Understanding Federal Government Financing of Long-Term Investments
Among the key policy battles going in Washington is how to pay for repairing and modernizing America’s infrastructure. Democrats are considering higher tax rates for corporations and upper income earners, positions that are popular among people of varied political persuasions. Meanwhile, Republicans regard even the partial restoration of taxes cut during the previous administration as a deal breaker and argue for a much smaller bill than proposed by the President.
Aside from the fact that Republicans in Congress are unlikely to vote for anything that looks like a victory for Joe Biden (though I’d wager that they’d go home to their districts to claim credit for such funding), there’s a more fundamental question here: why is maintenance of the nation’s infrastructure something that requires a so-called “pay-for”?
I’d argue that this is closer to normal wear and tear, just as a home or car tends to become more costly over time, and eventually requires overhaul or replacement. Our country has regularly spent (wasted?) trillions of dollars on weapons, warfare, and tax cuts for the wealthy, with no one on the right questioning how to pay for it. But propose programs to repair and update our infrastructure, and suddenly there are no dollars to be found.
A common argument among Republicans is that the Democrats are expanding the definition to include areas not traditionally considered infrastructure. This can easily be countered by pointing out that the internet, rural electrification and telephony, interstate highways, etc. also didn’t exist less than a century ago, yet are now key components of our infrastructure. Over time, what is considered necessary for a functional economy has evolved and will continue to do so in the future.
One of the fundamental differences between the way our federal government accounting works and the way state and local government units work is that the federal budget accounts for everything on a current basis, where there is no consideration of the value or of an asset or liability over time. Every dollar coming in or going out is counted within the current year’s budget. Under GAAP (generally accepted accounting principles), when a state or local government invests in property, plant, equipment, pension costs, etc., the lifespan of the asset or liability is taken into account. The federal government, however, is constitutionally prohibited from accounting in this manner.
Obviously, the federal government has the power to print money and incur debt in ways not available to local governments, but the requirement to use cash accounting exaggerates the effects of the federal deficit and debt by not, for example, recognizing the value of the government’s physical assets. While I do think that, as a means of moving toward economic equality, it’s beyond time to collect a greater share of taxes from the wealthy and from profitable corporations, infrastructure spending should not depend upon resolving the decades-old problem of our distorted tax system. The stimulative quality of infrastructure investment, coming in the wake of the most recent economic collapse under another Republican president, is reason enough to proceed with an ambitious national renewal program.
