Here We Go Again

Biden’s infrastructure plan will fail for the same reasons that Obama’s did.

Milton Ezrati April 14, 2021 @ City Journal.  Published with permission.  I recommend subscribing, it's free. 

 

It will take a while for Congress to debate President Joe Biden’s $2.3 trillion infrastructure spending plan. It should take a while. The proposal is immense, in both its scope and its cost. But even before getting into the details, the plan contains a central flaw that will doom the whole effort: the use of corporate tax increases to finance the bill’s spending. This flaw not only jeopardizes the essential maintenance of all the new infrastructure the bill envisions; it will also discourage the follow-on private investment—what economists call “multipliers”—that is essential to the plan’s purposes. We know this because the same flaw doomed President Obama’s 2009 infrastructure plan.

Never known for his originality, Biden has closely followed Obama’s infrastructure playbook (except perhaps for giving his plan a greener theme). He is even relying on the same three justifications: that “shovel-ready” projects will immediately trim unemployment rolls; that a refurbishment of the nation’s infrastructure is long overdue; and that government spending will “jump start” a broader economic surge as the private sector invests in opportunities opened up by the federal effort.

“Shovel ready” was nonsense in 2009 and remains so in 2021. Public hearings and zoning decisions hold up projects for months, sometimes years, and environmental considerations sometimes take even longer. As in 2009, there will certainly be employment opportunities for bureaucrats, consultants, and lawyers in the short term, but not for the guys with the shovels. Consequently, the urgent need for overdue refurbishment will have to wait as well. The only structures that went up promptly in 2009 were billboards announcing Obama’s grand plans. Such billboards are already popping up now with Biden’s picture on them.

Predictions that the spending would “jump start” the economy also failed miserably in 2009. This problem was entirely of Obama’s own making. Having blamed the country’s problems on corporate greed and threatening to tax and regulate away what he referred to as excessive profits, he signaled to the business community that investments made in response to the federal infrastructure spending would yield limited returns. He didn’t even have to follow through on these threats, since at the time the U.S. already imposed the highest corporate taxes in the world. So instead of enjoying the expected follow-on private investment, Obama’s policy (with help from the tax code) encouraged businesses to expand abroad, where tax rates were lower.

Biden now seems determined to recreate the same impediments to success. The White House has called for higher corporate taxes to “pay” for its infrastructure plans. Biden’s plan seeks to raise them by a whopping one-third, from 21 percent to 28 percent, and it will also impose a 21 percent minimum tax on companies that would otherwise take advantage of tax deductions or loopholes—precisely the kind that arise from large capital-spending projects. Effectively, Biden’s plan singles out for special punishment firms whose aggressive expansion would create the favorable multiplier effects that economists would otherwise expect from federal spending. And the tax hike would once again induce American companies to expand overseas. Nor would businesses have any incentive to repatriate foreign earnings, because the White House has promised that it would tax that money at the higher American rate.

The Biden plan has still another flaw. New roads and bridges need constant maintenance, as do recharging stations for electric cars and modernized homes and factories. The plan leans on corporate tax hikes to pay for the initial building but offers no provisions for how America will maintain all this new infrastructure. If the White House were to promise to reinstate lower business tax rates after a period of time, firms might then have the incentive and the wherewithal not only to maintain all these new things but also to expand on them. But instead, the White House is seeking to keep the higher tax rates in place—presumably to finance some other grand project while the infrastructure built over the next few years suffers its inevitable depreciation.

If the Biden plan becomes law, it will proceed in three stages. The nation first will see little, as it waits perhaps a year or two for the paperwork and approvals that allow the shovels to arrive at the projects. At that point, the U.S. economy will indeed see an economic boost, perhaps just in time for the 2024 election—but after that brief surge, the activity will quickly wind down, just as Obama’s infrastructure effort did. Unless your only focus is on winning the next election, this is a poorly structured deal.

Milton Ezrati is a contributing editor at The National Interest, an affiliate of the Center for the Study of Human Capital at the University at Buffalo (SUNY), and chief economist for Vested, a New York-based communications firm. He is the author of Thirty Tomorrows: The Next Three Decades of Globalization, Demographics, and How We Will Live.

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