Jim Millstein was chief restructuring officer at the Treasury Department from 2009 to 2011. He is chairman and chief executive of Millstein & Co., a financial advisory and investment firm.
Our major political parties don’t agree on much these days, but the 2016 Republican and Democratic platforms both include prominent planks calling for the federal government to address the sorry state of America’s infrastructure. The question is: Can the parties resolve their differences on fiscal policy to find the necessary federal funding to address this urgent need?
They can — if the next administration and Congress keep in mind two basic principles.
First, infrastructure spending generates a range of productivity gains that augment long-term economic activity and thereby increase tax revenue.
Second, in an economy where, since the start of this century, productivity and income growth have been well below the trend of the previous “American century,” a well-designed program of new infrastructure spending can be just the catalyst the U.S. economy needs to get out of its rut.
After World War II, America’s periods of greatest economic growth coincided with a much higher level of public investment in infrastructure and research and development than has been made over the past 16 years. The persistent shorting of funds for infrastructure modernization and repair has left us with a huge hole to fill: The American Society of Civil Engineers estimates that the federal government needs to spend an additional $140 billion a year for the next 10 years to fill the gap.
The problem is that any program involving such a dramatic increase in spending will inevitably get bogged down in legitimate concerns about the trajectory of budget deficits and the already dramatic, relatively recent increase in the size of the federal debt as a percentage of gross domestic product. Given the parlous state of America’s infrastructure, a solution cannot await some “grand bargain” that brings all aspects of the federal budget into long-term balance. Debt financing is not only needed but appropriate.
At the historically low interest rates at which the federal government can now borrow, there is no better time to incur long-term debt for the construction of long-term assets. And because of the positive effects on productivity and economic growth that public infrastructure creates, we need not worry about the implications of this spending for debt sustainability in the long run. A well-designed program of infrastructure modernization can pay for itself in economic activity and the tax revenue that results from that activity.
We must, however, take three steps to ensure that outcome.
First, infrastructure spending needs to be divorced from annual discretionary appropriations, categorically escaping the “pay for” rules that have frozen federal budget priorities and tax policy for six years. It must become a “mandatory” part of the federal budget, placed into a planning cycle and funded on a time horizon stretching beyond the next election.
Second, federal infrastructure spending needs to be centrally coordinated and optimized over a period of years, not balkanized across agencies that manage annual budgets. This could be achieved through the Commerce Department’s Bureau of Economic Analysis, for example, which could coordinate spending across relevant agencies on a 10-year budget authorization, subject to congressional oversight.
Third, the Treasury Department’s Federal Financing Bank should facilitate the necessary debt financing. For projects that generate revenue — for example, toll roads — the bank should encourage private investment to leverage, if not replace, debt incurred on the federal government’s full faith and credit. And, to promote accountability and oversight, the bank should publish separate accounting for its new infrastructure financing, ideally by project or at least by major category of project. However, federal financing for infrastructure projects should be done via U.S. Treasury securities to maintain a single, highly liquid market for federal borrowing and to minimize the cost of that borrowing.
While potentially increasing the federal deficit and debt in the short term, over the long term a well-tailored program of sustained infrastructure spending can reduce federal budget deficits.
In this sense, all federal debt is not created equal. Federal debt incurred to fund current consumption (whether on defense, health care, Social Security or transfer payments to the less fortunate among us) is in effect a tax on future generations, foisting on them the burden of servicing debt used to fund the expenditures that today’s taxpayers refuse to tax themselves to support.
But debt incurred to finance infrastructure modernization and repair is different. It creates not only a long-term liability (the debt incurred to finance the spending), but also a long-term asset (the highway, railroad, energy transmission grid or airport such spending buys). It’s perfectly fair to spread the financing costs of those assets across the generations of taxpayers who will enjoy their use.