There come times in Congress when they have an opportunity to change the game in fundamental ways. These opportunities are rare, with the last transformation perhaps the Affordable Care Act almost a dozen years ago. Whether or not one agrees with such momentous motions, none can deny their profound effects. We are facing that moment, more than ever.

Two infrastructure bills are winding their way through Congress, to the tune of $4.6 trillion dollars of expenses in the next ten years. That is, on average, $460 billion of spending per year, 

While a little more than half the spending in Medicare, Health, or Defense, and comparable to the cost of Commerce and Housing, or interest on our debt, these spending figures are significant, but not disproportional. Sticker shock on the infrastructure bills seem large because they are quoted as a ten-year figure while ongoing categories are quoted as annual figures. At 2% of our nation’s annual Gross Domestic Product, the sums are sufficiently significant to stoke our scrutiny. 

There are two questions an economist asks. Do the investments produce appropriate returns, and do we have a mechanism to pay for these investments? 

We have all heard anecdotes about what is included in the Infrastructure Bills. Increased spending on highways, bridges, broadband, airports and mass transit, clean water and the power grid are included in the physical infrastructure bill. There is broad agreement among economists and even Congress on the good benefit/cost ratios of these items. Many of these investments have been deferred for decades, and lack of investment in some of these areas have hindered economic growth. 

More difficult to assess are the items in the much larger human infrastructure bills. Paid family and medical leave, permanence for the COVID-era child tax credit, universal pre-K, subsidized day care, affordable housing, dental, vision, and hearing care, and reductions in global warming gas emissions each have their adherents in Congress, but the package in combination appears unpassable at the $3.5 trillion level. 

Consensus around the benefit/cost ratio is much harder to foment for these items. Each item will likely contribute to growth, but the benefits are not evenly distributed. For instance, some have observed that an upper middle class family may accrue more income from the economic freedom created by universal day care than lower income families. Similarly, more income will flow to a higher income family able to tap into paid family and medical leave than lower income families. If spending as a share of our income falls (and the saving rates rises) as our income rises, accruing more of these benefits to higher income families results in lower contributions to spending and growth than had these benefits been means-tested. 

Means testing means a tapering of such benefits as income rises. Such means testing is a condition of support by some in Congress, while others fear that such non-universality of benefits converts a human right to a privilege which can easily be withdrawn later. These are cases of strong benefits/costs ratios of perhaps around $8 of benefits for each $1 spent on early childhood education. However, if these benefits accrue mostly to families that do not so much need the money, the multiplier effect of such programs is effectively reduced substantially. 

I would have preferred the climate initiatives to be included in a larger physical infrastructure bill instead. While some may still argue whether global warming is human-made or natural, most everybody accepts that global warming is damaging, and that humans can limit it, even if we’ve left it far too long to reverse the trend. This item, like roads, airports, and clean water affect us all, regardless of income, and may even affect the wealthy, with their waterfront residences and investments most vulnerable. None of us are immune to dirty air or the soot from burning coal. But, most importantly, our entire economy is far better off abating global warming now than later. This is an item, not unlike a cancer, that is far easier to remedy early in the prognosis. 

The benefits of earlier intervention are also pronounced. New solar, wind, and nuclear installations are sustainable but are also now less expensive than new natural gas and coal plants. And, once the U.S. inevitably invokes the carbon taxes put in place in many of our closest political allies and economic competitors, we know that existing hydrocarbon power generation and transportation will no longer be economic. Anything we can do to force this transition earlier rather than later will mean we start earning the dividends of better energy technologies now rather than later. 

Early adoption also places our nation in a superior competitive position in developing the requisite new technologies. Certainly there is a good possibility we can develop nuclear fusion first, and hence provide the world with a technology that can provide abundant low cost energy. 

Such innovations make great economic sense, with or without legislation. However, without the legislation, and its concommitant commitment to such major structural changes in our economy, we are merely leaving potential growth off the table in an era when any such growth is elusive. 

I’m sure if we could also see the proposed legislation, and could benefit from a GAO analysis of the benefit cost ratio of each of its constituents, we’d conclude that many of the proposals will stimulate economic growth and enhance economic fairness well in excess of the investment. In other words, many items likely well more than pay for themselves. There is are no doubt many more examples of political pablum in the legislation as well, designed to take care of pet concerns of some legislators or committee chairs. That is too bad, and probably inevitable in 10,000 page long laws mostly hidden from the public until it is too late. 

Indeed, on the revenue side, there are inefficiencies and inequities in income taxation that can support the spending. Merely reinforcing existing tax policies and closing loopholes would raise much of what is necessary. A recent report on simple tax evasion puts that figure at about $100 billion annually. This evasion arises from the shifting of profits from the U.S. to offshore tax havens. Add to that tax cheating and a simple loophole for tax evasion for those who primarily earn on investments, and the I.R.S. chief recently reported the 2021 total will exceed $1 trillion, more than twice the amount necessary to cover the massive infrastructure plan. 

Two common techniques are carried interest and borrowing against portfolios. Carried interest allow hedge fund managers and sophisticated investors to pay taxes on their earnings at the much lower dividend or capital gains rate rather than on the much higher ordinary income tax rate other workers pay. Worse is the technique that allows investors to borrow against their portfolio at a low interest rate of perhaps 2%. These investors hence have access to their wealth at a low fee, and pay no taxes since they are borrowing from themselves. Granted, someday, usually on death, that sum must be repaid to the portfolio. Heirs inherit the same remainder they would have received had the investors drawn down their portfolio through withdrawals rather than loans. But, since most inheritances enjoy stepped-up capital gains, the portfolio is passed down taxfree. In effect, neither the investors nor their heirs ever pay any tax. This may explain why more and more companies no longer pay dividends. This trend makes tax avoidance easier. 

In a previous blog I noted that tax equity can contribute to improved economic efficiency. This results when our tax policy shifts the burden from those lower income wage earners who spend all they have to those higher income investors who can afford to reinvest most of their earnings each year tax free and contribute at a much lower rate to national spending from their taxes avoided. With the benefits arising from necessary economic restructuring exceeding the resulting net tax burden by perhaps an order of magnitude, many aspects of the Infrastructure Bills are no-brainers. Unfortunately, with the public afforded little opportunity for scrutiny, we have no easy way to separate the wheat from the chaff. This lack of public confidence in Congress may cost us dearly in times like these.