Hillary Clinton has a plan to boost federal infrastructure spending by $250 billion over five years, paid for by revenue-positive business tax reform. Bernie Sanders has an even more ambitious plan for a $1 trillion boost over five years, paid for by a bigger hike in corporate taxes. This is typical of how the modern-day Democratic Party works. Policy proposals come with pay-fors attached, meaning that candidates need to either trim their aspirations (Clinton) or propose really big tax increases (Sanders). On the Republican side, things look different.
Donald Trump and Ted Cruz are both running on mind-bogglingly large tax cuts with only hand-waving gestures at how they'd be financed. Their slain establishment foes Marco Rubio and Jeb Bush did the exact same thing.
But while these plans are of a scale that makes refusing to address offsets downright dishonest, Democrats are fetishizing accounting returns beyond all reason. Given today's global and national economic situation, there has rarely been a better time for the government to borrow money.
Reasonable critics might worry that $250 billion — and even more so $1 trillion — in infrastructure money might be wasted on boondoggles and bad projects. But money worth spending on investments in America's future is money that is worth spending. Stapling the proposal to tax plans that are contentious in their own right is pointless and destructive.
The budget deficit is too low
On a daily basis, the Treasury Department does some fancy math based on the current market prices of different kinds of bonds to project a "real yield curve" — the inflation-adjusted cost of government borrowing across various time horizons.
As of March 30, the inflation-adjusted interest rate on 30-year bonds was a staggeringly low 0.86 percent, and the inflation-adjusted interest rate on five-year bonds was an even more staggeringly lower negative 0.26 percent.
Global investors, in short, are very eager to buy the federal government's bonds. So eager that they have pushed the interest the government needs to pay down to freakishly low levels — below zero for shorter-term securities. It's a classic case of an imbalance between supply and demand.
The good news is that it's very easy for the federal government to generate more debt. It just needs Congress to think of something worth doing and then not pay for it.
In theory, infrastructure is a very good investment
The United States clearly has a lot of infrastructure needs. The toxic water crisis in Flint, Michigan, seems to have been caused in part by a lack of funds for upgrades to the city's water treatment plant. DC's Metro system is in a state of crisis due to long-deferred upkeep, our electrical grid is desperately outdated, and that's just a few problems.
Historically, major infrastructure projects have had rates of return that far exceed the federal government's current cost of funds — which can be locked in for 30 years at less than 1 percent. Many economists have analyzed the value of infrastructure investment:
- Treb Allen and Costas Arkolakis estimate a 9 percent rate of return for the Interstate Highway System.
- Simon Adler finds that adding highway building in India (where existing infrastructure is notoriously bad) has a rate of return of more than 11 percent.
- Dave Donaldson and Richard Hornbeck find an even bigger rate of return for the transcontinental railroad system in the United States.
- Even a relatively weak project like the pork-laden Appalachian Development Highway System secures an 8 percent rate of return.
Simply put, it turns out that location is very important economically, and initiatives that make it faster to get from point A to point B therefore have a large economic value.
America has a lot of bad infrastructure ideas
Unfortunately, a number of recent prominent infrastructure projects and proposals tend to fail the basic "make it faster to get from Point A to Point B" test.
Washington, DC's newly opened streetcar line, for example, moves about as fast as walking and somewhat slower than a bus, while not actually taking riders downtown or offering any useful connections. Unfortunately, these kind of slower-than-a-bus mixed-traffic streetcars are popping up in many American cities due to a mix of poor judgment by the federal Department of Transportation and the fact that real estate developers like the marketing cachet of a streetcar.
Similar prioritization of aesthetic over functional considerations is motivating the Port Authority of New York and New Jersey's effort to replace its existing hideously ugly bus terminal with a much nicer new one that's a block further west and will make most people's commutes longer.
A remarkably large share of elite discourse around transportation infrastructure, meanwhile, is morbidly fascinated with the way America's old airports tend to look dingy compared with the much newer ones in China and the United Arab Emirates. This is true, on the whole, but has very little to do with their actual functioning as airports, and making them shinier would have no real transportation benefit.
But investments to reduce highway congestion, improve safe travel speeds on rural routes, increase bus speed and frequency, and develop quality rapid transit rail routes can drastically improve the effective size of markets served by American businesses, improving productivity and competition while growing access to jobs and housing.
Trying to "pay for" good ideas would be counterproductive
The debate we ought to be having about federal infrastructure spending right now is whether we have a way to channel money into useful projects — not how to "pay for" the spending.
America is not currently experiencing a shortfall of financing options. On the contrary, global financial markets are practically begging us to go borrow some more money. The interest rates available are so outlandishly low that virtually anything that was useful at all (i.e., not a mixed-traffic streetcar or a relocation of a bus terminal to a less convenient location) would have a rate of return higher than the cost of funds.
Under the circumstances, there's no good reason to try to finance projects with taxes rather than debt. Doing so is only going to increase political opposition to your plan — no tax reform, no matter how cleverly designed, can fail to offend a powerful interest group or two — and make it less likely that the project will get done.
And global markets, again, are telling us not that America's taxes are too low but that we're not borrowing enough money. There's a global shortage of American debt. Indeed, a 2014 International Monetary Fund analysis concluded that in rich countries like the US, "public investment that is financed by issuing debt has larger output effects than when it is financed by raising taxes or cutting other spending."
It's better, in other words, to just build the projects than to fuss about paying for them. We need a good dose of irresponsibility.