- The bipartisan infrastructure framework announced at the White House looks pretty good.
- But I want to see assurances that the money will be spent more efficiently than we usually manage.
- The “pay fors” in the package may not be real tax hikes or spending cuts – which is fine.
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President Biden took a victory lap on Thursday, announcing a bipartisan deal to increase infrastructure spending over the next eight years, and rebuking those in his own party who had criticized the talks as a blind alley.
He also reassured liberals that passage of this deal will be tied to another spending package, to be passed through the budget reconciliation process, under which Democrats only need a simple majority to pass a bill and so will not need to rely on Republican votes. This reassurance has angered Republican supporters of the bipartisan deal, and presents a major hurdle to its passage.
For now, we have broad outlines of the bipartisan deal. I think it is probably a good deal on balance. But here are a few things I’ll be watching for as it turns into legislation and, possibly, law.
Is the money spent well?
Because of the plodding recovery from the Great Recession and the swift economic damage from the pandemic, we’ve spent more than a decade in a fiscal policy environment where there are all sorts of underused economic resources. As a result, inflation and interest rates were low, and it was an especially good time for the government to borrow and make capital investments.
Interest rates are still very low. But constraints on real economic resources are now high, partly due to the pandemic but also due to strong private-sector demand for labor and materials. And inflation is looking perkier, too.
In this environment, it’s not necessarily a bad idea for the government to make capital investments, but it becomes more important to be choosy about those investments – to make sure you’re building the right things, building them at a reasonable price, and setting out plans to operate them in a cost-effective way that does not use excessive amounts of labor.
As Matt Yglesias notes, there are some worrying signs that lawmakers – despite being aware of ways that US capital spending is inefficient compared to peer countries – are not really taking steps to bring down our relatively high costs as they make plans ramp up spending on infrastructure. In certain areas, like freight rail, they are even discussing making things worse by imposing labor rules that push costs up.
Especially with transportation infrastructure – and especially with rail infrastructure- I’m going to be looking for signs Congress is not just pouring money into a stupid pit, like these projects too often do.
Are the pay-fors fake? Let’s hope so.
Lawmakers in both parties, for some reason, have been insistent that any infrastructure bill should be “paid for” with new revenues or offsetting spending cuts instead of simply financing the cost of the bill through debt.
As Democratic Hawaii Sen. Brian Schatz has been noting with increasing exasperation, infrastructure is exactly the kind of government spending you should “pay for” with debt. The improvements last a long time, so you can pay for them over a long time, and assuming you built something good, it grows the economy and the tax base.
Like Sen. Schatz, I think the obsession with the deficit in the context of the infrastructure bill is a mistake – again with the large caveat that we need to be building things that add value in the economy. As such, I am pleased to see that “macroeconomic impact of infrastructure investment” is on the list of pay-fors that the bipartisan infrastructure group has proposed.
Basically, when deciding if the bill is “paid for,” senators intend to give themselves credit for how infrastructure investments will grow the economy and therefore increase tax receipts. This is the “dynamic scoring” that Republicans like to use, saying tax cuts at least partially finance themselves, but instead applied to government spending.
There is nothing inherently dishonest about dynamic scoring, whether applied to tax changes or spending changes. If you do the scoring well, it should reward cost-effective projects over wasteful ones. On the other hand, if you fiddle the score a bit, that creates a backdoor way to deficit-finance infrastructure, which is fine.
Another item on the pay-fors list, “extend mandatory sequester,” is another kind of fake pay-for.
I’ll try not to be too arcane, but this refers to a rule that originated in the Budget Control Act of 2010 whose main effect is to cut 2% off Medicare payments to providers and insurers. Every year or so, Congress extends this rule for a year or so, effectively acknowledging that we’ve set a new baseline for Medicare payment rates. But every time you do that, you get to say you’ve “cut spending” and can spend money somewhere else.
The mandatory sequester is already on the books through 2030, so if Congress pushes it through to 2031, that will free up something like $25 billion to “pay for” infrastructure spending to come much earlier than that.
There’s a lot left to work out in this package and the overall “two-track” negotiation on spending issues, but these are a couple of key areas I’ll be watching to see how they develop.