TL/DR: if traders were worried that inflation expectations are already soaring (and taking rate hike odds with them), just wait until it becomes common knowledge that Biden is hoping to more than double the funding needs for more government stimmies in just a few months…

What’s Next: Here Comes Biden’s $2 Trillion Infrastructure Package

Earlier today we published a recap of Biden’s $1.9 trillion American Rescue Plan from Rabobank’s Philip Marey in which he observed that “the Democratic approach may have spoilt the mood for bipartisanship in the near term. Republicans claim that the Democrats were not serious about finding a bipartisan consensus.” In short, since not a single Republican voted for the American Rescue Plan and centrist Democratic senators have shown that they are willing to use their leverage in the 50-50 Senate. “this will increasingly anger progressives as their left wing agenda continues to be watered down by senators of their own political party. Therefore, if Biden does not proceed with caution, this could already have been the high point of his administration.”

That would be the rational view. Alternatively, in a world where a flood of new debt is the only option left to perpetuating a failed status quo, one can also argue that record polarization notwithstanding, it will be in the best interest of both republicans and democrats to push the current spending spree to its absurd limits.

That’s where Biden’s upcoming boondoggle – his infrastructure plan – comes in, and as Marey concedes, “if you think that $1.9 trillion is a lot of money, this does not mean that Democrats are going to stop their spending spree here.”

Below is the Rabobank’s strategist preview of what could be the next big thing from the Biden admin: the $2 trillion infrastructure deal.

Congressional Progressive Caucus Chair Pramilla Jayapal tweeted that this (the American Rescue Plan) is a crucial down-payment on the $3-to-$4.5 trillion in stimulus needed to fully recover. Now that the American Rescue Plan has been signed into law by President Biden, he wants to proceed with a $2 trillion infrastructure package as part of the American Recovery Plan.

While there may be some common ground between Democrats and Republicans on infrastructure, for a large part they are thinking about different forms of infrastructure. While Republicans may be willing to spend federal money on highways, bridges and airports, Democrats are thinking of green infrastructure facilitating clean energy and electric vehicles. Last week Biden had a bipartisan meeting with members of the House of Representatives on infrastructure spending, but Republican Representative Sam Graves said that Republicans won’t support another Green New Deal disguising itself as a transportation bill. In fact, moderate Democrats may also be opposed to it.

Besides different preferences regarding the type of infrastructure to invest in, finding the funds to invest tends to be a challenge. Transportation Secretary Pete Buttigieg may find it difficult to find the funding as did President Trump who promised a $1 billion infrastructure bill during his 2016 campaign. And President Trump was focused on the Republican definition of infrastructure, not the greener Democratic one. While financial markets are currently focusing on Biden’s spending spree, funding infrastructure investment may very well involve raising taxes.

This would certainly put off Republicans, so Democrats may go at it alone again. House Democrats are thinking about a second budget reconciliation bill before the August recess (note that the enhanced federal benefits now expire September 6). Although budget reconciliation is in practice restricted to one procedure per fiscal year, it is possible to do it twice in a calendar year. This was the case in 2017 when the Republicans used a first bill against the Affordable Care Act and the second bill for their tax cuts. The Democrats could take a similar approach in 2021. The American Rescue Plan refers to fiscal year 2021 (1 October 2020-30 September 2021), the American Recovery Plan could be passed through budget reconciliation for fiscal year 2022 (1 October 2021-30 September 2022). While this route would bypass the Republicans in Congress, moderate Democrats could still push back against the green agenda, the size of the package, and the tax hikes.

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