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.
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.
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.
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.
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.
truth is, the benefits of spending on infrastructure are not fully understood
and remains the subject of continuing academic
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
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.
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.
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.
If you are a Millennial or the parent of one, and want to inspire them to understand more about American exceptionalism and our free market system, there is something that you can do. Give them a copy of Conquering the Political Divide – How the Constitution Can Heal Our Polarized Nation. This book provides the grounding we all need in basic civics and economics to help us defend ourselves from progressive ideology. Order your copy today by clicking here.
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Eric BeckEditor-In-ChiefFree Nation Media LLCGreenville, South Carolina
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