Thursday, January 1, 2015

Infrastructure and Taxes: Who should have to pay?

According to the November 10th 2014 edition of the Federal Reserve Bank of San Francisco's Economic Letter, the Federal Open Market Committee (FOMC), the Congressional Budget Office (CBO), and Blue-Chip Forecasters have all been lowering their projections for long-term GDP growth following the Great Recession. The Economic Letter cites, "The aging of the labor force, weak productivity growth, and possible long-run supply-side damage from the Great Recession have all suggested recently that the potential growth rate of the US economy may be lower in the years ahead." At this point I digress from the subject content of the Economic Letter, as it proceeds to explain conclusions about the possible links between lower output growth and lower short-term real interest rates. I have decided instead, to focus on a few implications of lower potential growth on the looming infrastructure needs of the United States.

If it was not for the obvious question, how would the mammoth price of a full upgrade, and in some cases rethinking of the current infrastructure layout that exists, the failing US transportation and energy infrastructure would have already been replaced. Left up to the states, the cost would be covered from a patchwork increase in taxes. But, left up to the Federal government, the cost would be covered by borrowing vast amounts of money.

Letting the costs of upgrading the public infrastructure fall on the states would mean the total costs of the improvements must be squared away from the onset. Any given state would either find a way to raise the revenue, or collateralize debt with future tax revenues. This approach lets [for the most part] the people that utilize the infrastructure bare the bulk of the burden of financing it.  States will also have the opportunity to exploit, in some cases, regional disparities in customizing their revenue generating approaches. For the most part, the costs will be distributed in concentration with need and urgency.

The Federal government on the other hand will follow the path of least resistance, and borrow. The administration of federal infrastructure spending as it would be a monolithic project if done right, would also be a bureaucratic mess. Costs would become overblown, and inefficiency would be abound. Costs for the most part will be spread disproportionately evenly, as both Federal government borrowing or hopefully tax policy change will apply universally, instead of in concentration with need and urgency.

It doesn't really matter how you slice it, in order for a comprehensive upgrade of the US transportation and energy infrastructure to be undertaken by any level of government, tax revenues would need to be raised and/or spending levels reduced. This feat would be much easier to accomplish when the economy is growing and profit generating activities can be taxed. During growth and expansionary times, as the income prospects of households and individuals improve, higher taxes are more easily accommodated. Without the rising tide of accelerating growth to lift all boats, it is hard to see how government [especially at the federal level] would be able to sustainably fund large spending projects.

The states in this instance, seem to be better capable in terms of experience and fiscal constraints to administrate infrastructure upgrading and replacement spending. Wherever need and urgency are disproportionately high, the Federal government can use expansionary fiscal policy to subsidize funding. This approach allows for some fiscal restraint due to the structure of the state finance model, while the Federal government plays a smaller role as a funding backstop. The objective here being to upgrade the nation's energy and transportation infrastructure, while not exacerbating the already horrendous fiscal position of the Federal government.

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