$2 Trillion Infrastructure Plan Opens the Door for Boondoggles by David Montgomery

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If reports that President Trump will recommend $2 trillion in infrastructure spending are true, he is once again putting himself in very bad company. The nation does not need and cannot afford that $2 trillion.

The robust growth and high employment the economy is now experiencing is largely due, in my opinion and that of many economists, the aggressive regulatory reform agenda pursued by the Administration and tax reductions designed and pushed through by the Republican leadership of the House and Senate. Neither of these would have happened if Donald Trump had not been elected President. But that is where I part company with him on economic policy.

Though it has caused pockets of hurt, it is hard to see that the President’s hard line on trade with China, redo of NAFTA, and trade pressure on Europe have done anything to slow the U.S. economy.  According to most accounts, it is growing about as fast as possible. The last report on wage growth showed substantial increases, supporting growing consumer spending, and business investment remains high. Labor productivity is growing, but the supply of labor with the needed skills and willingness to work is likely the binding current constraint on growth.

In this environment, the last thing the economy needs is an additional $2 Trillion of deficit spending.  The President, as I discussed last week, would like to see this paid for by the Federal Reserve System, and many Democrats also subscribe to the newly fashionable theory on the left that monetary expansion is harmless and a free source of cash for government to spend.  That, as Chairman Powell is well aware, is a recipe for inflation, crowding out of private investment, pressure on the dollar, and another serious economic downturn.

There is no credible evidence that deferred maintenance on highways, railroads, and bridges requires anything near that sum to correct. Many of the inflated claims about the disastrous state of U.S. infrastructure are based on comparison to current federal standards for new construction, not assessments of its physical condition or analysis of the costs and benefits of bringing existing, usable structures up to standards for new bridges and highways.

Even if there were a substantial need for corrective investment and additions that pass a cost-benefit test, the enthusiasm with which the proposed $2 Trillion is greeted by both Republicans and Democrats should be a warning about what it is likely to produce. Current highway spending is allocated to states based on their gasoline and road tax collections, not their need. Regional scale projects, such as improved rail systems, go unfunded while lucky jurisdictions repave and replace structures far more frequently than needed.  Unlucky jurisdictions jump at the idea of a massive infrastructure program funded from general revenues, because no one wants to suffer the pain of trying again to fix the current irrational funding rules.

A $2 Trillion infrastructure program would open the door for boondoggles on a massive scale. Every member of Congress gets a vote, and members of the leadership and appropriations committees get several.  In the current every politician for him/herself environment, that means that at least half the states and half the Congressional districts must receive their share of $2 Trillion no matter how wastefully it has to be spent.

When I was Assistant Director of the Congressional Budget Office, one of my areas of responsibility was transportation programs.  We concluded that in the late 1980s all economically justifiable transportation projects could be funded by the existing transportation budget if the boondoggles could be eliminated – but that to fund them with the current mix of useful and wasteful projects would require doubling the budget.  That experience shaped my attitude toward infrastructure spending.

On a national scale, the Trump Administration and the California governor have wisely cracked down on the immensely costly and technologically challenged high speed rail system for California, but the proponents of high-speed rail have convinced many politicians on both sides that it is just around the corner if we would only spend enough money.  That will be money down the drain, because there is no way that the value of time saved by pushing rail speeds toward 200 mph can be sufficiently large to justify the orders of magnitude higher cost compared to well-run conventional systems or simpler new systems that can provide speeds in the low 100s. The more we spend on HSR, the more we lose, and a $2 Trillion push for infrastructure spending almost guarantees that some with go down that hole.

It is frustrating to see a Republican President promote an arbitrary spending target of $2 Trillion, rather than ask where additional infrastructure investment would have the highest payoff and how much we can afford.  In the last analysis, every dollar spent on an infrastructure project that does not pass an economic test comes out of our pockets, in the form of displaced private investment that would have provided a higher return or higher taxes to support unnecessary projects.  Republicans should remember that, rather than jumping on the bandwagon to get government spending for their favored vote and contribution-generating projects.

David Montgomery is retired from a career of teaching, government service and consulting, during which he became internationally recognized as an expert on energy, environmental and climate policy.  He has a PhD in economics from Harvard University and also studied economics at Cambridge University and theology at the Catholic University of America,   David and his wife Esther live in St Michaels, and he now spends his time in front of the computer writing about economic, political and religious topics and the rest of the day outdoors engaged in politically incorrect activities.

Letters to Editor

  1. Forest Hansen says

    David Montgomery clearly favors political actions that benefit those who already possess great wealth and opposes political actions that would benefit ordinary citizens (those who drive on our deteriorating roads and bridges and through our maintenance-needed tunnels), to say nothing of his lack of sympathy for those many who are desperately poor. His views on economic matters must be viewed through that prism.

  2. J.T. Smith says

    Montgomery with his usual self confidence attributes the current health of the economy to the Administration’s regulatory reform agenda, coupled with the 2018 tax changes. Much of “ regulatory reform” has yet to take effect as many Trump Administration initiatives have been blocked by courts due to reckless disregard by the Administration for the elementary requirements of the Administrative Procedures Act and the need to articulate a reasoned record basis for action. Thus “ regulatory reform” is more a slogan or branding effort than an accomplished reality. That said, it may be a cause for market optimism but is not yet a realized force in the economy. As to the Trump tax legislation, there is a wide body of economic opinion that it has not realized its stated purpose of stimulating investment as distinct from economic rewards to shareholders on the form of stock buy backs, etc. given the size of the US economy and the scale of its inertial momentum, one must attribute current economic health in largest measure to the policies of the prior administration—accomplished despite intransigent opposition of Republicans in Congress who were then afraid of inflation but now embrace burgeoning deficits, even before any infrastructure investments.

  3. While I disagree with Mr. Montgomery’s assertion that the current state of the economy resulted from Trump’s growth policies, tax cuts and perceived regulatory reform (more like regulatory destruction in which we will pay a significant price in the long term), I do agree that the proposed infrastructure proposal, typically short on details, would be likely to result in wasted projects lining the pockets of contractors and real estate developers. Shame on Schumer and Pelosi for thinking that bit of press coverage will do anything more than play well for Trump.
    Like so many other overtures, this one too will fall short. Trump is only doing what he did when he failed in business. Overreaching and over leveraging. Who is going to bail out our country?

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