This election year, we are once again having a political debate with presidential nominees who are not incumbents; neither has a presidential track record to defend. But this time around there are three important economic issues over which there is some surprising bipartisan agreement: the need to rebuild America’s infrastructure; tax reform for a more efficient and fairer tax code; and reducing budget deficits over the long run. These are important economic issues, and they are worthy of reasoned debate.
The case for increased infrastructure spending is very strong because our infrastructure is in such bad shape after years of neglect and low investment. It is crazy that policymakers at all levels of government force Americans to drive on roads full of potholes and bridges that are structurally unsafe, and ride subways that break down. At the same time, it would be a mistake to ignore the size of the federal budget deficit and the consequences of a continuation of such deficits.
Economic growth today is very slow, but investing in infrastructure alone won’t solve that problem. Growth is weak because of two factors that are very hard to do anything about: the workforce is growing very slowly as the baby boom generation reaches retirement age, and productivity growth has been slower than at almost any time in the past. Improving infrastructure would increase economic growth, but not by much.
On the positive side, improving the country’s infrastructure would not be that expensive. Hillary Clinton is suggesting spending $275 billion on infrastructure and Trump at least twice that amount. But in both cases the spending would occur over many years and would not change the budget picture dramatically.
That’s not to say the deficit problem should be ignored. The case for deficit reduction is often made in terms of dire warnings about a fiscal crisis, but the crisis never comes. Why not? Investment in the United States and around the world has been weak, so private sector borrowing demand is low and that keeps rates low. And central banks around the world are trying to encourage growth, so they keep rates low, too. Rates could rise unexpectedly in the future, and it is possible that Congress would pass an infrastructure program right when businesses decided to start investing, big time. But if infrastructure spending constitutes only a modest addition to total spending each year, its contribution to any future interest rate surge would be tiny. And, in any case, if interest rates are rising, that would likely mean the economy is booming, which would hardly be the worst thing that could happen.
The concern about deficits is that unless something is done soon, the problem will continue and worsen to the point where debt becomes an unreasonable burden on future taxpayers. Large federal deficits have persisted through most years since the 1980s and have been paid for, directly or indirectly, through foreign borrowing. The U.S. was a net debtor to the rest of the world to the tune of $7.5 trillion at the end of the first quarter of 2016 — a legacy of foreign debt we are passing on to future generations. It is a manageable amount for now, but the demands of Social Security and Medicare make it virtually certain that spending on entitlements will rise faster than tax revenues at current levels. The result? We are on track for rising deficits and increases in the amount owed to foreigners unless something is done. And getting China to pay for our budget deficits in return for letting them flood our market with goods is not the right answer.
There is no easy solution to the problem of federal budget deficits. There is plenty of breezy talk about cutting “entitlements,” but voters consistently oppose cuts in Medicare or Social Security. There could be constructive dialogue about how to save money on Medicare. Some progress has already been made in holding down health-care costs. However, more could be done, for example, by giving Medicare administrators more power to negotiate prices with providers.
Getting rid of tax breaks is another favorite. But while this approach might help, the big money tax breaks are firmly entrenched and hard to eliminate. Corporate tax reform should be an important policy goal for the next administration, but it will be hard to justify passing tax increases on American business because we already have one of the highest corporate tax rates in the developed world — something that is encouraging American companies to move their headquarters overseas. Complaints about these companies’ disloyalty are futile in a world where capital is mobile. Instead, America must make itself an attractive location for business. Still, there are some tax breaks that can and should be scaled back. For instance, current taxes on carried interest and capital gains are too low.
It is possible to have a balanced budget. I was proud to be Chairman of the Council of Economic Advisers under Bill Clinton in 1999 and 2000, when the federal budget moved into surplus powered by strong economic growth, a tax increase, and serious bipartisan spending discipline. Unfortunately, the Bush administration and Republican Congress stepped up spending, cut taxes twice, and abandoned the bipartisan spending restraint rules known as PAYGO, putting us back into the deficit swamp.
The Great Recession of 2007 and the following slow recovery blasted another hole in the budget. And it will be harder to achieve a balanced economy today than it was in the 1990s because we are stuck in low growth mode and the workforce is aging. We can, however, ask the right questions and avoid snake oil promises. The presidential candidates should have a fruitful debate about both the need to improve infrastructure today and how to match the size of government to the amount voters are willing to pay over the next 10 years.