Spending to improve the nation's infrastructure stimulates the demand side of the economy, fostering economic growth and job creation. It also provides the economy with productive assets such as streets, roads, sewer and water systems, bridges, freeways, broadband Internet, and seaports and airports that reduce cost, enhance quality and increase our competitiveness in the global economy.
Republican opposition to then-President Barack Obama's infrastructure initiative contributed to stagnant wages and the slowest GDP growth of any recovery since World War II. Now that Republicans control all three branches of government, the Democratic leadership is proceeding to oppose everything that President Donald Trump wishes to do and attempt to make him a one-term president. Just as Republicans opposed Obama's infrastructure initiative, Democrats are prepared to return the favor. Their "tit-for-tat" strategy is likely to have the same result: suppression of economic growth and further deterioration of public assets.
This pattern is likely to recur because political gain requires the reverse of sound economics. For the party in power, infrastructure spending will increase its popularity and extend its term in office. For the party out of power, however, cooperation with infrastructure investment will extend its time in exile.
DEFICIT FINANCE OF PRODUCTIVE ASSETS. Opponents of infrastructure spending routinely warn that borrowing to finance such investment would harm the economy by boosting the nearly $20 trillion national debt. This is a scary number until it is placed in context. Deficit spending is justified when the benefits of borrowing exceed the cost of borrowing.
Our nation becomes poorer when it buys something worth less than it costs, such as a "bridge to nowhere" or a weapons system that the Pentagon has no use for. The country becomes richer when it buys assets of greater value, such as improved water and sewer systems, highways in good working order, increased broadband coverage, and more efficient and safer seaports and airports. When interest rates are low, as is the case today, it is more likely that the value of infrastructure investment and its associated increase in employment outweigh the cost of borrowing.
IN ADDITION TO BORROWING, PRIVATE FINANCING. Recognizing the aversion to more debt, Trump is proposing to meet some of the infrastructure needs with private financing. In these public-private partnerships, or "P3" plans, private investors fund the infrastructure reconstruction and recoup their investment by charging users of the facility once the reconstruction is complete. The government maintains the right to recover ownership after a specified period and to regulate the quality of service and the amount of the user charges.
An example of a P3 plan is the city of Chicago sale of the rights to tolls from the Chicago Skyway Bridge, a 60-year-old structure connecting south Chicago to the Indiana Toll Road. After paying the city $1.5 billion, private sector buyers reconstructed the bridge, entitling them to the stream of tolls to be collected in future years.
BIPARTISAN COOPERATION REQUIRED. Restoring infrastructure will require a combination of debt financing and public-private partnerships. In those cases where user charges can generate a competitive return to private partners, private financing is feasible and will not add to the government debt. Alternatively, the government could borrow for the projects that can be financed by user charges, but in so doing would incur financial debt.
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Explore all your optionsSome infrastructure needs cannot or should not be financed by user fees, such as the water project in Flint, Mich. That project will require public finance backed by general taxes and not user charges, because the water system was corrupted through no fault of the Flint citizens.
Cost-beneficial projects should proceed, making the nation richer and more productive. The proper choice of projects to be launched and the method of financing will require bipartisan cooperation. Our country's infrastructure cannot sustain another four-year delay.
William L. Holahan is emeritus professor of economics at the University of Wisconsin at Milwaukee. Charles O. Kroncke, retired dean of the College of Business at UW-M, is also retired from USF. They are co-authors of "Economics for Voters."