Fiscal Policy

The Seen and the Unseen in the Infrastructure Plans

Rush-hour traffic in Washington, D.C., in 2016. (Joshua Roberts/Reuters)
If the ‘unseen’ consequences were considered more carefully, political negotiations around public infrastructure might have ended much sooner.

The general understanding on Capitol Hill is that America requires a massive infrastructure overhaul, as was shown on Tuesday by the approval of the $1 trillion bipartisan proposal in the Senate. Most lawmakers favored increasing public spending on infrastructure. However, neither Democrats nor Republicans seemed to recognize that these types of government plans come with extra costs beyond the proposed expenditure. As Henry Hazlitt would have said, it is not only the “seen” effects of proposals such as these that matter, but their “unseen” direct and indirect effects.

Consider the $110 billion allocated to rebuild roads, highways, and bridges in the bipartisan infrastructure framework. That money could have been spent elsewhere if taxpayers had been allowed to hang onto it. Such a reduction in their consumption, in turn, will entail fewer cars, TVs, computers, clothes, food, and services bought, and thus manufactured or provided. And that, in its turn, will mean less private-sector investment, quite a bit of which would be located in this country.

That’s not to deny there will be indirect benefits from the investment in public-sector infrastructure, but, as a rule, the private sector spends, whether for consumption or investment, more wisely than the state. People will see the bridges, highways, and roads built, but they will not see all the goods and services that will never be produced — a cost that is rarely factored into the calculation of whether that spending was worth it.

The same reasoning applies to the alleged millions of jobs that passing these bills will bring forth. Although it could be true that some people will be hired in specific sectors of the economy related to infrastructure, the jobs not created because of the goods and services not produced cannot be seen. It’s job diversion, not job creation. There will be more road and bridge builders, but fewer people making cars, TVs, computers, and clothes.

Another critical aspect of the infrastructure talks in Congress is the section of the proposals earmarked for affordable housing. In this case, indeed, there will be a particular group of people fortunate enough to live in the new homes constructed with government incentives. But again, people will see the new houses built without seeing the goods and services that will never come to the market. Of course, this spending will produce indirect benefits, but that shouldn’t be allowed to obscure the trade-offs involved and the reality that such a policy will mean that one group of people will be subsidized by another.

The above, of course, assumes that these programs are fully funded by today’s taxpayers. Supporters of public infrastructure often raise two arguments. First, they argue that a significant part of it will not be paid by taxes but by government debt. They argue that people will voluntarily contribute to the funding of public infrastructure instead of being taxed involuntarily, and foreign investors will pay for it. However, debt financing of government spending can be even worse than taxes.

For one, these debts must be paid back eventually, meaning that debt financing only delays the tax increase into the future. Moreover, those paying higher taxes in the future will probably be the descendants of those voting for the proposals today and, therefore, do not have any way to express whether they approve of these plans.

There’s also the little matter of the fact that any debt incurred will be on top of the trillions of dollars in debt that have already been piled up and the trillions that will ultimately have to be repaid. In the meantime the risk of running up servicing costs (in the shape of an interest) could easily become a problem in its own right. We cannot assume that the current low rates will last forever.

A second argument is that government should step up in the infrastructure sector because private capital does not invest in such projects — an argument hard to square with, say, what is now being carried out on hyperloop transportation. Perhaps it’s worth adding that public-infrastructure supporters do not fully seem to understand how the government is financed. Public infrastructure is, in fact, funded by the private sector.

The government does not make money from creating products and selling them. It takes in money through taxation and borrowing. All the money the government has was at one time in private hands. Of course, it’s true that some projects will have to be carried out by and through the state, but before major infrastructural work is embarked upon, it’s always worth asking the question why private investors would not fund it themselves. Could it be because those projects are simply not worthwhile?

Lawmakers argue that the U.S. should modernize its infrastructure and that the government should play a major role in that modernization. However, everybody seems to be discussing only the “seen” effects of the infrastructure plans. If the “unseen” consequences were considered more carefully, political negotiations around public infrastructure might have ended much sooner because those participating might have decided that the marginal costs outweigh the marginal benefits. Maybe.

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