For half a decade, the prospect of a massive federal infrastructure bill has captivated headlines and state and local policymakers. Boosted by presidents Obama, Trump, and Biden, such bills are seen as a way to add jobs and repair America’s failing infrastructure. These goals seem noble now, as people continue struggling through the pandemic. But having the federal government involved at all ignores certain economic and political fundamentals, and may actually worsen infrastructure.
After months of negotiation, Congress appears closer to a $1 trillion infrastructure bill. It would include $110 billion on roads, bridges, and transportation; $73 billion for a clean energy retrofit of the grid; $66 billion for Amtrak’s repair backlog; and more. The bill is a priority of the Biden Administration, which boasts on a fact sheet: “The historic Bipartisan Infrastructure Framework will make life better for millions of Americans, create a generation of good-paying union jobs and economic growth, and position the United States to win the 21st century, including on many of the key technologies needed to combat the climate crisis.”
But I see two problems with this bill, one in the pragmatic sense, the other philosophically.
Pragmatically speaking, now is not the time for a $1 trillion infrastructure bill, given the debt and inflation pressures that have built up through the pandemic. USASpending.gov notes that $2.59 trillion had been spent on COVID relief by October 2020 and that ultimately $3.49 trillion in relief was available. For the 2020 fiscal year, writes Rob Berger for Forbes, the U.S. government spent $6.5 trillion. By October, Berger says, “Covid-19 relief obligations are more than twice the annual federal government discretionary spending in FY 2019 and exceed total FY 2019 revenue.”
All this stimulus has surged the federal deficit to over $3 trillion, while overall federal debt stands at $28 trillion. The debt-to-GDP ratio has skyrocketed since the Great Recession and now exceeds 100%, the highest since World War II.
This increased spending puts pressure on the Federal Reserve to print money, further undermining the value of the dollar. Inflation has sharply increased in the last year and is now at 5.4%, the highest in over a decade. That is because over 30% of the current money supply has been created since coronavirus was declared a public health emergency in early 2020.
Some observers argue that the situation is temporary, but the price spikes hitting American consumers have gradually drawn concern from economists across the political aisle, with even Larry Summers stating that the Fed’s approach is too dovish. Other analysts have noted that if inflation were measured the same as it once was – to include housing costs – inflation levels would be close to where they were in the late 1970s. The rush to spend exorbitant sums on infrastructure will further pressure the Fed to keep printing; and will force taxpayers, at this time of high prices, to pay premiums on labor and materials.
But even if the U.S. weren’t in an inflationary moment, I would oppose this bill on principle, as federal spending creates perverse incentives with infrastructure.
For starters, just look at the structure of federal infrastructure spending, whether it’s through a Congressional bill or a traditional revenue stream like the gas tax. USDOT takes money from states and localities and redirects it back to them via a political process. This is an added bureaucratic layer that saps money that could be spent on actual infrastructure.
Once federal transportation money returns to communities, it comes with regulations that increase project costs. One example, concerning transit, is “Buy America” regulations that force a certain amount of materials acquired for any transit project to be American-made. This edict has driven up procurement costs and thwarted purchases (the Biden Administration now wants it strengthened). But there are other federal regulations dealing with labor policy, environmental guidelines, and more.
The federal government, due to the dispersed nature of Congressional representation, also tends to redistribute money from productive areas to less-productive ones. For example, fast-growing cities that need large-scale investments compete with rural areas where investment isn’t practical, but where a powerful political bloc might exist. The infamous example of Alaska’s “bridge to nowhere”, which would’ve cost $28 million, did not serve any immediate transportation need. While it was never completed, similar, low-intensity transport projects get funded by federal dollars elsewhere. New York, on the other hand, suffers the worst disparity of the 50 states in what it pays to federal coffers versus what it gets back. A big reason why is the relative lack of help USDOT grants for New York City’s transport infrastructure. Meanwhile, a Congressional Budget Office report in 2016 found that, when looking at the revenue directed to roads relative to demand, “less than half of the funding has been tied directly to the amount of travel on the roads.”
But worst of all, the federal allocation process discourages planning- and cost-discipline. Localities receive from the feds what appears to be “free money”, which impels them to spend stupidly on vanity projects that they would never fund themselves. California’s high-speed rail project is an example; if the state had to fund that internally rather than receiving billions in federal aid, the poorly-routed train likely would not have absorbed such hefty cost overruns – and may not have broken ground at all.
If federal money is to be used on transportation, then reforms are needed. The money could be allocated based on population, and more specifically, on travel demand in given areas. And it could be distributed as block grants that don’t come with all the added regulations. The overarching goal of federal infrastructure financing should be to fund infrastructure, not bureaucracy.
But such measures don’t figure into the political calculus driving this current infrastructure bill. Congress is promising jobs, stimulus and so much more, without factoring in what long-term effects it could have on the federal balance sheet, or whether federal spending is the right way to fund infrastructure in the first place.
[This article was originally published by the Independent Institute.]
Scott Beyer owns and manages The Market Urbanist.
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