Highway Bill Caught In “Pay For It” Trap

Dave Johnson

Washington is caught in a going-round-in-circles argument about how to “pay for” a surface transportation bill. Various proposals are in the air. Cutting other things to “pay for” this. Raising the gas tax. Telling corporations to bring back the profits they have stashed offshore as a way to avoid taxes (with the sweetener of rewarding the companies for dodging taxes by letting them pay a lower tax rate than companies that didn’t do this). And more.

Isaiah J. Poole explained Wednesday in “Leaders Should Be Leading To Get The Transportation Investments We Need“:

The last time Congress was able to pass a surface transportation authorization for more than two years was in 2005, when it sent to President George W. Bush a bill that authorized $286.4 billion over five years. The bill that was sent to the Senate floor today would authorize $11 billion less than the bill Bush signed.

That’s 4 percent less money that is supposed to be stretched to last 20 percent longer, at a time when many of the nation’s transportation needs have gotten much greater and the cost of meeting those needs is higher.

… Nearly all federal funding for roads, bridges and public transportation has traditionally come from a federal gasoline tax. But that tax – 18.4 cents per gallon – hasn’t been increased since 1993. Not only has inflation eroded the value of that tax, but for most of the past decade people have been driving less and are consuming less gasoline thanks to more fuel-efficient vehicles.

The result is expected to be a shortfall of about $170 billion in the Highway Trust Fund over the next 10 years.

Idea: Don’t “Pay For” It

Here is the best way to “pay for” the transportation bill: sell bonds and use the proceeds.

Republicans have maneuvered the country into a trap of thinking that we have to “pay for” everything in the budget by cutting something else. Almost every economist will tell you this is a mistake. There are things that government does to make our lives better and grow our economy and cutting only stops government from making the investments that need to be made.

“Pay for” is bad policy. Never mind the side of the argument in which we cut tax rates on the rich and corporations, and then Republicans say “we’re broke” and can’t do anything that makes our lives better. And never mind that our military budget is more than that of all the rest of the world combined. There is another reason that “pay for” is bad policy. The market is demanding bonds.

Law Of Supply And Demand Says Sell Bonds

Interest rates on U.S. Treasury bonds are ridiculously low. Low bond interest means that the bonds sell for a very, very high price. Things have a high price when they are in demand. So low interest rates on bonds says there is a demand for them. Supply/demand says this means the supply of our bonds is way too low for what the world currently demands.

People who understand markets would say this means the government should address that demand by issuing more bonds to increase the supply. We need to borrow more, not less.

The money we get from selling those bonds would finance improving our country’s infrastructure, which would employ people in the short term and improve the economy long term.

In the short term, this would allow the hiring of millions of people who would buy things in stores and pay taxes. Wages would finally be forced up. Buy America policies for the infrastructure purchasing supply chain would reopen factories.

Investing In The Economy Pays For The Investment

In the long term, the improved infrastructure means a more efficient and productive economy.

We can pay off the bonds with the return from the improved economy.

Also when you create an asset (a bridge, a school) you own the asset. It balances the other side of the books. When you build a bridge, you don’t “lose” the money spent on the bridge, you have the bridge. Maintaining the bridge keeps its value up.

Here is a “family budget” way to understand this.

You borrow to buy a car, but you have the car. So your balance sheet has the loan on one side and the car on the other.

You have the use of the car to get you to work, and you can pay off the loan with money you make from this use of the car. Then, after a while, you still have the car and can get to work, but have paid off the loan. So you are ahead of where you were before you borrowed to buy the car.

But if you didn’t buy the car you couldn’t get to work at all and you’d go broke. That’s where we are right now with Republicans blocking infrastructure improvements because “government spending.”

Pay for the transportation bill by selling bonds. In fact, sell bonds to “pay for” education and health care and everything else that makes things better and therefore pays off later.

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