Who Needs Free Lunch Anyway?

There appears to be a standoff brewing over renewal of the federal gas tax.  The tax traditionally funds highway infrastructure projects and is due to be extended September 30^th.  But a group in Congress, led by Senator Tom Coburn, is maneuvering to block the extension.  A delay of just ten days, Ron Klain writes in Bloomberg, would mean “the permanent loss of $1 billion in highway funding (and layoffs for thousands of workers).”

So not only must we accept the fact that there will be no new infrastructure or public works programs—certainly nothing on a large scale that might begin closing the current employment gap—but there will be an uphill political battle just to maintain existing funding.  In other words, the policy battleground has shifted, such that the choice is not between maintaining the inadequate status quo and investing in a new public works program, but between the status quo and less infrastructure investment.  It is difficult to come up with novel ways of explaining why this is ridiculous.  The fact that the real yield on Treasuries is negative gives us an excuse to rehash the case.

The Levy Institute’s research shows that investment in social care services, like home-based health care and early childhood care, yields twice the employment impact per dollar as investments in physical infrastructure (for reasons suggested by Klain, who notes that federal roads programs have become less labor intensive over the years).  But this does not mean that we ought to abandon investing in our physical infrastructure.  With 9% unemployment, just about any job creation measure will suffice.  Moreover, jobs impact aside, maintaining our existing infrastructure is a necessity.  Numerous studies indicate that the US needs to make $2 trillion worth of necessary repairs to its roads, bridges, and sewage systems.

The key word here is “necessary.”  The issue is not whether to invest $2 trillion to make these necessary repairs.  Unless we decide that we want to return to dirt roads the only question is when.  Right now we are well below full employment (with serious unemployment in the construction sector), and borrowing costs are not just low by historical standards, but comically low—negative real yield territory.  The federal government is being paid to borrow money.

These conditions won’t always hold.  Borrowing to invest in infrastructure, right now, is about as close to a free lunch as you can get.