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With the world economy suffering, neither monetary nor fiscal nostrums are giving much relief. Easy money has boosted bond and equity prices, as well as housing values, but it has done little to lift wages or employment. Fiscal expansion is constrained by politics, not economics. Debt and deficit hawks are ascendant in Germany and elsewhere, and in too many influential circles "Keynes" has become a pejorative word.
Reacting to policy failures, the grey eminences who attend annual meetings hosted by the International Monetary Fund (IMF) have rediscovered the virtues of infrastructure spending. Public infrastructure is congested and deteriorated in advanced countries and totally inadequate in much of the developing world. The economic payoff from infrastructure investment is well above long-term bond rates. Infrastructure projects employ lots of workers, both skilled and unskilled—just what the economy needs. These facts are well known.
Bolstering the case for infrastructure spending, a timely IMF report calculates that every dollar spent on productive projects will generate three dollars of additional output and pay for itself in future tax revenues. As former Treasury Secretary and White House economic adviser Lawrence Summers rightly emphasizes, infrastructure outlays in today's world economy are the proverbial free lunch. An extra trillion dollars annually of infrastructure spending—about 1.3 percent of world GDP ($75 trillion)—would do wonders for the ailing global economy.
What's standing in the way? Two things: too little money and too slow approvals. We don't have a sure prescription for shortening the approval process. Consider the Obama administration's 6-year delay in giving a green light for the Keystone pipeline. Unlike the present process, opponents of an infrastructure project should have to meet a heavier evidentiary burden before their objections prevail. However, since streamlining approval processes will require cooperation between layers of government, it's probably too much to expect rapid reform.
But we do have a prescription for the money problem, and if more money can be mustered for infrastructure, permits might be issued faster. We illustrate our prescription in the US context, but the approach could be easily adapted to circumstances abroad.
Our prescription calls for an immediate 100 percent federal tax deduction for private funds devoted to certified infrastructure—whether the expected life of the project is 5 years or 50 years. Private investors would look to tolls earned on the infrastructure project—not public funds—for their financial returns. The tax write-off would be available for a trial period, say five years, to determine its success in boosting the economy, relieving congestion, and repairing dilapidated bridges, roads, and much else.
Objections from the Joint Committee on Taxation—experts who worry that a new tax deduction might increase the fiscal deficit—can be overcome by the IMF's "pay for" calculations. Appropriate certifications would ensure both that projects are worthwhile and would not be done without private funding. Certificates could be issued by competent bodies such as the Departments of Transportation and Energy, the Federal Energy Regulatory Commission, and the Army Corps of Engineers. While certification will not be cheap and painless, the procedure should work fast, since it will follow environmental and other approvals.
Our approach stands a far better chance, in the US political arena, than the infrastructure funding approach proposed by President Obama's Treasury Department. Treasury wants to grab a huge chunk of tax revenue from earnings held abroad (over $2 trillion) by US-based multinational corporations and use those funds to finance roads, bridges, and ports. The Treasury proposal is completely at odds with the "territorial" tax systems of other countries and was dead on arrival when it reached the Congress. Whatever good it might do for US infrastructure would be more than offset by hampering the competitive position of US firms in the global marketplace.
By contrast, our approach aligns the interest of US firms with the infrastructure needs of America. US multinationals might voluntarily repatriate hundreds of billions of dollars from their earnings abroad, since the additional US federal tax would be offset by the large and immediate tax deduction. Other US firms, without operations abroad, might draw from their cash hoards at home to earn a better return on infrastructure projects than on commercial paper.
To summarize: Now is the time for an infrastructure boom, not only in the United States but around the world. Monetary policy has done all it can, while political constraints on fiscal policy compel worthwhile projects to languish. Harnessing private finance through immediate tax deductions that pay for themselves is one answer for global malaise.
