Friday, December 30, 2011

The Time to Invest in Infrastructure is Now.

As Paul Krugman notes in a recent post, it makes a lot  of sense to invest in infrastructure in hard times, like we're going through right now. One reason is that borrowing costs are low. Another and more important one is that the resources, including labor, that are put to work building roads or schools or whatever would otherwise be unemployed. So infrastructure investments put people back to work, and do so without depriving other sectors of the economy of the resources they need to do what they do.

Make sense? Unfortunately, as Krugman points out, state and local government investment in infrastructure has contracted over the past three years. Here's his chart showing the trends:

What happened here is that since state and local governments are usually required to balance their budgets, as the economy tanked and tax revenue dropped sharply, spending had to go down as well. This is one of the real pitfalls of requiring budgets to be strictly balanced over, say, a single year. When the economy turns down, balancing the budget means that states and local governments do exactly the wrong thing and reduce spending, which only makes the downturn that much greater. And it doesn't help at all if Republican legislators, as they did in Montana, grossly underestimate tax revenues (despite compelling evidence to the contrary) or promote fiscal austerity and "reducing the size of government" as a matter of ideology.

In the 2011 session, Republicans in the Montana legislature killed a bill to issue $100 million of bonds to finance infrastructure investment.. The state General Fund cost of issuing and servicing these bonds during the current biennium would have been a little less than $4 million, but even that the Republican majority, in a fit of misguided austerity, found unaffordable. Ironically, it turns out we have a lot more revenue - about $275 million worth - than we were willing to recognize we would when we balanced the budget. That's enough to pay the for infrastructure investments outright, without bonding. But when Democrats in early December asked the Revenue and Transportation Interim Committee to simply consider asking the 2013 legislature to do just that, the motion died on a party line tie vote.

The other irony here is that infrastructure investments not only stimulate the economy in the short run, they position it for sustained growth in the long run. One of the projects that would have been funded was the new College of Technology building in Missoula. The COT would have trained workers to prosper in a new, dynamic and changing post-recession economy. But for the moment, it appears, that's not  an investment in our kids' future we are prepared to make.

"Fiscal austerity," may sound good, but at best it's penny wise. And pound foolish. 

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