The Bidding War Begins

We are now at that point in the Presidential race where the two major combatants begin to offer payoffs to interest groups in order to buy their votes come November. But instead of payoffs, the candidates refer to “investments”. This time the primary payoff target is construction workers. The preferred payoff mechanism is infrastructure spending.

 

The Columbus Dispatch reports that Hillary Clinton plans “…to invest in infrastructure as a way to create more jobs.” She promises “…to improve schools and water systems, expand broadband access and invest in clean energy.” She will “…unleash the power of the private sector to create more jobs at higher pay.” She will “…create an infrastructure bank to collect public and private money”, which is a surefire way to create conflicts of interest and special deals for insiders, a specialty of the Clintons.

 

Not to be outdone, Donald Trump upped the ante. According to CBS News, Trump says the “… the U.S. government should exploit historically low interest rates and borrow hundreds of billions—if not trillions of dollars—to repair aging infrastructure across the country.” Trump didn’t specify how much but when asked if it could be more than the $500 billion Hillary Clinton proposed, Trump said “You’d need a lot more than that to do it right”.

 

In this he appears to be in the camp of Paul Krugman who insists that there is “an overwhelming case for more government borrowing” to invest in infrastructure, in part because interest rates are historically low.

 

Thus far none of the candidates (or Krugman for that matter) has explained why taking capital from the private sector is going to produce a net increase in wealth. That would require making the case that these (unspecified) public sector investments would be more efficient than private sector investments would be. That argument ought to test to patience of even the most credulous voters.

 

On the surface, the proposed infrastructure spending would create construction jobs that are easily observable. But what is more important is what you can’t easily see: the jobs and wealth that are not created in the private sector as a result of capital being transferred from the private sector to the public sector. That is the crux of the matter, and it explains why investment decisions generally belong in the hands of private actors rather than politicians.

 

It is clear that Clinton and Trump are on the same side. Each professes to believe that transferring more capital from the private sector to the public sector for infrastructure investment results in net job and wealth creation. Not surprisingly, neither has offered a shred of evidence to support this.

 

It is also worth noting that the great majority of public infrastructure investment is done at the state and local level. And it is financed in the municipal bond market. In 2014 for instance, the Congressional Budget Office notes that public spending on transportation and water infrastructure amounted to $416 billion, of which $320 was state and local spending and $96 billion was federal.

 

That is as it should be. The people who use the infrastructure should be the ones who pay for it. They can pay for it a number of ways: for example through state and local income, excise and sales taxes, user fees, tolls and licenses. But there isn’t any reason why the construction and maintenance of municipal bridges and city subway systems should be financed by the federal government.

 

Separating the locus of taxes from the provision of services is an affront to federalism. It is a ploy designed to obfuscate the distribution of costs and benefits. It raises costs by hiding them; it encourages political bargaining as a substitute for market prices, and increases corruption, a subject with which both the Clinton and Trump camps are all too familiar.

 

There are ways to invest in needed public infrastructure that are transparent and more reliant on market mechanisms. Neither of the two major candidates seems to be interested in going there. That’s not surprising either.

Please take a look at John Stossel’s video below on infrastructure.

 

JFB

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Joe Benning