Infrastructure Spending and Tax Incentives

FROM a recent Bloomberg article on the issue of infrastructure spending:

Last week, Larry Summers repeated his plea for the U.S. to invest more in its crumbling infrastructure. He—and the latest World Economic Outlook (PDF) from the International Monetary Fund—are imploring governments to issue additional debt to finance roads, bridges, water treatment, and extension of power grids. Even the most conservative estimates suggest that the projects would pay for themselves, especially with real interest rates below 1 percent.

Investing in infrastructure may seem like a no-brainer, but financing it is more complicated. Most infrastructure projects are chosen and paid for at the state and local level. Even politicians’ favorite example of the U.S.’s “third world” infrastructure, New Yorks airports, are under the domain of the local Port Authority of New York and New Jersey. About three-quarters of U.S. highway spending is financed by state and local governments. Which projects are chosen and how they are financed comes down to local politics. And local governments are not making infrastructure investment a priority.

. . .

Summers argues that today’s low interest-rate environment makes this an ideal time to invest in infrastructure. A just-released report from Standard and Poor’s (MHFI)explains why states are not doing this. Henry Henderson,, a director of public finance at Standard and Poor’s, says borrowing for anything, including infrastructure projects, requires states to account for future interest payments in budget projections. Even with low interest rates, that’s money they just don’t want to spend. Instead resources are going toward other services (such as schools), lowering taxes, and funding pension and health care. About 10 states are proposing tax cuts for 2015, but hardly any states are planning significant infrastructure expansion.

This is short-term thinking. Neglecting infrastructure now increases the cost of repairs in the future, both because there will be more damage and because the cost of borrowing money will probably rise. 

Together with addressing an economy’s crumbling infrastructure, such projects can help boost employment during periods of economic stagnation.  Of course, as the article notes, state leaders are wary of this approach for several reasons; namely states have been paying down debt rather than issuing more.  One alternative is turn to Public-Private-Parternships to fund public infrastructure projects, but those programs are not without their own problems (see here, here, and here).

Unwilling to make such investments, most states continue to use tax incentive programs to “create” jobs; the efficacy of such programs is questionable.  From a recent WRAL.com article on the North Carolina experience with these programs:

At groundbreaking ceremonies, ribbon cuttings and company-wide announcements, governors in North Carolina have for decades appeared alongside corporate executives to herald the coming of new jobs.

They’re aided by millions in taxpayer dollars that North Carolina, much like other states, uses to lure and retain businesses.

As the state dug out from the depths of the recession, the projects were seen as bright spots in the slowly recovering economy.

But years after these jobs were announced by executives and state leaders, most failed to fully materialize, a WRAL News analysis found. More than 100 companies named in job announcements since 2009 have since reported no new jobs. Some have laid off workers or closed up shop altogether.

. . .

WRAL News analyzed the JDIG and One North Carolina projects announced by Gov. Bev Perdue from 2009 to 2012 to get a complete picture of how the administration’s incentives measure up. Although not all projects are required to report as of the 2014 commerce report, 267 projects at varying stages of their grants have.

For those projects, Perdue announced the creation of 39,562 jobs during her tenure.

Data show that only 38 percent of those jobs have been created, despite the projects being a cumulative 75 percent of the way through their grant cycles.

Even among the 146 projects closed out or past their ramp-up period, companies created 8,774 of the 19,537 announced jobs – less than 45 percent.

Since 2009, commerce data shows 127 projects have reported zero new jobs out of a promised 17,592. About half of the companies reporting zero jobs created still have time to catch up, although only 18 are less than halfway through their grant cycles.

While politically appealing in that such programs do not require spending, the results are dubious.

The International Monetary Fund refers to infrastructure spending as a free lunch (that it is self-financing).  Whether that’s true or not is questionable, but the same is  said for tax cuts/incentives.  But given the weak labor markets across the U.S. following the recession,  including in Maine, there is a need to address the long-term unemployed and the under-employed; and so the issue is not solely a fiscal matter.  While those two forms of employment are cyclical in nature (the result of the 2008 recession), there is a risk that they will become structural in nature.  As the a Brookings paper on the impact of infrastructure spending notes:

More than 80 percent of workers employed in infrastructure occupations typically have short- to long- term on-the-job training, but only 12 percent hold a bachelor’s degree or higher and generally need less education to qualify for these jobs. Many infrastructure jobs have low barriers of entry in terms of formal education, including cargo agents, rail car repairers, and other trade occupations, which frequently rely on skills developed on the job. However, these workers still earn competitive wages across a variety of occupations, ranging from gas compressor operators to septic tank servicers.

If states, such as Maine, are willing to invest in job-training programs, why not shift those resources to infrastructure programs to provide both on the job-training as well as improve an economy’s infrastructure?  Both sides of the structural vs cyclical argument can (presumably) have their arguments met under that model (suggesting that, generally, the skills gap argument is overstated in importance).  As to the former, the structurally unemployed can be re-trained, and as to the latter, the long-term unemployed and the under-employed can be put back to work to prevent an erosion of skills and eventual structural unemployment.  Most beneficial is the economic stimulus that would result.

Of course, we shouldn’t simply build defenses for a theoretical alien attack (seriously, click the link), but there are needs that could be targeted that would bring higher rates of returns.

John Haskell

About John Haskell

John graduated from the University of Southern Maine with a degree in Political Science, and from the University of Maine School of Law. He has worked in both the public and private sectors, and currently, works with a small business services company in the Mid-Coast area.