Economic Impact of Federal Infrastructure Investment

WM, Special Revenue, Examining the Economic Impact of Federal Infrastructure Investment, February 15, 2022

What is infrastructure?

Federal infrastructure is many things to many people. It includes both soft and hard infrastructure. Soft infrastructure includes building human capital and making sure it can be employed. The Build Back Better Act, still under consideration, contains such investments. 

The biggest investment is not just human capital, but humans. Life and capitalist economies are both Ponzi schemes. You need more entrants than exits due to death or retirement. The current economy shows the effect of large numbers of people retiring unexpectedly. A more generous, refundable, child tax credit - even beyond BBA - as well as a higher minimum wage - are needed to meet these needs. Any pro-life legislative agenda must include this type of human capital. That this has not been mentioned as an abortion issue is a shame shared by both sides of the debate on the Act.

Having more children means more household consumption, which fuels jobs, investment and the demand for services from the government - which fuels more consumption. A rising tide that lifts all boats.

Economic Analysis

The same analysis also applies to the physical infrastructure already passed and signed into law, which is presumably the entire scope of this hearing.

As a former contract specialist, budget analyst, program manager and government contractor proposal manager, I have a unique perspective on the main question of the impact of this bill:

It will not be like the New Deal. Sufficient firms already exist for all of the projects under consideration and they will be the most likely contract awardees. As we all know, the recent law reauthorizes current spending levels as well as adding new projects. The creation and destruction of firms to do this work will occur regardless of funding levels. Firms will likely grow, but some will fail spectacularly - just as they do now.

More and newer equipment will be purchased as the result of increased infrastructure spending. 

Employment will increase in three areas. Construction and architectural firms, et al, will add staff - including at the entry level. This is primary employment. Secondary employment increases will occur among those firms which supply equipment and resources - from office supplies to asphalt. Tertiary employment supports the spending by households who engage in the other two types of employment. 

The demand for goods and services will increase in all supportive industries - including housing, food, cars and gasoline. Such demand will further grow the construction, manufacturing and energy sectors - and increase infrastructure needs further.

All types of employment and related sales will provide for increased taxes at the federal, state and local levels, as well as contributions to Social Security. 

To the extent that wages go up (which could be helped by higher minimum wages), future and current retirees will be made better off. Union labor will also gain from better blue collar job opportunities.

Local public services, both education and infrastructure, will improve because of increased funding. Grow the economy enough and the next round of infrastructure spending will be easier to pass.

This brings us to the political issues. 

More than one member of Congress and the Senate who voted against the infrastructure bill are now pointing to its likely benefits. It would have been a better bill with more support - but we are at the beginning, not the end.

Between funding and ribbon cutting, members of both parties will facilitate project completion by serving as links between the federal and local governments in all matters from project planning to keeping funds flowing as the years go by. Congressional-local relationships are vital in getting infrastructure done -as both a congressional intern and an appointee in the highest levels of local government.

There is nothing like actually doing the work of government to make the political system work. Every member needs to be socialized on this fact, especially the members of the Freedom Caucus.

Eventually, fuel taxes will need to go up to fund increased infrastructure needs. Transportation funding must be broadly based and funded, to the greatest extent possible, by its users. 

Motor fuel taxes must remain a direct excise. Taxing a percentage of the price is unconstitutional because prices vary from state to state. This would violate Article I, Section 8's prohibition requiring equal national excise taxes, although individual states could explore the idea. Regardless, the coalition for a higher national excise collapsed long ago, causing our infrastructure crisis.

The reason for this collapse is the end of earmarking. The late Senator John McCain (God rest his soul), was a driving force in the elimination of this funding tool, while Congressman Bud Schuster was its champion.  

Earmarks lost favor because of the bad publicity on Alaska's Bridge to Nowhere, which was necessary to reach a vital airport destination. Ironically, the road to the bridge was built and became the road to nowhere because it was part of the overall plan. Governor Sarah Palin's lack of courage in defending the project led to the downfall of earmarks and the coalition for higher fuel excise taxes. 

Earmarks simply codified agreements by the local members of Congress and the Senate, the Federal Highway Administration and state and local government to plan specific projects rather than leaving their planning solely up to the Department of Transportation. Without these constituencies, the natural constituency for higher fuel taxes could not hold out against general anti-tax sentiment. In essence, the government stopped doing its job to represent the interest of society rather than its vocal anti-tax minority.

Bring back earmarks and projects will go forward and fuel taxes can be raised with little heartburn.

Carbon Added Taxes could be adopted in place of Motor Vehicle Fuel taxes. These would fund both infrastructure and research. Unlike simple carbon taxes, the total carbon added at purchase would be laid out on the receipt. This will allow for comparisons by consumers rather than having carbon tax effects linger in the shadows. The inelastic nature of energy usage (and carbon) means that some portion of the tax will be absorbed by merchants - meaning that they will pay more than they collect.

Gas Prices

Gasoline usage is very inelastic. If workers and their families own a car and need to drive to work or get groceries, the price of gas will not stop them. It takes very high prices before people start looking for alternative transportation methods. Also, many professionals who work from home have less gasoline expenses as a whole, so high prices do not affect them.

This is not to say that, in order to increase gas taxes, something needs to be done about the current price of gas. Everyone agrees that it is too high.

The current scapegoat for high prices is uncertainty over Ukraine (as if there were no reserves on the planet). While, in general, prices are higher because of supply chain issues, there is no disruption of oil imports. Barrels of oil do not sit on the docks. Container ships pull up to a pipe and offload their oil from offshore. There is no line of ships waiting to do so.

Are refineries having supply chain issues? We would have heard about it, so no.

Fuel prices are high for the same reason they were high in 2007 - an out of control futures market. Part of the Dodd-Frank law created regulations to prevent bad behavior in the NY Mercantile Exchange (NYMEX). These reforms helped keep the price of gas in a reasonable range.

When Mick Mulvaney was serving as OMB Director, he was also acting director of the Consumer Financial Protection Authority.  Little is reported as to what he did while there, but the proof is in the pudding. There should be joint hearings with the Financial Services Committee and this subcommittee to find out what happened to allow price to be so terribly different from what Supply and Demand would explain. It is best to look at this sooner than later. 

The current market resembles the market for cryptocurrency (which also demands further study). Prices are so highly inflated that the market is not a measure of value so much as a game of musical chairs. 

The goal is to sell futures contracts to the next available sucker (and not to be that person). The last time something was done, oil traders had to cover their bets by selling mortgage backed securities. This was in 2008. It did not go well.

Again, fix the Exchange’s trading rules and there will be plenty of room in what people will pay in taxes to fund infrastructure (and research) adequately. Allow us to describe one such research project as it relates to infrastructure. It has two components, one technical and one managerial.

The Future is Calling

Two technologies are not yet ready for prime time: electric cars with lithium ion batteries and self-driving cars. There is a better way that is less likely to result in individual failures. These options are overhead transmission lines - a mature technology for bus and rail - and central computer control (also through overhead lines). 

Build the interface into a roof deck, which would be covered with grass, and block pedestrian access and fatal traffic accidents (including drunk driving, mechanical failure and pedestrian) will become but a sad memory. Testing this concept would be both easy to do and inexpensive.

The managerial concept is as important. Rather than having fuel, road building and government owned and operated independently, combine them into a single enterprise in a geographic area. Include car companies, energy companies, local governments, infrastructure contractors (with supporting suppliers), electronic payments and selected local employers.

For the driver, this will appear as one-stop shopping. They can either own their own cars or call for a car from a common pool. Their banking information will already be programmed in or they can insert a fob into a common pool car. They enter (or say) the destination and the computer does the rest. 

Prices would vary based on congestion and vehicles could be taken to a public transportation hub (which might be located at their children’s school), with the vehicle returning home empty or going to the next fare. If congestion is low, it may be affordable to drive to work. If it is high, prices for public transit and commuting would be adjusted accordingly.

This solves the problem of having to walk to and wait for the bus. At the end of the day, your car picks you up from the train or from work. It is always hooked up to diagnostics and, if necessary, will take itself to get fixed, (because dangerous cars will not be allowed in the system). 

The power grid would be redone at the same time and Internet services could be included to both home and office. 

The question of gasoline is also important, that question being: in refining oil for plastics will gasoline be burned anyway? If so, burn it at the refinery to power generators and sell the power into the grid. This converts gas and oil companies into electric companies. 

In a cooperative economy, employers would pay for commuting (including taking kids to school) and for going to cooperative owned stores. Part of the process of accumulating retirement shares would be accumulating shares in the local transportation and energy system - enough so that transportation in retirement is paid for by dividends or by former employers. Some shares would be voting - some would be preferred.

There would be no need for a separate carbon added tax or motor vehicle taxes. Intercity consortia may even include linkages to rail and aviation - although for larger families there is nothing like traveling by car - especially an automated one. With Tesla could come SpaceX, linking spaceports into the system.

Implementing such a system allows us to reduce the role of politics in infrastructure, especially national politics. Cooperative employment and transportation can be extended to cooperative human services and education with both secular and religious options, at the choice of workers - both individually and collectively.

We only need willingness to do this. The technology is already there, or can be easily demonstrated. Even the managerial portion can be designed easily. The concepts have already been developed. The Future is Calling.