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The Case Against an Infrastructure ‘Stimulus’

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The Case Against an Infrastructure ‘Stimulus’

National Review Online April 15, 2020
Urban PolicyInfrastructure & Transportation
EconomicsTaxBudget

This 'stimulus' bill will bury America more deeply in debt, fail to stimulate economic growth, and likely be squandered by politicians.

The free-falling economy is bringing Washington, D.C., together in bipartisan calls for a massive infrastructure stimulus bill. President Trump tweeted that “With interest rates for the United States being at ZERO, this is the time to do our decades long awaited Infrastructure Bill. It should be VERY BIG & BOLD, Two Trillion Dollars, and be focused solely on jobs and rebuilding the once great infrastructure of our Country! Phase 4.” This follows House speaker Nancy Pelosi’s long-standing call for an infrastructure bill that would be “about jobs, jobs, jobs.”

Congress and the president have been wise to help the victims of the economic shutdown with unemployment and safety-net assistance, as well as business assistance to continue paying salaries and other expenses. Social insurance and relief are absolutely necessary to prevent a cascade of bankruptcies and a humanitarian crisis. Yet transitioning toward traditional economic “stimulus” measures would not only build on a failed, 1930s economic model, but even pro-stimulus Keynesian economists concede that infrastructure is the least-effective type of economic stimulus.

Nevertheless, the three common arguments for a large 2020 infrastructure “stimulus” are that: 1) low interest rates make it affordable; 2) it will create jobs and stimulate growth; and 3) American infrastructure stands to substantially benefit from this initiative. None of these arguments is persuasive.

First, let’s address the affordability assertions. Even before the pandemic hit, the budget deficit was already set to surpass $1 trillion this year on its way past $2 trillion within a decade under current policies. The cost of pandemic-related legislation, as well as the economic effect of the business shutdowns, threaten to push this year’s budget deficit past $4 trillion, or 20 percent of the economy — a level unseen in American history outside the height of World War II. Adding trillions in stimulus spending would test Washington’s borrowing capacity to a point where the Federal Reserve could have to monetize much of the new debt. This degree of borrowing is uncharted territory in the modern economy.

President Trump asserts that today’s near-zero interest rates make such borrowing affordable. But what matters are the interest rates several years down the road when the planned infrastructure projects finally begin pouring pavement and borrowing money. Additionally, because Washington relies on short-term borrowing (rather than locking in low-interest rates long-term — markets have expressed little interest in such a move), any interest-rate increases over the next few decades will raise the cost of servicing the entire national debt. Each percentage point that interest rates rise raises federal budget interest costs by $1.8 trillion over the decade and $11 trillion over 30 years. This matters a lot when Washington is already projected to run $80 trillion in new deficits over the next 30 years, even before the COVID-19 costs. Infrastructure is a priority, and one that should be paid for in taxes and user fees, rather than added to the already-unsustainable national debt.

Second, advocates assert that massive infrastructure spending will stimulate economic growth and create jobs. Economists across the political spectrum have debunked this myth for the obvious reason that infrastructure projects require several years of planning and regulatory reviews before they begin — at which point the economy has already recovered. In fact, the typical environmental impact statement alone takes 4.5 years to complete. After allocating $94 billion for mostly “shovel-ready” stimulus projects in 2009, President Obama later joked that “Shovel-ready was not as, uh, shovel-ready as we expected.” Former Obama White House chief economist Jason Furman and former Congressional Budget Office director Doug Elmendorf added that “In the past, infrastructure projects that were initiated as the economy started to weaken did not involve substantial amounts of spending until after the economy had recovered.”

Delays are not the only stimulus barrier. Stanford economists John Cogan and John Taylor observed that state and local governments receiving 2009 federal stimulus infrastructure grants simply cut back on their own spending and borrowing almost dollar-for-dollar, completely negating the impact of the federal spending.

First, let’s address the affordability assertions. Even before the pandemic hit, the budget deficit was already set to surpass $1 trillion this year on its way past $2 trillion within a decade under current policies. The cost of pandemic-related legislation, as well as the economic effect of the business shutdowns, threaten to push this year’s budget deficit past $4 trillion, or 20 percent of the economy — a level unseen in American history outside the height of World War II. Adding trillions in stimulus spending would test Washington’s borrowing capacity to a point where the Federal Reserve could have to monetize much of the new debt. This degree of borrowing is uncharted territory in the modern economy.

President Trump asserts that today’s near-zero interest rates make such borrowing affordable. But what matters are the interest rates several years down the road when the planned infrastructure projects finally begin pouring pavement and borrowing money. Additionally, because Washington relies on short-term borrowing (rather than locking in low-interest rates long-term — markets have expressed little interest in such a move), any interest-rate increases over the next few decades will raise the cost of servicing the entire national debt. Each percentage point that interest rates rise raises federal budget interest costs by $1.8 trillion over the decade and $11 trillion over 30 years. This matters a lot when Washington is already projected to run $80 trillion in new deficits over the next 30 years, even before the COVID-19 costs. Infrastructure is a priority, and one that should be paid for in taxes and user fees, rather than added to the already-unsustainable national debt.

Second, advocates assert that massive infrastructure spending will stimulate economic growth and create jobs. Economists across the political spectrum have debunked this myth for the obvious reason that infrastructure projects require several years of planning and regulatory reviews before they begin — at which point the economy has already recovered. In fact, the typical environmental impact statement alone takes 4.5 years to complete. After allocating $94 billion for mostly “shovel-ready” stimulus projects in 2009, President Obama later joked that “Shovel-ready was not as, uh, shovel-ready as we expected.” Former Obama White House chief economist Jason Furman and former Congressional Budget Office director Doug Elmendorf added that “In the past, infrastructure projects that were initiated as the economy started to weaken did not involve substantial amounts of spending until after the economy had recovered.”

Delays are not the only stimulus barrier. Stanford economists John Cogan and John Taylor observed that state and local governments receiving 2009 federal stimulus infrastructure grants simply cut back on their own spending and borrowing almost dollar-for-dollar, completely negating the impact of the federal spending.

The stimulus case is also undermined by Washington distributing spending largely based on politics rather than local economic needs. Harvard economist Edward Glaeser revealed that 2009 stimulus dollars were disproportionately distributed to regions with lower unemployment rates that did not need stimulus. On one level, this makes sense — many high-unemployment regions are rural or losing population and are thus not the best candidates for widening local highways or adding high-speed rail. However, this approach exposes the disconnect between the goals of infrastructure and job creation. Glaeser also writes that, unlike the past infrastructure projects that relied more on manual labor, today’s “big infrastructure requires fancy equipment and skilled engineers, who aren’t likely to be unemployed.”

Because of these factors, a review of 2009 stimulus highway projects shows no sustained effect on county-level employment. Another study found that half of all new employees hired at firms that received stimulus dollars had peen poached from other firms (rather than coming from the ranks of the unemployed), and many of these companies were forced to turn down other construction projects to accommodate the new “stimulus” projects. Overall, the Congressional Research Service examined highway spending and concluded that “to the extent that financing new highways [comes from] reducing expenditures on other programs or by deficit finance . . . the net impact on the economy of highway construction in terms of both output and employment could be nullified or even negative.”

Adherents to the infrastructure stimulus argument should consider the case of Japan, which responded to a sustained economic downturn with $6.3 trillion in infrastructure investment between 1991 and 2008. One of the largest investments in airports, trains, highways, and tunnels in world history helped push Japan’s national debt from 38 percent to 140 percent of GDP, yet its per-capita GDP was roughly the same in 2008 as in 1994.

Third, there is little reason to trust that Washington politicians can significantly improve American infrastructure. The geographic distribution of infrastructure spending has historically been driven by the political leverage of members of Congress, as well as political considerations within federal agencies. It is naive to expect lawmakers to remove politics from these allocations.

Not surprisingly, politicians often steer federal investments toward large vanity projects that provide ribbon-cutting ceremonies, such as high-speed rail, the expansion of interstate highways, and the famous (and eventually canceled) $223 million “Bridge to Nowhere.” However, former Manhattan Institute senior fellow Aaron Renn has shown that “America’s infrastructure crisis is local,” and repairing local streets, bridges, and potholes is a much higher and more affordable priority. These locally managed projects are often ineligible for federal funding.

And while Washington steers infrastructure spending toward vanity projects and the districts of congressional leaders, state governments face their own misaligned incentives with federal dollars. A state funding a $100 million project with its own transportation revenues must convince its taxpayers that the project will provide $100 million in value. By contrast, if the state is required to put up just $20 million of its own funds — and can use a federal infrastructure grant for the remaining $80 million — it need only convince its citizens that the project is worth $20 million. In other words, the ability to offload the costs on the federal government makes states more cavalier with how the money is spent.

Consequently, past infrastructure stimulus bills and budget-busting reauthorizations have done little to relieve traffic congestion, repair bridges and roads, or improve waterways. Instead, they brought unfinished high-speed rail projectsenormous cost overruns, a $3.4 million “eco-passage” to help turtles cross a highway in Tallahassee, Fla., and a $54 million “Napa Valley Wine Train.” Better to eliminate the federal middleman and empower state and local governments to more easily raise the funding necessary to finance local projects based on local priorities.

While government spending on infrastructure remains near the 40-year average, America still needs more repairs, maintenance, and improvements. This will require careful planning, reductions in cost overruns, and creative financing. Rushing through a $2 trillion Washington-micromanaged infrastructure “stimulus” bill will bury America more deeply in debt, fail to stimulate economic growth, and likely be squandered by politicians.

This piece first appeared at National Review Online (paywall)

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Brian M. Riedl is a senior fellow at the Manhattan Institute. Follow him on Twitter here.

Photo by Justin Sullivan/Getty Images

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