Hold on to your hats, and wallets, our federal government is on the brink of passing a $1.2 trillion infrastructure bill. The Senate voted last week, 67-32, to end debate and clear the way for the final passage of the Infrastructure Investment and Jobs Act. Seeking to accentuate the bipartisan aspect of the legislation, a dynamic sorely lacing in D.C. these days, Biden stated, “The bipartisan infrastructure deal … will create good-paying, union jobs repairing our roads and bridges, replacing lead pipes, and building energy transmission lines. We can’t afford not to do it.”
However, acknowledging Republican resistance, Senate Majority Leader Chuck Schumer remarked, “I said yesterday we could do this the easy way or the hard way. Yesterday it appeared that some republicans would like the senate to do this the hard way. In any case we’ll keep proceeding until we get this bill done.”
Complicating matters is the fact that as a whole, the federal government has not invested in our infrastructure, at least not in a robust manner, for quite some time. Instead, most of the spending has occurred at the state and municipal levels, A recent Congressional Research Service points out, “Over the past several decades, government investment in infrastructure as a percentage of gross domestic product (GDP) has declined. Annual infrastructure investment by federal, state, and local governments peaked in the late 1930s, at about 4.2% of GDP, and since has fallen to about 1.5% of GDP in 2016.” This underlying dynamic is a compelling argument for investment.
And, a 2021 report by The American Society of Civil Engineers (ASCE), “. . . estimated that there is an ‘infrastructure investment gap’ of nearly $2.6 trillion this decade that, if unaddressed, could cost the United States $10 trillion in lost GDP by 2039.”
All of this would auger the push for increased spending on infrastructure. But, the devil is in the details, as the saying goes. So, what are the details of the bill, and is it worth the spending that adds significantly to the bloated budget and our ever-expanding federal debt?
In reality, the bill authorizes an additional $548 billion in spending beyond the current budget. Here is a breakdown of the spending in billions of dollars according to the Penn Wharton College at the University of Pennsylvania:
- Roads, Bridges, and Major Projects $110
- Road Safety $11
- Public Transit $39
- Passenger and Freight Rail $66
- Electric Vehicle Infrastructure and Electric Buses $15
- Airports $25
- Ports and Waterway $17
- Environmental Remediation $21
- Clean Drinking Water $55
- High-Speed Internet $65
- Power Infrastructure $73
- Resilience and Western Water Infrastructure $50
- Reconnecting Communities $1
As to whether infrastructure spending, a better question might be, Does it stimulate the economy in a way that not only pays for the increased debt but also spurs economic growth?
The answer is a bit complex because it depends on the type of stimulus, and the current situation in which the money is spent. As Investopedia points out, “Overall the empirical evidence is that infrastructure spending does have a stimulatory effect on Gross Domestic Product (GDP) that is larger than some other types of spending. However, its effectiveness as stimulus isn’t without caveats. In practice, it can only achieve this level of effectiveness in very specific circumstances, limiting its use to certain instances.”
There is no doubt that infrastructure is a vital component of economic health. We cannot remain a prosperous country without the bridges, roads, and power grids that support commerce and bolster free markets. As a Brookings report puts it, “Infrastructure enables trade, powers businesses, connects workers to their jobs, creates opportunities for struggling communities and protects the nation from an increasingly unpredictable natural environment. From private investment in telecommunication systems, broadband networks, freight railroads, energy projects and pipelines, to publicly spending on transportation, water, buildings and parks, infrastructure is the backbone of a healthy economy.”
Yet, effective use of funds would not only lead to overall economic growth, or GNP but also address income disparity. As reported by the Economic Policy Institute (CRS), “Such growth requires two components: rapid overall productivity growth, and a stabilization (or even reversal) of the large rise in income inequality that occurred in the three decades before the Great Recession, a rise in inequality that kept overall productivity growth from translating into living standards growth for most Americans.”
In other words, the argument goes that if spent appropriately, the monies would eventually lead to conditions that pull people up from the bottom of the economic ladder because the private sector alone is not doing this effectively enough.
Furthermore, there are arguments that in such a large, complex, highly interconnected economy such as the United States, the federal government must play are coordinating role in any large-scale infrastructure projects. As Adjunct Senior Fellow Heidi Crebo-Rediker at the Council for Foreign Relations (CFR) argues, “. . . the United States lacks a culture of private ownership of major infrastructure, which could pose enduring political barriers to efforts to privatize swaths of the transportation system and public utilities.”
If you peel the proverbial onion back a bit further, you’ll find there are two underlying components: short-term gains (1-3 years), and long-term gains (more than 8 years). Additionally, whenever the government spends money, it reduces the spending and the resulting economic activity, that would normally take place in the private sector. This competition for funds, labor, materials, and human capital is called “crowding out,” which means the funding from the government decreases the private market spending, thus reducing the economic benefit of the spending.
The CRS frames it this way: “The largest short-term gains in GDP would likely be achieved if the investments were deficit-financed, the funds were spent during a recession, and the investments focused on core infrastructure (i.e., roads, bridges, and railways). But because of crowding out, long-term gains (outside of a recession) would generally be greater if infrastructure investment were deficit neutral.”
In the simplest terms, this means that while some short-term deficits are okay, long term-deficits create a collective drag on the economy. This is where it gets sticky, because the proposed bill, in the long term, is likely to increase the overall deficit while bringing about minimal economic growth. The Wharton School analysis argues this exactly, stating:
The bulk of the spending on infrastructure occurs in the first few years. Overall spending on infrastructure is much larger than the increase in revenues, which leads to a 1.3 percent increase in government debt in 2031.
Over time, as the new spending declines and some provisions, particularly the cryptocurrency reporting requirements, continue to generate increased revenue, the increase in government debt shrinks. In 2040 and 2050, government debt increases relative to baseline by 0.9 and 0.6 percent, respectively. The additional public capital increases the productivity of private capital, however the higher government debt crowds out additional private investment, leading to a 0.2 and 0.1 percent decrease in productive private capital in 2040 and 2050, respectively.
There are also concerns about how the bill is paid for, specifically concerns over taxing cryptocurrency. As reported by the New York Times, “A provision intended to raise about $28 billion in taxes from crypto transactions sent lobbyists scrambling. Despite already winning some concessions, crypto supporters said the language in the bill would define most participants in the sector as brokers, including Bitcoin miners, prompting onerous tax disclosures.”
The bottom line is that it appears we are potentially sacrificing long-term growth for short-term gains. As Ryan Bourn, the R. Evan Scharf Chair for the Public Understanding of Economics at Cato Institute warns, “. . . high public debts, higher public borrowing will at best crowd out significant amounts of private-sector activity, with government spending having a minimal effect on GDP.”
This overly optimistic short-term perspective is echoed by Moody’s Analytics chief economist Mark Zandi, who wrote, “I can’t remember a time when I’ve been so sure of the economy’s near-term prospects. It is going to be rip-roaring. For the next six months, probably for the next year, and perhaps even well into next year, real GDP growth and job gains will boom, and unemployment will quickly decline.”
What may be going on here is a form of economic myopia, in which the appeal of short- and medium-term gains are more compelling than the potential for long-term suffering. The point here is that there can be diminishing returns from spending. As economist Edward Glaeser has written, “While infrastructure investment is often needed when cities or regions are already expanding, too often it goes to declining areas that don’t require it and winds up having little long-term economic benefit.”
And deficit spending, if it gets out of control, can lead to inflation, which disproportionately affects people in poverty. Erik Randolph, writing for the Alaska Journal of Commerce points out, “The most recent mid-year consumer expenditure report from the BLS [Bereau of Labor Statistics] found that consumers in the lowest income quintile spend 82.2 percent of their income on housing, transportation, food and health care, compared to 64.4 percent for the highest quintile. A 5 percent inflation rate would cost those in the lowest quintile an additional $1,156 for these items on their already tight budgets, averaging $28,141. A 10 percent inflation rate would double those costs to $2,312.”
Consequently, what is needed is a clear sense of purpose and sets of priorities, couple with fiscal constraint and oversight. As James Poterba, an economist at the Massachusetts Institute of Technology, who co-wrote the paper with Edward Glaeser of Harvard University cautions, “If we are going to commit a significant amount of resources to new infrastructure projects or to maintain our existing infrastructure, bringing some discipline to the way we decide what we’re spending on is an important element of this.” Whether this discipline is forthcoming, only time will tell.
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