Although US President Joe Biden’s $2.3 trillion infrastructure plan would be many times larger than previous such bills, only about one-third of it would meet even a broad definition of «infrastructure.» And the package comes on top of the $5 trillion-plus that has already been spent on Covid-19 relief and stimulus since last March, and will soon be followed by pledges for even more spending in the near term. What could possibly go wrong?
A lot. Responsible governance dictates that unrelated outlays be debated separately and on their own merits. There are some proposals in the Biden plan that I myself support. But as it is currently structured, federal spending would crowd out private and local government spending, with a substantial risk of boondoggles piling up along the way.
Politicians who seek ever more spending and regulation are banking on the public’s limited ability to wade through the details of massive omnibus bills. In doing so, they tend to pay little regard to the laws of diminishing returns and unintended consequences. But we should remember that the 2008 financial crisis followed a period of serial social engineering by the federal government (through banking mandates, sub-prime mortgage subsidies, and other measures) to promote home ownership.
Anti-growth corporate-tax hike
The Biden plan is rife with opportunities for earmarked pork-barrel projects (bridges to nowhere) and crony capitalist corporate welfare (next-generation Solyndras). Consider California High-Speed Rail, an infrastructure train wreck that will soon be begging for a bailout from the Biden administration. It originally used a grant from President Barack Obama’s 2009 «stimulus» package to pay, six years later, for a tiny initial rail line. Yet, because the project’s projected total San Francisco to Los Angeles cost has tripled to $100 billion, it has been downgraded from high-speed to a «blended system,» all while suffering from technical and financial obstacles and epically opaque mismanagement.
Like all countries, the United States certainly has infrastructure needs. In the World Economic Forum’s 2019 Global Competitiveness Report, US infrastructure ranked 13th of 141, putting it ahead of Sweden and Denmark (those paragons for the American left). But with the American Society of Civil Engineers giving the US a C- for infrastructure, there is still ample opportunity for productive long-run infrastructure investment. The problem is that only some of what the Biden administration has in mind would qualify as an appropriate governmental obligation, and only a fraction of that should be a federal responsibility.
For its part, the Biden plan would radically change how federal infrastructure spending is financed, by moving from a user-fee model that accurately aligns the costs with those who benefit to an anti-growth corporate-tax hike. In addition to raising the corporate rate well above those of America’s global competitors, the proposal would also increase taxes on US companies’ overseas earnings.
No such thing as shovel-ready projects
As a result, US multinationals will earn less abroad for the Americans who own the bulk of their shares (either directly or through pension funds). They will also most likely have to pay their American workers less and charge higher prices to their customers. Worse, the Biden administration wants to pay for eight years of «infrastructure» spending with 15 years of tax hikes. Its recently passed $1.9 trillion spending bill also was deficit-financed (as much of its forthcoming spending initiatives will be).
The Biden administration claims that this spending will dramatically spur growth, raising employment and incomes. The reasoning is that because government borrowing rates are low and below output growth, deficit financing amounts to a free lunch (which makes one wonder about the real motive for the tax hikes).
But this argument is nonsensical four times over. First, as Valerie Ramey of the University of California, San Diego and Edward Glaeser of Harvard University each note, infrastructure spending does not make for good short-run economic stimulus. Planning and approvals take time, and construction is often plagued by delays and budget overruns. As Obama himself admitted in 2010, «there’s no such thing as shovel-ready projects.» The New Deal did not end the Great Depression, nor did Japan’s massive ongoing infrastructure expenditures spare it from its «lost decades.» Most of the unemployed do not have the skills or experience to operate giant excavators and tower cranes.
Making politicians look good
Second, large public infrastructure projects (highways, bridges, dams, ports, and major repairs) are designed to last many decades, which will pose problems when interest rates on government debt eventually rise. The Congressional Budget Office estimates that by 2051, the ten-year Treasury rate will triple, and the federal government’s interest costs will sextuple, exceeding even rapidly growing spending on Social Security, and dwarfing all discretionary spending, including on defense.
Third, the economy is recovering rapidly from the pandemic and is projected to reach its output potential without additional spending. The accelerating vaccine rollout on its own will allow for a return to in-person schooling, dining, and shopping, as well as travel, which will sharply reduce unemployment in the sectors hit hardest by the pandemic. As such, a recent analysis from the respected Penn Wharton Budget Model finds that the package will actually shrink the economy over time, because of the harm from its tax hikes.
Finally, when federal funding is plentiful, there are more chances for cronyism and pork-barrel spending on low-return projects designed to make politicians look good. Repairs and maintenance generally offer higher returns than new construction, but only the latter offers a ribbon-cutting photo op in a congressperson’s home district.
When federal grants pay for 80% of new highway construction, local authorities have a strong incentive to push for pet projects, because they can tell their voters that they will be on the hook for only 20% of the cost. What they don’t say is that they are also paying for pet projects in all of the other states that receive federal grant money. Voters would reject this fiscal cross-hauling if they were given the full picture.
When politicians get it in their head that spending is free, the professional cost-benefit analyses conducted within government agencies tend to be ignored. And now, Biden has hastened this dangerous feeding frenzy with a misplaced memorandum that warps cost-benefit analysis by demanding that many unmeasurable, intangible, and politically contentious items be «counted» as benefits. Virtually any pet political project could «qualify.» Get ready for the boondoggles.
Copyright: Project Syndicate.