Infrastructure looms large on the 2017 policy agenda. Both Hillary Clinton and Donald Trump have promised to build a lot of roads, bridges, and whatnot. Trump, in particular, has offered a grand vision, pledging to construct "the next generation of roads, bridges, railways, tunnels, sea ports, and airports."
Neither candidate has been clear about how those plans will be paid for. But a plausible approach has been evident for some time: linking new infrastructure spending to the deemed repatriation of foreign earnings of U.S. multinationals.
The repatriation-for-infrastructure deal has its virtues, although as my colleague Martin A. Sullivan has observed, logic is not one of them. (Prior analysis: Tax Notes, Oct. 24, 2016, p. 471 .) The deal may also be bad economics.
After all, the first question we should be asking ourselves about any new infrastructure plan is not how to pay for it but whether we should pay for it at all.
Borrow to Build
There's a reasonable case to be made that the federal government should finance new infrastructure with debt. The deficit outlook makes that option problematic, at least in political terms. But plenty of economists think a dose of unfunded construction (aka fiscal stimulus) would give our sluggish economy just the sort of boost it needs.
Paul Krugman has made the case with particular clarity. "Put these two facts together -- big needs for public investment, and very low interest rates -- and it suggests not just that we should be borrowing to invest, but that this investment might well pay for itself even in purely fiscal terms," he wrote in an August 8 column for The New York Times. "Spending more now would mean a bigger economy later, which would mean more tax revenue. This additional revenue would probably be larger than any rise in future interest payments."
That's a rosy picture, but Krugman is not alone; Wall Street seems to like the idea, too. Andrew Slimmon, a portfolio manager with Morgan Stanley Investment Management, recently told The Wall Street Journal that "fiscal spending is an answer to an economy that is not growing at the level it should be this many years after the recession." Likewise, Alec Phillips, a political economist at Goldman Sachs, observed that "Congress has demonstrated a tendency to start adding a little bit to the deficit, whereas several years ago the tendency when you hit a big political deadline, you would use that to reduce the deficit."
In both political and economic terms, infrastructure has been linked to fiscal stimulus for nearly a century. Generally speaking, Democrats have been the biggest fans of using debt-funded construction to jump-start a slow economy; the New Deal is only the most famous example of trying to use infrastructure spending as a countercyclical device.
But Republicans have embraced infrastructure stimulus, too. Indeed, the nation's most famous construction project -- the creation of the modern interstate highway system -- began with a vibrant debate on the virtues (and perils) of using debt to finance construction. And who took the lead in arguing for debt? Republican President Dwight D. Eisenhower.
Origins of Federal Aid
Road building has long been the domain of America's subnational governments, but since the early 20th century, Washington has been offering states help in paying for it. Concerned by the poor condition of many roads around the nation, Congress enacted the Federal Aid Road Act of 1916, offering financial assistance for the construction and improvement of any road used by the Postal Service to transport mail. The bill allotted $75 million (about $1.7 billion in today's dollars) to be used in a 50-50 matching program with state funds.
The 1916 legislation set the pattern for future efforts to support state road construction projects. And as the automobile revolution swept the nation, congressional interest in road building only grew. By the 1940s, Congress was committed to the idea of building an interstate highway system. The Federal-Aid Highway Act of 1944 called for a system of up to 40,000 miles "so located, as to connect by routes, direct as practical, the principal metropolitan areas, cities, and industrial centers, to serve the National Defense, and to connect at suitable points, routes of continental importance in the Dominion of Canada and the Republic of Mexico."
Notably, the 1944 law provided no actual funding for its grand vision. In 1952, however, Congress finally offered some cash to the states, allotting $25 million (about $233 million today) each year in interstate funding for fiscal 1954 and 1955. In 1954 lawmakers increased the aid to $175 million ($1.75 billion) for fiscal 1956 and 1957.
The appropriations helped, but they were hardly sufficient to build an interstate system of reasonable scope and scale. The big money was still missing -- and Eisenhower was determined to provide it.
Eisenhower's Borrow and Build
Eisenhower made the interstate system an early priority of his presidency. In July 1954 he proposed a 10-year, $50 billion program of new highway construction (above and beyond existing expenditures) in a speech to the national governors' conference. He underscored the need for completing a comprehensive highway system, insisting that modern roads would enhance motorist safety and support the nation's economic growth. (He also emphasized national security concerns, noting the current road system's "appalling inadequacies to meet the demands of catastrophe or defense should an atomic war come.")
Eisenhower's speech (which was actually delivered by Vice President Richard Nixon because of scheduling conflicts) came as a surprise to its audience because the governors were then contemplating, as they did every year, asking the federal government to repeal its gasoline excise tax and abolish the federal Bureau of Public Roads entirely. But as highway historian Richard F. Weingroff has noted, the governors agreed, reluctantly, to work with the administration on its grand plan.
Eisenhower created two executive branch working groups to develop plans for accelerating highway construction, one of which was chaired by retired General Lucius D. Clay, an army engineer with sterling family connections and a reputation for competence.
In a biography of Clay (quoted by Weingroff), Jean Edward Smith related Clay's memory of his appointment to head the highway planning committee. Sherman Adams, the president's chief of staff, "called me down," Clay recalled. "This was in August 1954. We had lunch with the President, and they were concerned about the economy. We were facing a possible recession, and he wanted to have something on the books that would enable us to move quickly if we had to go into public works. He felt that a highway program was very important."
Clay's recollection is important because it underscores the macroeconomic motivations behind Eisenhower's highway program. As his speech to the governors made clear, there were many good reasons why the nation needed better roads. But the stimulus effect of large-scale road construction -- while rarely cited in public statements -- was an important part of the president's thinking.
The committee did not debate the fundamental need for a highway program. "The question really is not whether or not we need highway improvements," Clay observed. "It is, rather, how we may get them quickly, economically, and how they may be financed sensibly and within reason."
When Clay released his committee's final recommendations, they featured a construction program costing roughly $101 billion over 10 years -- $53 billion more than allotted under then-current law for federal highway aid. The immediate need, however, was for $26 billion to complete urgent projects.
Even funding that smaller amount would be hard, given fiscal constraints. As Weingroff recounts in his history of the Clay committee:
The Administration was committed to balancing the budget, so an increase in annual appropriations was out of the question. The Administration was reluctant to approve an increase in the national debt for a bond issue. Further, the Federal Government was embarked on a program of decreasing, not increasing taxes, so "we could not look to an increase in tax rates for the money to support this program."
The committee's solution to that puzzle involved the creation of an independent Federal Highway Corporation authorized to issue bonds in its own name but guaranteed federal support equal to the amount collected through federal taxes on gasoline and lubricating oil. Ultimately, the corporation could be expected to issue between $23 billion and $24 billion in bonds during its 10-year life span. Notably, those bonds would not count against the nation's debt limit (the extension of which was just as contentious in the 1950s as it is today).
Clay defended his financing scheme as a necessity. "There is one thing certain; we are not going to get an adequate highway program through the normal approach," he declared in one public speech explaining the plan. "If we are going to have an adequate highway program, we have got to have the courage to take bold measures now so that it will be available when the traffic growth reaches us."
Clay tried to normalize his financing proposal, casting it in terms designed to resonate with conservatives. "So perhaps we may say that we are recommending, rather than a pay-as-you-go policy, a pay-as-you-use policy, capitalizing the revenue of 30 years over and above the money required for primary and secondary roads so that we may have in 10 years a really and truly national system of highways feeding our principal cities throughout the country," he said.
Eisenhower forwarded the Clay plan to Congress, endorsing its financing scheme. In general, he said, taxes related to road use should be used to finance highway construction -- just not this time. "I am inclined to the view that it is sounder to finance this program by special bond issues, to be paid off by the above-mentioned revenues which will be collected during the useful life of the roads and pledged to this purpose, rather than by an increase in general revenue obligations," the president wrote.
Harry Byrd's Pay-Go
The Clay committee's financing scheme met with a chilly reception on Capitol Hill, despite Eisenhower's endorsement. Chief among the critics was Sen. Harry F. Byrd, a Virginia Democrat and noted fiscal conservative. Byrd objected to Clay's novel proposal for a highway corporation, arguing that it merely served to obscure the size and scope of federal borrowing necessary for Ike's grand highway plan. He thought it set a bad precedent. "If the government can borrow money in this fashion, without regarding it as debt and without budgetary controls, it may be expected that similar proposals will be made for financing endless outlays," he said.
Byrd was in good company; the nation's newly appointed comptroller general also attacked the Clay plan. "It is our opinion that the Government should not enter into financing arrangements which might have the effect of obscuring the financial facts of the Government's debt position," said Joseph Campbell, testifying before a Senate committee.
Clay's financing proposal was voted down in both houses of Congress. Weingroff quotes the political writer Teddy White to explain its abject defeat: "The politics of American highways has always been dominated by one overwhelming truth: Everyone loves roads, but no one wants to pay for them."
Trust Fund Solution
The 1955 defeat of Eisenhower's highway bill proved to be only a temporary setback on the road to building an interstate system; the following year, Congress approved the landmark Federal-Aid Highway Act of 1956, allotting funds for the mammoth infrastructure project.
Fiscal conservatives carried the day in drafting that second round of legislation, providing for the creation of a new Highway Trust Fund supported principally by higher gasoline taxes. Notably, the 1956 law also featured a provision, known as the Byrd amendment, whereby shortfalls in the trust fund would automatically trigger reductions in highway spending adequate to eliminate the shortfall.
But if the 1956 legislation was successful in getting bridges built, it was less successful when measured against Eisenhower's original hopes for using infrastructure as a countercyclical device.
In his biography of Eisenhower (quoted by Weingroff), historian Stephen Ambrose gave special attention to that element of Eisenhower's highway program. The program, he wrote, was "a public-works program on a massive scale, indeed the largest public-works program in history, which meant that the government could put millions of men to work without subjecting itself to the criticism that this was 'make-work' of the [New Deal-era Works Progress Administration or Public Works Administration] variety. By tailoring expenditures for highways to the state of the economy, Eisenhower could use the program to flatten out the peaks and valleys in unemployment."
Indeed, Eisenhower's macroeconomic motives may have been primary, according to Ambrose:
One of Eisenhower's favorite programs for reducing the peaks and valleys on the [gross national product] chart was the Interstate System. Back in November 1955, the President had talked to [economic adviser Gabriel] Hauge, then informed [Secretary of Commerce Sinclair] Weeks that he wanted Commerce to plan to use the Interstate System for managing the economy. As Hauge put it, "That was the fundamental purpose of the plan in the initial instance."
Byrd's pay-go financing system, as embodied in the 1956 legislation, frustrated that purpose, limiting the countercyclical utility of the interstate highway project.
Still, interest in using infrastructure spending to manage the business cycle has remained high in the decades since Eisenhower embraced it and Byrd killed it off. President Obama's 2009 stimulus legislation is only the most recent major example; almost every president since the 1920s has contemplated the countercyclical possibilities inherent in building new infrastructure projects.
Whether debt-funded infrastructure will find a home in a future Trump or Clinton administration remains unclear. What seems certain, however, is that fiscal conservatives will oppose the idea. And if they do, Byrd would certainly approve.
It's worth recalling, however, that Byrd was not a wholesale obstructionist; he ultimately agreed to Eisenhower's grand plan for highway construction. He just insisted on paying for it -- with higher taxes.