The Bi-Partisan Gamble on $2 Trillion in Infrastructure Spending

Politicians Are Again Promising Infrastructure Spending as Economic Stimulus.

As if $22 trillion in federal debt is not enough, President Trump and Congressional Democrats now want an additional $2 trillion for “infrastructure” spending.  We are told by Nancy Pelosi, Chuck Schumer and the President that such spending will stimulate the economy and create jobs. Given the poor track record of President Obama’s $787 billion in “shovel ready” stimulus, we have every reason to question whether infrastructure spending will deliver on such promises. Unfortunately for taxpayers, infrastructure does not always deliver a return on investment. Here’s why.

What Exactly Do Politicians Mean by Infrastructure Spending?

Textbooks might describe infrastructure as shared physical resources that are required to support a modern industrialized society. Therefore, infrastructure could include roads, bridges, communications lines, railways, and other resources that enable commerce and information sharing. President Trump certainly thinks in these terms given his background in real estate development. His plans include public tax credits to encourage private-sector investment in infrastructure. Democrats traditionally want government to spend on infrastructure directly because it creates jobs in the short run for the construction trades. Hillary Clinton even proposed a government run “infrastructure bank” that would loan money to state and local governments for this purpose. However, regardless of party, what politicians mean when they advocate for infrastructure is that government needs to spend more of your tax money.

Government Does Have a Role to Play in Infrastructure Spending.

The debate over the federal government’s role in infrastructure spending is as old as the nation itself. Alexander Hamilton was a proponent of federal spending on infrastructure because he believed the general welfare required investment in economic development. Thomas Jefferson and James Madison disagreed, believing federal spending should be limited to resources required for national defense, our justice system, and internal security. This debate continued through 1936 when the Supreme Court in United States v. Butler decided that Congress could effectively appropriate funds for any purpose they determine was for general welfare. Because of this decision, SCOTUS opened the flood gates to expand federal government spending for almost any purpose, including infrastructure.

Unfortunately, Government Infrastructure Projects Are Too Often a Boondoggle.

Taxpayers should note the American countryside is littered with half-built and underperforming infrastructure boondoggles that have wasted billions in taxpayer money. For example, California Governor Gavin Newsom recently cancelled the state’s overbudget $77 billion high-speed railway project that was intended to connect Los Angeles and San Francisco. According to the Washington Examiner, traveling by air between these two cities was less expensive than by high-speed railway, with flights lasting only one hour compared to a four hour rail trip. Another boondoggle includes the John Murtha Johnstown-Cambria County Airport that cost federal taxpayers $200 million. Unfortunately, this airport only serves five departing flights per day. Even worse, the federal government still subsidizes passengers $266 each time they book a flight out of this airport. With boondoggles like this, taxpayers must question the motives of politicians who push infrastructure and demand that they justify potential benefits.

Can Infrastructure Spending Add to Economic Growth and Create Jobs?

There is a short answer to this question: maybe. When properly targeted, new or enhanced infrastructure can have a positive economic cost-benefit, at least in the long-run. Advocates of infrastructure spending will point to “multiplier” effects of government stimulus they say will increase economic activity as money spent circulates through the economy. But multiplier advocates have difficulty with basic math because they don’t use double-entry accounting. They choose to ignore the “de-multiplier” effects of taking tax money out of some other part of the economy to inject it into their pet infrastructure projects. Ask any accountant whether a commercial company could get away with manipulating their books using a single-entry ledger, and they’ll likely point to Enron as the example of how well this works.

The truth is, the benefits of spending on infrastructure are not fully understood and remains the subject of continuing academic research. However, it is possible to make an intuitive case for some infrastructure spending based on productivity. For example, think about what would happen if a key highway used by millions of people suddenly disappeared, thereby forcing workers and businesses to find alternate transportation routes. Commuting time and costs would likely increase, and the price of goods transported to market would also go up because of extended travel distances and traffic delays on alternate roadways.

The same argument can also be made in reverse. A new highway has the potential to increase private-sector productivity by reducing transport times and costs, or by encouraging private-sector investment that creates economic activity and jobs. However, maintenance projects on existing infrastructure, or poorly targeted projects that do not encourage complimentary private sector investment, can result in negative returns on investment.

Infrastructure Spending Also Comes with Political and Economic Risks.

Infrastructure spending left in the hands of politicians is a blunt instrument for boosting economic growth and creating jobs. First, all discretionary spending by government is subject to cronyism, meaning politicians may direct funds to projects that benefit their political allies instead of investments that generate a broader economic return. We saw many examples of this with President Obama’s stimulus program where a large portion of this money was handed to his political allies. This included loan guarantees to “green energy” firms like Solyndra.

Additionally, with the U.S. national debt now over $22 trillion, adding to this debt load may hurt the economy. There is academic research to suggest that when gross public debt exceeds 90 percent of GDP (aka the debt-to-GDP ratio) on a sustained basis, such debt becomes a drag on economic growth. In 2018, the U.S. debt-to-GDP ratio stood at 105 percent, a figure that is going up because of increasing federal deficits. Therefore, higher levels of public debt incurred by the U.S. for infrastructure could counteract any potential economic benefits. That’s why an intellectually honest cost-benefit analysis is critically important as a means of ensuring that such investment will create positive returns.

How Can We Ensure That Government Invests Responsibly in Infrastructure?

Politicians have every incentive to spend other people’s money, whether it be for a sound investment or not. This is especially true for infrastructure spending because it can create jobs in the short run even though potential benefits don’t always come until years later. But fiscal responsibility also has an important moral component as well because borrowing that accompanies infrastructure investment can indenture taxpayers who have not even been born yet.

Given that our federal government carries more than $22 trillion in debt and more than $50 trillion in unfunded liabilities for Social Security and Medicare, the notion of borrowing trillions more should give us pause. More than that, it should make us question the morality of such investment and demand that public officials provide credible justification before such spending commitments are made. Or better yet, maybe we should think about future generations first and consider paying down existing liabilities and reducing our out-of-control federal spending before gambling on the economics of infrastructure.

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If you would like to suggest a topic for a future blog, or to provide us with feedback on this commentary, email us at: [email protected]

Eric Beck
Editor-In-Chief
Free Nation Media LLC
Greenville, South Carolina

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