November 27, 2016
In Washington, there are two sure ways to get rich: you can work as a corporate lobbyist or you can work with a Peter Peterson-funded organization and whine about government debt. The Peterson Foundation, along with its allies at the Washington Post and other media outlets, have long worked to fan irrational fears about government debt just as Donald Trump and other demagogues have fanned racism and xenophobia. One small positive of a Donald Trump presidency is that it may provide a teachable moment on the meaninglessness of such fears.
The NYT gives us an excellent lead in with this piece on the need to repair locks and dams on inland waterways. The piece tells us of Trump’s plan to spend $1 trillion improving the country’s infrastructure, then adds:
“To avoid raising taxes or increasing debt, his plan calls for much of the money to come from the private sector, with a proposed tax credit offered in return. …
“Even with a tax credit, though, companies building roads or locks would want a return on their investment — most likely in the form of toll collection, said Mike Toohey, president of the Waterways Council, an advocacy group for the river shipping industry.”
So let’s look at how we are avoiding raising the debt in this story. First, the infrastructure is supported through a tax credit rather than direct spending. If we spent $1 trillion directly then this would add $1 trillion to the debt. We will then have to pay the interest on this debt as long as it is outstanding. (Currently, the real interest rate on government debt is nearly zero, since the inflation rate is almost as high as the long-term interest rate.)
But if we give the tax credit (Trump has proposed a tax credit of 82 cents on the dollar), then we have added zero dollars to the government debt. However, we will collect less money in tax revenue in future years. Given his plan, we will collect $820 billion less in revenue over the period where the tax credits are cashed in. Other things equal, this will raise our debt in future years by $820 billion compared to a situation where we did not have the infrastructure spending, but at least for initial scoring purposes we can say that it didn’t add to the debt, so the Peter Peterson–Washington Post crew should be happy. (The boost to output from greater productivity should add to tax revenue in future years, but this would be the same regardless of whether we paid for the $1 trillion in spending through borrowing or a tax credit. If the economy is below full employment, there will also be a boost to demand, and therefore output, as a result of this spending, but again this is independent of how we finance the spending.)
Let’s turn to the other part of the story, the tolls. Trump’s plan will bias infrastructure spending towards areas that are able to create a revenue stream, like tolls, as opposed to clean drinking water (think Flint) or other areas of public investment like child care, which may lead to diffuse gains. It may also lead to inefficiencies since collecting tolls can be a waste of resources. (Imagine paying tolls to use the sidewalk in front of your home.)
But ignoring these issues, let’s think about the tolls for a moment. Suppose the government paid for the infrastructure and used tolls to recoup part of the cost. The tolls are then future revenue to the government, just like any other tax. But with Trump’s plan people pay the tolls to private companies, so the money doesn’t go to the government. In Peter Peterson–Washington Post land we are supposed to be worried about the burden to our children of the tolls collected by the government, but somehow the burden imposed by the private companies don’t count.
If this seems like a relatively minor accounting quirk to use against the deficit fear mongers, consider the case of government granted patent monopolies. This is a mechanism through which the government funds research. It gives companies monopolies on the products they sell that allows them to charge far more than the free market price. In the case of prescription drugs we will spend more than $430 billion this year on drugs that would cost 10–20 percent of this amount if they were sold in a free market without patents or related protections.
This is a difference of between $340–$390 billion, and that is just for prescription drugs. But the Peter Peterson-Washington Post types would have us ignore this massive burden in the form of higher drug prices because these are not taxes imposed by the government. In other words, the only burden on our children they want us to think about is the burden of government taxes. They are happy to ignore any other burden that reduces their standard of living.
I leave others to assess the rationale for their focus on debt, but the point that should be clear is that tax burdens have very little to do with the living standards enjoyed by future generations. And policies that seek to avoid government debt through accounting games will almost invariably make matters worse.
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