September 18, 2016
The NYT had an article discussing proposals by Hillary Clinton and Donald Trump to increase spending on infrastructure. The article likely left many readers confused.
First, it briefly described the two candidates’ proposals:
“Mrs. Clinton has said that if she is elected president, her administration would seek to spend $250 billion over five years on repairing and improving the nation’s infrastructure — not just ports but roads, bridges, energy systems and high-speed broadband — and would put an additional $25 billion toward a national infrastructure bank to spur related business investments. Mr. Trump said he wanted to go even bigger, saying his administration would spend at least twice as much as Mrs. Clinton.”
It is unlikely many readers have a very good idea of how much money $250 billion is over the next five years. This comes to $50 billion a year, which is a bit less than 1.2 percent of projected federal spending over this period, or roughly 0.25 percent of projected GDP. Donald Trump’s proposal is presumably twice as much. (It is not clear exactly how the $25 billion infrastructure bank would work, so it’s not easy to come up with a figure for the related spending.)
The piece also somewhat misrepresented the argument being put forward by former Treasury Secretary Larry Summers:
“Today, with maintenance lacking and interest rates low, a host of influential economists, including Lawrence H. Summers, who served as Treasury secretary under President Bill Clinton, argue that America’s need for better infrastructure is so great that it could increase its debt load and still come out ahead.
“In a telephone interview, Mr. Summers laid out his case: The federal government can borrow at something like 1.0 percent interest a year, and through enhanced productivity it would reap something like 3 percent a year in higher tax receipts.”
There are two separate issues at stake. First, it is possible that additional spending on infrastructure will lead to an increase in GDP, but also require more taxes in the future. Suppose that if we spent an additional 0.25 percent of GDP on infrastructure over the next five years it would result in GDP being 0.1 percent larger in subsequent years (a very low rate of return) than would otherwise be the case.
If the real interest rate on government debt were 3 percent, then we would have to pay an additional amount of interest equal to 0.0375 percent of GDP. If the federal government pulls in tax revenue an amount equal to 25 percent of GDP, then we would collect an amount equal to 0.025 percent of GDP as a result of the additional growth. In this case the country would be richer as a result of the higher infrastructure spending, but it would be necessary for the government to increase taxes to cover the costs.
Summers is actually arguing an even stronger case. he is arguing that returns from infrastructure spending are high right now, and the real interest rate on government debt is very low (@ 1.0 percent). In this context, he is arguing that the government can spend more on infrastructure and thereby increase growth enough so that no additional tax increases will be needed to cover the interest expense.
Even in the first case, the country would come out ahead from spending more on infrastructure. People might face a higher tax rate, but they would still have more after-tax income. The only people who oppose more infrastructure spending in this scenario are people who hate taxes so much that they would be willing to surrender more than $1 in before-tax income to reduce their tax bill by a $1 dollar.
In the case described by Summers, we could increase future output without ever increasing taxes. While Summers view may accurately describe the current situation, it need not be true for infrastructure spending to be a good investment.
Comments