Republicans Won’t Accept an Infrastructure Bank Financed by Debt

Business Insider’s Josh Barro has a nice piece this morning listing five ways that President Obama could improve the economy. I agree with him that Obama should nominate Janet Yellen to head the Fed, allow more homeowners to refinance and prioritize standing up to Republicans on the debt ceiling/budget debate over appointing Larry Summers to the Fed. I disagree with Barro on approving the Keystone pipeline, but that’s for environmental, not economic, reasons.  On his third point though, I don’t see what Obama can do:

Propose an infrastructure plan that isn’t designed to draw Republican opposition. Democrats keep attaching tax-increasepoison pills to their infrastructure plans and then acting surprised when Republicans won’t support them. In today’s low-interest rate environment, infrastructure spending should be financed with debt, not taxes. Obama should try again for an infrastructure bill without any revenue offset. As a sweetener, he should offer to repeal the Davis-Bacon Act, which forces contractors on federally-funded infrastructure projects to pay inflated wages. Davis-Bacon repeal would make infrastructure spending more cost-effective and more appealing to the Republican-held House.

Here’s the thing though: an infrastructure bank funded by debt would be unlikely to pass Congress. In the Senate, it would be welcomed by most Democrats and could pick off enough cement-loving Republicans to garner 60 votes. Maybe. In the House, it would be a major uphill battle. The majority of House Democrats would likely support it, but the majority of House Republicans, who are more concerned about cutting spending than rebuilding our infrastructure, would not. That would put Speaker Boehner yet again in the position of deciding whether to break the Hastert Rule again. If he is so wary to do so over something as big as the debt ceiling, what makes us think he would do so over an infrastructure project?

Thus, I don’t see any way that an infrastructure bank financed by debt gets to the President’s desk. And the President knows this. That’s why all of his infrastructure plans have been funded through tax increases. Barro is right that the best policy would be to finance those projects via debt (and I like his Davis-Bacon repeal sweetener). But the GOP won’t allow it so Obama has turned to Plan B.

It’s Immoral NOT to Spend Money on Infrastructure Now

Here’s Mitt Romney on reducing the deficit from the debate last night:

I think it’s not just an economic issue, I think it’s a moral issue. I think it’s, frankly, not moral for my generation to keep spending massively more than we take in, knowing those burdens are going to be passed on to the next generation and they’re going to be paying the interest and the principal all their lives.

And the amount of debt we’re adding, at a trillion a year, is simply not moral.

President Obama didn’t object to this at all and instead demonstrated a commitment to reducing the deficit. They’re both wrong.

We need to spend a lot of money rebuilding our infrastructure across the country – $2 trillion in total. If we put it off, the next generation will have to pay for it. If we do it now, the next generation will have to pay for it too. Our deficits aren’t going down over night and the next generation is inevitable going to either face higher taxes or reduced spending on programs. Either way, the next generation will have to pay to redo our decaying infrastructure. But, they’ll pay less if we do it now.

Here’s why:

We have to repair our infrastructure soon.

Right now, the rate on U.S. Treasuries is really low. So low, in fact, that when you account for inflation, people are actually paying us to keep their money. The current rate for a 1-year Treasury is 0.18%. That means that if you buy a 1-year Treasury at a $100 face value, the U.S. will take the $100 now and pay you $100.18 next year. But that $100.18 really is worth less than that because a year has passed and its purchasing power has decreased because of inflation. The current CPI, the most commonly used measure of inflation, from the Bureau of Labor Statistics is 1.7%. Let’s be generous and call it 1.5%. That $100.18 in 2013 is the equivalent of $98.51 in 2012.

Now, if the U.S. government took $100, held on to it and then gave you back $100.18, that would be dumb. It would lose money there. But, what if the U.S. took that $100 and bought $100 in infrastructure improvements? In a year, those improvements are still worth $100 (2012 dollars). but the government is only paying $98.51 (2012 dollars again). The government just made a profit!

Normally, when the U.S. borrows money, the interest rate is greater than inflation. Imagine if the 1-year Treasury rate was 3%. Now, the U.S. government is paying out $103 in 2013, worth $101.48 in 2012 dollars. In that case, the government loses money.

That’s how the real rate of inflation works. Right now, most U.S. Treasuries have a negative real rate of inflation. In the future, this will almost certainly not be the case. If we delay these infrastructure improvements until the next generation, they will have to pay for them with Treasuries that have a positive real rate of inflation. Instead of profiting on the infrastructure improvements, the next generation will be losing money. But they won’t have a choice. Our roads and bridges will be deteriorating so much that we will have to make those improvements and accept the losses.

By not spending money on infrastructure repairs now, we are making the next generation spend more. That’s what is really immoral. (Image via)