority of the spending in the infrastructure and BBB packages will have little to no effect on competitiveness. The provisions that will are funded at minuscule levels. And some tax provisions in the BBB package will actually hurt U.S. competitiveness.

This does not mean that some or all of the provisions in both bills are not warranted on other grounds. There are pressing national needs that should be addressed, including better housing, a cleaner environment, and improved access to medical care. But claiming that they will restore U.S. competitiveness risks leading the public, pundits, and policymakers into believing that Washington has actually advanced the competitiveness ball, when in fact it has done little.

Many Provisions Are Worthy Goals, But They Won’t Help Competitiveness

Most of the spending in these two bills has almost nothing to do with helping traded-sector firms become more globally competitive. For example, BBB includes $10 billion for hazardous fuels reduction projects within the wildland-urban interface, $1.25 billion for conservation, and $970 million for replacing water pipes with led. This spending will do nothing to help firms in the United States compete with foreign rivals. Likewise, virtually all the physical construction spending will have no effect on firm competitiveness. These include $10 billion to support affordable housing and enhance mobility for low-income individuals and residents, $4 billion to support neighborhood equity, safety, and affordable transportation access, and $65 billion for public housing. Likewise for the $1.8 billion to invest in sewer overflow and stormwater reuse projects, the $6 billion for coastal rehabilitation, and the $20 billion for relieving flood insurance debt. Similarly, the $65 billion for broadband is long overdue, but its benefits will principally be to the households that now don’t have broadband.

The social spending provisions will also do nothing to spur competitiveness. That includes the $1 billion to support the direct-care workforce, $100 billion for childcare, $18 billion for preschool, $1.2 billion for older Americans, $15 billion for national service, $10 billion annually for reimbursing health-care costs, and $2.5 billion community violence prevention.

Some measures may have an effect, but it is likely to be de minimis. For example, while the nation desperately needs improvements in its surface transportation network, especially added road and lane capacity in metropolitan areas, little of the transportation spending would spur competitiveness. For example, the infrastructure bill adds $100 billion for roads, $60 billion for Amtrak, and $39 billion for transit. Most of the road funding is likely to go to resurfacing existing roads, which will do nothing to address congestion. Likewise, the transit and rail funding will do little to boost throughput. Moreover, to the extent any of this funding boosts throughput in the U.S. transportation system, it could just as easily facilitate imports as it does exports.

Some Provisions Will Advance Competitiveness, But They Are Drops in the Bucket

Some of the spending, particularly that related to clean energy, could have some competitive benefits, but most of the impact will be on the U.S. and global environment. This includes the $2.9 billion for rural energy storage and another $2 billion for rural renewable energy, $9.7 billion for renewable energy for rural electric co-ops, the multiple billions for electricity grid modernization, and funding for development of other energy technologies like nuclear, CCS, hydro, and storage.  While some of this funding will help spur the development of clean energy technologies, the United States cannot hope to build a globally competitive economy around clean energy alone; it is just too small.

In addition, virtually all of the multiple billions of dollars’ worth of funding listed as space, science, and technology is related to climate, except for the $668 million for STEM funding for NSF, which will boost competitiveness.

To be sure, there are some projects that will have direct competitiveness benefits, but most of these are quite modest in funding levels. The $3 billion for a grant program to improve the research capacity and research and development infrastructure at four-year HBCUs, TCUs, and MSIs will likely boost competitiveness, as could the $25 billion for workforce development activities, although this money is not targeted to skills for workers in advanced-industry, traded-sector firms.

A few provisions will have direct competitiveness benefits, such as provisions to ensure rare earth development. The $5 billion for the Department of Commerce to support the reliance of supply chains, the $260 million to NIST for the Manufacturing Extension Partnership, and the $1.5 billion to NSF for the new Directorate for Technology, Innovation, and Partnerships, and the $3.4 billion for supporting regional technology hubs (an ITIF proposal) will all directly help competitiveness. Finally, the provision to delay the introduction of a requirement to amortize research and experimental expenditures until December 31, 2025, will directly boost R&D investment. The problem is that altogether, these competitiveness provisions appear to account for around 1 to 2 percent of total funding at best.

On top of that, some of the revenue provisions will have negative impacts on U.S. competitiveness. For example, the provision to limit the tax credit for orphan drugs and tax limits on clinical trials tax will hurt U.S. biopharma development and jobs. And of course, increasing the corporate tax rate will make the United States a less competitive place to do business.

What a Real Competitiveness Agenda Would Look Like

Again, this is not to say that any of these funding provisions are not warranted on their own merit. But to say that the infrastructure and BBB bills will significantly address or even solve America’s severe competitiveness challenges is deeply misleading.

So, what should Congress do? First, lawmakers should pass and fully fund the Senate U.S. Innovation and Competition Act. The fact that Senate Majority Leader Schumer and Speaker Pelosi announced this week their intention to bring this bill to conference is welcome news. The concern though is with all the spending on the infrastructure and BBB bills, will Congress be willing to fully fund USICA?

If Congress truly wants to address America’s growing competitiveness challenge with China, much more needs to be done. This is not the place to lay out such an agenda, but let me highlight a few priorities:

• While the idea of creating an applied research directorate at NSF is a good one, it should be funded at a level of at least $10 billion per year.
• Funding for the Manufacturing USA program should be increased from the low millions per year to at least $1 billion per year.
• Budgets for DARPA and ARPA-E programs should be doubled, at least.
• A new “civilian DARPA” program, to be run by NIST, should be created funded with at least $1 billion per year.
• The new business grant funding program for the Defense Innovation Unit should receive at least $250 million a year.
• The CHIPS Act should be fully funded and a similar incentive program for investing in new factories should be created for other key technologies (such as batteries, advanced materials, robotics, and others) and funded at least $100 billion per year.
• The R&D tax credit should be at least doubled from 14 to 28 percent, and business expenditures on global standards-setting and workforce training should be eligible.
• Congress should establish an investment tax credit of at least 20 percent for investments in new machinery and equipment.
• And Congress should pass and fully fund the proposed U.S. Industrial Finance Corporation.

Imagine where the United States would be in the race for global innovation advantage if even half the resources put to the infrastructure and BBB bills were put to a real competitive package. Xi Jinping would be losing sleep.