After failed negotiations with congressional Republicans, President Joe Biden is now working with a Senate group to get one step closer to a bipartisan infrastructure spending deal. The agreement would, among other things, fund upgrades to traditional infrastructure such as roads, bridges and airports. But although funding traditional infrastructure has bipartisan support, the emerging deal is a bad investment for the United States.
Biden’s proposed $2.3 trillion “infrastructure” plan also includes funding for transfer programs such as child care, elder care and education, as well as climate-change initiatives. Republicans balked at the non-infrastructure spending increases, as well as the president’s plan to finance part of this spending through an increase in the corporate tax and taxes on families earning more than $400,000.
Congressional Republicans were negotiating up from Sen. Shelley Moore Capito’s (R-W.Va.) proposal to fund $568 billion in infrastructure over five years. Their proposal of $928 billion included more than $500 billion for roads with the remaining funds going to public transit, rails, ports, water infrastructure and broadband.
Republican and Democratic politicians agree that a massive increase in infrastructure funding is a good investment in America’s future. But paying for this investment without at least cutting other government spending would undermine the market economy’s more productive process of growing private investment.
If infrastructure spending was financed by cuts in government consumption and transfer payments, it would be a good investment in America. But no politician in either party is proposing such spending cuts to offset the increase in infrastructure spending.
Instead, the government is likely to finance the infrastructure spending through increased borrowing and increased taxes. Financing infrastructure spending through either channel would crowd out more productive private investment.
Total private investment averaged between $3 trillion and $4 trillion in the United States over the last five years. The federal government borrowedmore than $3 trillion in 2020 and nearly $1 trillion in 2019. Investment funds are scarce. So adding another large increase in the government’s demand for loanable funds would necessarily crowd out some private investment.
Alternatively, paying for the infrastructure through increased taxes would discourage private investment by lowering the after-tax return on investment. Either method of finance would trade off some private investment for infrastructure. The question is which form of investment generates better returns for our country.
Research published by economists James Gwartney, Randall Holcombe and Robert Lawson helps us answer this question. They examined the productivity of public vs. private investment in generating economic growth and how changes to the institutional environment in which markets operate impact the quantity of private investment. They found that in a mostly economically free country, like the United States, a 1 percent increase in private investment as a share of GDP generates nearly twice as much annual growth in the economy as a 1 percent increase in public investment.
Private investment is more productive than public (government) investment because it responds to market forces that signal scarcities, reward good decisions with profits and discipline bad decisions with losses. In contrast, decisions over which roads, bridges, and other infrastructure projects receive public investment funds are driven by pork barrel partisan politics.
These economists also found that both the quantity and productivity of private investment varies with the level of economic freedom. This infrastructure bill would decrease economic freedom through both increased government spending and higher tax rates. Decreased economic freedom would reduce both the amount of private investment and the rate at which that private investment translates into economic growth.
After years of polarized politics, we need to remember that bipartisan consensus is not synonymous with beneficial policy. The American economy would be better off if the whole deal was scrapped and more avenues for greater private investment in infrastructure were created while increasing our overall economic freedom by cutting taxes and lowering spending.