The Capitol Hill pols are so excited about the Donald's trillion dollar infrastructure boondoggle that they are positively foaming at the mouth. So it's worth paying attention to their double-talk; it's yet another reminder that the Federal budget is indeed a fiscal doomsday machine that can't be stopped, and that will soon send bond yields soaring and the stock market crashing.
Perhaps we are getting a warm-up session today, but the truth is you haven't seen nothing yet. Bond yields are fixing to soar as the US Treasury and the Fed team up t0 sell massive amounts of debt on a parallel basis for the first time in history. In the upcoming FY 2019 alone that will total $1.8 trillion, and it will only get worse from there.
Consequently, the dual centerpieces of the Donald's State of the Union address tonight couldn't be more ill-considered. That is, he intends to bash immigrants and flog even more public debt for infrastructure, defense, border walls and disaster relief.
Yet given the shrinking native-born labor force, which is already baked into the demographic cake in the form of 10 million fewer prime-age workers over the next two decades, Trump's planned drastic shrinkage of immigration is a colossal error. It will extinguish the only source of additional workers to grow the US economy in the decades ahead, as well as the new Tax Mules that will be urgently required in order to shoulder the massive Welfare State fiscal burden of 100 million prospective retirees by 2060.
At the same time, the Donald's planned borrowing spree is sure to be almost entirely wasted. We don't need any more national security than the $600 billion Trump inherited---so the $1 trillion extra he's requesting over the next decade is sheer economic waste, as is the Mexican Wall and border control.
As to the latter, if you want less crime and violence at the border, repeal the War on Drugs. If you want "legal" immigrants, give them a guest worker permit and a route to earning citizenship by paying taxes for a decade or longer.
But above all else, don't pile more debt on the public and private sectors to fund a Washington-based infrastructure pork barrel. It would actually retard long-term economic growth by misallocating capital and by raising the nation's $67 trillion total debt burden (public and private combined) by another $1.7 trillion.
Moreover, its political impact would be even worse because it amounts to declaring a bipartisan open season on domestic spending---even as it opens the door to every cockamamie excuse for Federal largesse that 535 Congressional politicians can conjure.
Thus, yesterday one Democrat Congressman demonstrated exactly the kind of historical and economic illiteracy that the Donald's infrastructure gambit will elicit. Complaining about the apparent White House requirement for an 80% local or private share of each project, he blathered as follows:
“When they built the Hoover Dam, they didn’t say, ‘Let the states do it,’ ” said Democratic Illinois Congressman Mike Quigley in an interview. “(President Dwight D.) Eisenhower didn’t say ‘We’re going to build the interstate system and the states will pay for it.’ ”
Well, no. Ike built the Interstate highway system on the principles of user fees (the Federal gas tax) and pay-as-you-go, not by resort to Uncle Sam's credit card. And Ike managed to balance the budget three times while doing so.
Likewise, the Hoover Dam was a New Deal economic boondoggle and environmental monstrosity.
It should never have been built. And it wouldn't have been if the Los Angelos residents who ultimately got the water and electric power had to pay for it; or if the farmers who made the desert bloom had to foot their share of the tab; or if the Las Vegas casinos that didn't exist in a tiny town of 5,000 in 1931 had been properly tariffed; or if the downstream watersheds that have been turned into salt deserts had been given a say.
As we said in Part 1, Federal infrastructure spending ultimately boils down to interstate theft. The appropriators with seniority, committee position and power get the pork and the rest of the country gets the bill. Invariably, the result is uneconomic and wasteful projects---like the Hoover Dam----that would never get built if they had to be paid for by direct users and local taxpayers.
So by opening up this can of worms and giving it Republican endorsement and sanction, Boondoggle Don is making a mockery of traditional GOP fiscal principles and is putting the torch to Federalism once and for all. What good are cities, for example, if they can't assess users for sewer and water facilities or require taxpayers and users to fund local bus and subway services?
Likewise, what's the point of state governments if they can't tax motorists using the streets and highways within their jurisdiction or impose taxes and user fees to fund the regional and local airports which serve their population?
Stated differently, nearly the entirety of the so-called infrastructure sector consists of local, not national, economics. What is the point of 89,000 units of state, county, city and other local governmental entities if they can't manage the various and sundry categories of public works and services within their jurisdictions?
When all of this gets federalized on an ad hoc basis, of course, you end up with the worst of all possible worlds. That is, random redistribution of resources among localities; waste and inefficient pork barrel allocation of funding; and a centralization of politics where the permanent governing class always wins and working taxpayers are left out in the cold.
So it is well to start with a basic proposition which puts the lie to the entire Trump infrastructure boondoggle. To wit, the only real case for Washington involvement in the nation's infrastructure is Ike's legacy project of maintaining the Interstate Highway System.
Moreover, the 47,700 miles of the Interstate System proper (1% of total national highway and street miles) is in pretty good shape, and from a funding point of view has most definitely not been neglected.
Since 1993, for example, public spending for highways and transportation construction generally has grown by 3.5% and 4.1% per annum, respectively. That was far more than enough to keep up with inflation----even though much of what was actually spent was redundant or wasteful.
More importantly, if additional "investment" is needed in the interstate highway grid, then the users should pay for it with a modest increase in the gasoline tax. Or better still, Washington merely needs to rescind the earmarks that divert more than half of the existing $35 billion per year of gas tax revenues to non-Interstate Highway uses.
To wit, state and local roads, mass transit, bike trails, walking paths, weed removal, transportation museums and countless other diversions. Absent these diversions, the Interstate Highway system would be in tip-top shape, in short order.
Beyond the latter, however, upwards of 95 percent of what passes for infrastructure investment — highways, roads, streets, bridges, airports, seaports, mass transit, water and sewer, the power grid, parks and recreation etc.----are the responsibility of the private sector and should be paid for by user fees or, arguably, constitute local public goods and amenities that should be funded from local taxes.
But give the Beltway lobbies and racketeers an inch and they will take a mile. After decades of federal mission creep, there is virtually no aspect of “infrastructure” spending that has not wormed its way into the federal budget. And after the Donald's massive proposed pork barrel, there is no possibility that it would ever be rolled back.
That’s why the nation has $20.5 trillion of public debt already---with $40 trillion baked into the fiscal cake under current policy by the end of the 202s. And that's also why Trump's infrastructure program will prove to be little more than a political sanction for the massive waste already embedded in the Washington Swamp.
Even in the case of just highways, the extent of mission creep and pork barrel politics is stunning. The 47,000 miles of interstate highways constitute only 1.1% of the 4 million miles of streets, roads and highways in the entire nation.
Indeed, the reason we have state, county, municipal and township government in the United States is precisely to take care of 99 percent of road surfaces that the great Dwight D. Eisenhower said should remain a nonfederal responsibility — even as he pioneered the Interstate highway system and trust fund.
Yet less than $15 billion, or one-third, of the Federal highway program goes to the Interstate Highway System Ike fathered. The rest gets auctioned off by the congressional politicians to state, county and local roads and to the far-flung array of non-highway purposes mentioned above.
At the end of the day, the entire dilapidated infrastructure meme is just bogus Beltway propaganda. It is cynically peddled by the construction and builder lobbies and by state and local officials looking to fob the bill onto any taxpayers except their own.
That is to say, when the Beltway bandits run low on excuses to run-up the national debt they trot out florid tales of crumbling infrastructure, including dilapidated roads, collapsing bridges, failing water and sewer systems, inadequate rail and public transit and the rest. This is variously alleged to represent a national disgrace, an impediment to economic growth and a sensible opportunity for fiscal “stimulus.”
In many cases, however, what the infrastructure lobbyists are really complaining about is economic outcomes they don’t like, not under-spending. For example, when they say that electrical power infrastructure has been underfunded, the data refutes that point instantly. Since 2004, construction spending for power utilities has, in fact, nearly tripled, as shown in the chart below.
What the advocates are really complaining about, however, is the fact than only a tiny fraction of the $100 billion per year spent on power construction has been allocated to "green" fuels such as wind and solar.
But that’s because it is not economically competitive, not because capital investment is being starved. After all, the overwhelming share of utility investment is accounted for by the private sector and is debt financed.
To borrow a phrase, the infrastructure propagandists are actually bringing coals to Newcastle. That is to say, thanks to the Fed’s misguided financial repression policies, long-term utility financing has never been cheaper in real terms.
The idea that there is a financing shortage for the single largest category of infrastructure spending---- utilities and power---- is just plain ridiculous. Indeed, the typical double-shuffle or hidden agenda of the infrastructure cheerleaders is revealed by the repeated claim that $30 billion is “wasted” each year due to inefficient power transmission.
Now, how in the world do they know that?
Of course, there is inherent frictional power loss in the process by which central-station bulk power is distributed through high voltage power lines and then across the local distribution grid. But it’s a matter of physics and economic trade-offs. If you invest a lot more in high performance transmission systems, you will absolutely get less power loss.
In any event, that’s a pricing issue and could readily be alleviated — to the extent that it exists — by intelligent rate reform. Dig deep enough, however, and it becomes obvious that a whole wing of the infrastructure lobby is really composed of radical environmentalists.
The infrastructure they want to replace is not crumbling and an impediment to economic growth; it’s actually a low-cost contributor to growth and jobs which happens to emit carbons.
In fact, this completely ulterior — and false — agenda against carbon emissions was actually admitted to — even if inadvertently — by a typical spokesman for the impending Trumpian style infrastructure boom:
“The wasted electricity from the obsolete power grid is the same as the output of 200 average coal-burning power plants— causing an extra 280 million tons of carbon to spew into the air each year.”
Right. Replace perfectly good conventional transmission capacity with ultra-high cost advanced transmission technology. That way you can add even more debt to the nation’s balance sheet and force the shutdown of perfectly serviceable coal-fired power plants, too!
Another category of alleged infrastructure starvation is waste water and sewage treatment, and here the story is even worse. Ever since the EPA started making multibillion-dollar grants for sewer plants during the early 1970s, municipalities have been wasting massive amounts of resources building over-sized plants, and then under-charging their business and residential customers for their use.
So the truth in this category is not starvation but economic obesity! Accordingly, under a regime of full economic pricing for waste treatment services the nation’s infrastructure budget for this category could be sharply reduced.
That’s because higher, unsubsidized prices at the municipal system intake pipe would cause an outpouring of technological innovation and practice changes among users and waste generators.
Such innovation and user conservation investments, in turn, would dramatically reduce the capacity requirements and cost of end-system treatment plants.
Moreover, even under the current system of waste treatment socialism, there are no facts whatsoever that support the starvation argument. Current annual spending for waste treatment has ranged between $22 and $26 billion per year. That’s 20 percent higher than 15 years ago — even after adjustment for the 25 percent gain in the GDP deflator during the interim.
Now, it is absolutely true that in selective localities in the U.S. there are obsolete sewage-treatment plants, just as in the case of roads and streets. But you can’t blame that on inadequate spending. The real problem is local government corruption, inefficiency, pork barrel politics and the excessive power of the municipal unions and the construction trades.
That’s true in spades for the local transportation sector. The disgraceful condition of roads and streets in places like New York City and Philadelphia, for example, is owing to the fact that billions have been siphoned off by drastically overpaid union labor and deeply corrupted contract award processes.
Needless to say, waste and corruption are the very opposite of a funding shortfall. In fact, nationwide highway spending has averaged between $80 and $95 billion since 2009 or about 30% higher in real terms than a decade earlier.
Moreover, if the voters really want better roads and streets throughout the localities of the nation there is one simple solution: raise state and local gas taxes and other user fees and tolls.
Stated differently, the proof is ultimately in the pudding. There is apparently nothing that Americans treasure more than their autos and the freedom to motor far and wide. If they can’t be persuaded to pay higher road taxes and tolls, then by definition there is not a “shortage” of highway investment.
At the end of the day, what is “crumbling” is not the nation’s infrastructure, but the case for deficit spending; that’s what the infrastructure brouhaha is all about. It’s just another variation of the misbegotten Keynesian notion that the state can command economic growth via borrowing or printing money in order to fuel “aggregate demand.”
Indeed, we do not need any more federal subsidies for any category of infrastructure— especially transportation. For instance, airport capacity and modernization is already being funded at $36 billion per year mainly from ticket taxes, general aviation user fees and the like.
If that isn’t enough, as indicated by air-traffic congestion and crowded airports, there is a simple solution. The 10 percent of the population that accounts for 90 percent of air travel should pay for higher investment spending via increased user charges on their tickets or landing fees on their G-5s.
Likewise, if the $65 billion currently being spent to subsidize the capital and operating costs of local mass transit systems is not enough, then let local taxpayers absorb the burden, not unborn generations that will inherent the nation’s $20 trillion public debt.
And when it comes to enhancing real economic productivity and growth, nothing could be more inimical than to pour tens of billions into hopeless white elephants like Amtrak and the high-speed rail boondoggles.
In short, the infrastructure bleaters have it exactly upside-down. The economic crisis confronting the nation is owing to the state getting way too big, not because public spending on infrastructure or anything else has been too small.
Needless to say, Boondoggle Don has no clue at all. His mindset is that of a Keynesian real estate developer: Borrow and spend, and the economics will take care of itself.
Unfortunately, that has actually been true for the past 40 years because the Fed's financial bubble kept inflating the value of real estate assets, and therefore the capacity to "extend and pretend" with respect to the associated debt.
That's all about to change, however. The fiscal chickens are coming home to roost and the Donald's infrastructure folly may be the catalyst that finally awakens the bond markets of the world to the "yield shock" that lies dead ahead.