Economic Policy Conservatives

In yesterday's Dallas Morning News, my former DC colleague Charles Blahous concludes his thoughtful op-ed on, Who will stop America's plunge into debt?, with the following:

One thing is for certain: Unless and until economic policy conservatives finally put the Trump years behind them, there will be no serious challenge to the left’s economic agenda, and the only debate will be over how rapidly to expand government. The contest over America’s economic future can only truly be joined if moderates and conservatives reunite to advocate for fiscal prudence and free economic activity, wielding the same energy and commitment that the left uses to pursue government’s expansion.

The first statement is true but it does not go far enough. It is a necessary but not sufficient condition.

Economic policy conservatives were on this road to ruin when Chuck and I both served on the Bush economic policy team. Not at our suggestion, the Bush administration passed a new Medicare Part D benefit that, at the time of its passing, had a larger projected unfunded liability than Social Security's projected unfunded liability, which was the fiscal threat that I went to Washington to help solve. My very first week on the job, I wrote a memo to try to get more means-testing onto that new entitlement. (Some of those ideas were later published here, alongside a similar analysis of the marketplace subsidies in Obamacare.) Prior to my arrival in DC, the Bush administration passed a series of so-called temporary tax cuts, almost all of which were eventually made permanent by the Bush and Obama administrations. When the latter did so in the face of the so-called "fiscal cliff" in early 2013, I referred to it as creating a fiscal grand canyon.

All of this happened before the Trump administration.What economic policy conservatives need to do to challenge the left's economic agenda is to acknowledge that:

1. Republicans have expanded our fiscal imbalances through entitlement spending when it suited their political interests.
   
2. Republicans have squandered resources in ill-conceived military operations in Iraq during the early part of this century.
3. Republicans have ignored fiscal balance over the last 20 years when passing tax cuts for the sake of passing tax cuts.
4. There are some valid reasons for the federal government to engage in deficit spending if needed, primarily when it benefits children who are born into challenging social and economic circumstances. (See this paper for an introduction.)
   

Economic policy conservatives, when they can acknowledge these things that implicate much more of the Republican Party's recent history than the Trump administration, might then be able to play a constructive role in countering the left's economic agenda. They are not credible elements of the economic policy process if they don't.

 

Hillary Clinton's Infrastructure Plan

It was almost eight years ago that I started writing about spending on infrastructure as a means of countercyclical fiscal policy. There was an op-ed in The Washington Post, followed by an essay in The Ripon Forum, as the Great Recession was beginning. I returned to it occasionally as the weak recovery and inelegant policy discussions of economic stimulus continued the need for a sensible plan to boost economic activity. This op-ed at U.S. News Economic Intelligence blog is a good example.

In the intervening time period, the American Society of Civil Engineers (ASCE) has updated its quadrennial Infrastructure Report Card. As of 2013, the costs to improve our D+ grade had reached $3.6 trillion. That far exceeds what we allocate to infrastructure investment over a reasonable period, and the additional $275 billion (perhaps coupled with private funds to reach a total of $500 billion) over 5 years that Hillary Clinton has proposed is a small step in the right direction.

What I find interesting about the proposal is less in the details and more in the possible timing. At present, the labor market is cresting. My preferred measure of the labor market is the initial claims for unemployment insurance. The latest estimates are posted each Thursday morning at this page. The latest 4-week moving average of initial claims was 271,000. We have been below 300,000 for over a year now, a threshold which has historically been associated with a growing economy. Between now and 2017, we can expect that series to start creeping back up to values that are less consistent with a growing economy.

So the interesting part of the proposal is that when a new president takes office in January 2017, economic growth will be slowing, and our friends at ASCE will be getting ready to release a new report card showing, I'm sure, an enormous infrastructure gap. Our friends at the Fed will have started to raise short term interest rates (maybe this month?), but they won't be very high by that time and so there won't be much room to cut. We will be relying once again on fiscal policy to smooth out a looming downturn.

I hope that 14 months from now, we are not scrambling around for "shovel ready" projects like we were in 2009. I also hope that our fiscal policy discussions are more elegant than "which expiring tax cuts should we hold our nose and continue to extend?" (correct answer: none, actual answer: almost all of them)

The time to set the stage for better policy options is now. Congress should make a prioritized list of the nation's infrastructure needs from the menu laid out by ASCE and its own objectives for improving sectors like energy, commerce, and transportation. Have the list ready to go in January 2017 when the new president takes office and when the economy will likely benefit most from increased public spending. That we would look like a functioning republic again is just an added bonus.

Not Much Grade Inflation Here

The American Society of Civil Engineers (ASCE) has released its 2013 Infrastructure Report Card, and the overall grade has inched up from a D in 2009 to a D+ this year. The estimated amount required to address deficiencies (to get a grade of B) is $3.6 trillion by 2020. As this table makes clear, of the $3.6 trillion, only $2.0 trillion is likely to be funded, leaving a $1.6 trillion gap. That's an additional $200 billion per year for eight years.

A lot of the infrastructure we have is at the end of its useful life. We continue to be lucky rather than smart in avoiding widespread failure. This is an important report that should be read and appreciated in Washington. Like many other advanced warnings, it is likely to be ignored until the subject becomes an imminent crisis.

At one level, the inability for the federal government to oversee adequate infrastructure is just another in a long line of failures of government to effectively do the things that even a person who believes in limited government would agree that it should do. Many of these projects, like transportation, energy, parks, drinking water, education, and waste management, have characteristics of public goods.

At another level, the continued deficiencies in infrastructure are a missed opportunity. This is a subject I have been following for over five years, in the context of what policy makers should have done differently with fiscal policy as the Great Recession began.  In two op-eds in early 2008, one in the Washington Post and the other in the Ripon Forum, I pointed out the connection between capital projects and how to deal with economic downturns. The prevailing wisdom for what to do during a downturn was deficit spending to boost economic activity in ways that are "timely, targeted, and temporary." I thought this was short-sighted -- the right thing to do during a downturn is to advance forward capital projects that have already been planned over a window of several years. You can only do that if you have made those plans. Good luck with that in a Washington policy-making climate that cannot agree on anything constructive.

What is saddest about today's report is that we are no closer to having a well defined plan for replacing antiquated infrastructure or adding critical infrastructure than we were four years ago. I wish more people in Washington would have appreciated the following simple insight. The best reason to do infrastructure spending in a downturn is not because of some mythical Keynesian multiplier. The best reason to do it is because you have to do it at some point and the cheapest time to do it is in a recession, when both labor and capital are underutilized and available more cheaply than in business cycle upturns.

In fairness to the Obama Administration, key advisers recognized the need for more government spending as the depth of the Great Recession became more apparent. It started with a change in language, as Larry Summers dropped the "timely, targeted, and temporary" mantra in late 2008 and substituted "speedy, substantial, and sustained over a several-year interval." But it wasn't clear to me at that point that the Obama team had connected this to infrastructure when they designed the stimulus bill that passed as the American Reinvestment and Recovery Act in early 2009. Provisions for "shovel-ready" projects and an infrastructure reinvestment bank are fine, but what ASCE's report makes clear is that these efforts are too modest. Even as the connection was made to infrastructure and the Obama Administration joined what I referred to as the "build while it's cheap chorus," the sheer dollars being proposed were too small, even today, compared to what the ASCE estimates we need.


My favorite saying is, "The best time to plant a tree is 20 years ago. The second best time is today." With economic growth still tepid and unemployment still above 7.5 percent, let's hope the newest report card is enough to motivate a renewed effort in Washington to combine sound fiscal policy with proper oversight of public goods and address this growing problem.