Last month, Congress and the White House enacted a $1.9 trillion so-called relief bill in which there was little relief to be found. Let's not forget the other $5.3 trillion that was passed last year in coronavirus relief, aid, and "stimulus." If it was not enough that the U.S. government has driven our debt-to-GDP ratio to a new high, Biden wants to spend even more money. This time, it's not to deal with coronavirus, but rather to purportedly deal with infrastructure. Last week, Biden proposed an eight-year, $2.3 trillion infrastructure plan, although the bipartisan Committee for a Responsible Federal Budget puts that figure at $2.7 trillion. When you look at it, Biden's plan is hardly original. It comes off as a combination of President Eisenhower's pitch to expand infrastructure back in the 1950s and the trope that Obama used in 2009 to justify the American Recovery and Reinvestment Act [ARRA].
Before delving into the details of Biden's plan, I would like to ask even if we have an "infrastructure crisis," especially since if you look at the media, everything is a crisis. When the centrist Brookings Institution analyzed local transportation policy (Turner, 2019), they found that "the situation is obviously not worse than it was than 20 years ago. In fact, there are fewer potholes on the interstate." If anything, a 2020 research brief from the Cato Institute shows that infrastructure has been improving. I'm not here to say that our infrastructure couldn't use an upgrade, but rather that we are hardly in crisis mode when it comes to national infrastructure. Aside from a questionable sense of urgency, what other reasons are there to object to Biden's plan?
Raising the corporate tax rate to 28 percent would harm the economy. Biden is looking to undo the corporate tax rate cut from the Tax Cuts and Jobs Act and increase the federal corporate tax rate to 28 percent. We can ignore the fact that the Congressional Budget Office [CBO] found that higher taxes are not the answer to funding this. The only plausible way to generate the funds for federal investment without running a deficit is to cut non-investment discretionary spending (CBO, 2016, p. 13).
There is the cost of raising the corporate tax rate. According to a February 2021 Tax Foundation analysis on Biden's proposed tax increase, such an increase would result economic output by 0.8 percent over the next decade, as well as eliminate 159,000 jobs and cuts wages by 0.7 percent. These findings do not surprise me. I have covered the topic of the corporate tax before (see here and here). I came across research from the OECD that found that corporate taxes are one of the most harmful to economic growth. They also reduce labor productivity, create a higher tax burden, shift the tax incidence to the working class (and not to the shareholders), and disincentivize investment. Speaking of investment.....
More federal dollars in investment translate into less net investment. The CBO calculated that each dollar of federal investment increases total investment by two-thirds of a dollar, i.e., for every dollar of federal investment, there is only $0.67 of actual investment (CBO, 2016, p. 4). To frame it in a slightly different way, when the federal government invests a dollar, state and local governments, as well as private actors, reduce their investment by $0.33. The joys of disincentive and the crowding-out effect! The CBO confirmed this in a separate analysis of highway infrastructure funding. Guess what the CBO found? A $1 increase in federal highway infrastructure grant money me that state and local governments reduce their spending from anywhere between $0.20 and $0.80 (CBO, 2018, p. 1).
Lower rates of return from public-sector investment. According to the CBO, the average rate of return on private-sector investment is 10 percent. For the public sector, that is 5 percent (CBO, 2016, p. 4). In other words, when the government invests, the rate of return is about half of what it would be compared to the private sector.
Already-existing federal regulations will increase cost of capital projects. The federal government has a number of regulations that affect the cost of labor, which in turn, affects the rate of return mentioned above. The Davis-Bacon Act requires union-rate wages. Project labor agreements, which were enacted during the Obama administration, requires union-style work rules. As I discussed in 2017, "Buy America" provisions increase the cost of raw materials and equipment required for the projects. When you take out the competitiveness in the procurement process, limited options and labor market rigidities increase prices of projects. That means that we can invest in fewer investment projects, which is a way of saying that federal investment is inefficient.
Electric vehicle subsidy seeks to benefit the wealthy. Part of the proposal is $175 billion to subsidize electric vehicles (EVs). Right now, EVs account for less than 1 percent of the vehicle fleet. By 2035, they are projected to be at 13 percent of the vehicle fleet (New York Times). Who disproportionately buys electric cars? The wealthy. Congressional Research Service found that 78 percent of those who purchase electric cars make over $100,000 annually. Aside from price, EVs are having issue gaining traction because of smaller ranges and longer refueling times. Technological development could change these factors and make EVs more accessible and more alluring. But at least in the short-to-medium-term, Biden's $175 billion is going to subsidize the wealthy. Plus, let us not forget that the production and charging of electric vehicles relies on fossil fuels.
Biden's agenda with climate and electricity. Biden would like to have the United States have 100 percent carbon-free electricity by 2035. When I criticized the Green New Deal a couple of years ago, I pointed out that such associations as the Union of Concerned Scientists and the National Academy of Sciences predicted that using carbon-free energy would not be feasible before 2050. On the plus side, Biden is not removing nuclear power from the equation, which is vital if the long-term goal is carbon-free electricity.
Amtrak subsidies. Biden would like to subsidize Amtrak with $80 billion. Amtrak is tricky because of its quasi-public status. While it is run as a for-profit corporation, it still receives public funding. I haven't scrutinized Amtrak since 2013, but I would contend that privatizing Amtrak is a better solution than throwing money at a company that has lost money every year since it was founded in 1971.
Much of this bill has nothing to do with infrastructure. CFRB correctly points out that $621 billion of the bill has to do with traditional infrastructure (i.e., transportation infrastructure). Biden seems to add the word "infrastructure" at the end of the other spending that he would like to incur and make it seem like it is an infrastructure bill when it comes off more like an omnibus spending proposal. Here is a list of some of the things in Biden's proposal not having to do with traditional infrastructure:
- $400 billion to expand home and community-based health services
- $213 billion to retrofit houses
- $100 billion to modernize public schools
- $100 billion in workforce development
- $35 billion in climate change research and development
- $25 billion to "advance racial and environmental equity"
- $25 billion to upgrade child care facilities
- $12 billion for community colleges
Conclusion
I can point out research that shows that infrastructure spending does not boost the economy short-term (Krol, 2020). I can drudge up the Solyndra debacle or the billions spent on light-speed rail in California. What I will say is that this bill is an excuse for government to spend more money and shovel out pork while under the guise of "helping us out." In many respects, this proposal takes money from one hand and puts it into another, all the while slowing economic growth with deleterious tax policy. Biden is not fixing the problem. He is merely throwing money at a problem without any mechanisms for cost control. We can talk about user fees, shifting spending to state governments, or using tax incentives to spur research and development in traditional infrastructure, but what is clear is that federal spending on infrastructure projects is only going to make matters worse.
4-16-2021 Addendum: I came across an Ivy league economic analysis on the plan from the Wharton School of Business. A few things that are projected as a result. One is a decrease of economic output by 0.9 percent. The second is a three percent decrease in capital stock. Third is a 0.7 percent decrease in wages by 2031, which is ironic given this is supposed to be a "jobs plan."
No comments:
Post a Comment