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Wednesday, January 31, 2018

Art Perlo:A quiet Wall Street coup-de-etat pulled off in Connecticut

Thought you might be interested in my most recent story. Although it deals with CT,  I wouldn't be surprised to see this cropping up in other states. Maybe it already has -- if so, please let me know. Thanks. --Art Perlo

http://www.peoplesworld.org/article/a-quiet-wall-street-coup-de-etat-pulled-off-in-connecticut/

"The most immediate priority is to urge the repeal of the bond lock, before it goes into effect in May. Once that happens, it will be far more difficult to fix Connecticut's regressive tax and spending priorities."
A quiet Wall Street coup-de-etat pulled off in                      Connecticut
Rally against budget cuts at state capitol. | Art Perlo/PW

A quiet coup-de-etat has taken place in Connecticut. The legislature has effectively turned over control of the state to Wall Street. This was the conclusion I drew from a presentation by Connecticut Voices for Children.

After four months without a budget in the summer and fall of 2017, the state's legislature and governor reached a budget deal. Ruling out any new taxes on the rich or giant corporations, the budget increased taxes on middle and lower income working people, imposed further cuts on public workers including a special tax on teachers, and continued years of austerity cuts to almost every state program.

But that wasn't enough for the corporate forces. As part of the budget deal, they got four stealth provisions. Together, they not only enact austerity in this budget — they cast austerity policies in concrete. And — they bind four handcuffs of gold on future governors and legislators by making it legally impossible to undo the damage!

The Four Golden Handcuffs

1) Spending cap. A spending cap was written into the state constitution in 1989. It means that state spending can never grow faster than inflation or personal income. Then, in 2017, the legislature tightened the cap to apply to additional forms of spending. Some implications:

  • Aid to distressed municipalities will now fall under the cap. If the state helps a struggling city, it will have to cut education, or state parks, or children's services by an equal amount.
  • Contributions to the state workers' and the teachers'  retirement funds will fall under the cap after 2022 and 2026. Each of these funds is likely to require substantial increases in contributions. The cap will require that those increases be balanced by equal cuts elsewhere. In one not-unlikely scenario, up to $4 billion — about 20% — would have to be cut from the general fund.

2) Volatility cap. If the state gets larger-than-last-year revenue from certain income tax receipts, it is not allowed to spend that money. Instead, the extra must be deposited in the state's "rainy day fund." This cap applies only to "estimated and final" income tax returns — the quarterly returns filed mainly by wealthy people, including most income from dividends and capital gains.

This sounds sensible. Dividends and capital gains income fluctuates from year to year. The cap means that extra income this year can go to cover a shortfall next year. But there's a catch.

The volatility cap applies to all increases, instead of unexpected increases. For example, the legislature could tax dividends and capital gains, recovering some of the huge giveaway the Republican/Trump tax law gave to rich people. The additional revenue would not be unexpected, but it would still fall under the cap — the state would not be allowed to spend it!

Taxes paid by working families do not fall under the cap. If the state needs to raise more revenue to cover budget shortfalls, it can increase the sales tax, or the income tax on wages (which is paid through witholding, not through  "estimated and final" returns). The additional revenue could be used normally. But taxes on the rich are mainly collected through "estimated and final" returns, and therefore could not be used.

So the volatility cap as implemented encourages an even more regressive tax system which shifts the burden from the rich to everyone else.

3) Bond cap. This was already in place, but new rules make it stronger. This is a hard limit of $1.9 billion on issuing bonds. The amount can be increased each year only by an inflation adjustment. What if there is an emergency infrastructure need? Or what if there is an economic crisis as in 2008, when interest rates are extremely low and there are idle resources and high unemployment? That is an excellent time to increase public spending on infrastructure — but the bonding cap would prevent it.

4) Bond Lock. This is the real poison pill. Beginning in May 2018,  every new bond issued by the state will include a pledge not to change other caps. That completely ties the legislature's hands. Suppose a future governor and legislature is elected on the pledge to enact a millionaire's tax to deal with spiking pension costs (not a bad idea!). That would violate both the spending cap and the volatility cap. Presumably, Wall Street bondholders could get a court injunction to stop us.

This goes even beyond anything we have seen before. Even when technical problems are found in the legislation (as is almost always the case), it will be impossible to fix them. The bond lock makes a mockery of our elections and the right to vote. We can elect anyone we want, but effective control of the state will be turned over to the big investors who buy Connecticut bonds.

The Fallacy

All of these measures are sold on the premise that Connecticut is in trouble because irresponsible lawmakers have spent money they didn't have, borrowed too much, and made promises for future generations to keep. Therefore, it is necessary for legislators to tie their own hands. Despite grains of truth, those arguments miss the major causes of Connecticut's crisis, and therefore offer the wrong cure.

The money Connecticut has spent and promised has overwhelmingly gone to meet real needs. In fact, in a state with one in eight children living below poverty, with vast inequality in education, with a growing backlog of transportation infrastructure maintenance — to meet the needs of the state's residents and secure our future, there should be more spending, not less.

The legislature's failure has been to allow a regressive tax structure to continue. The wealthiest households face a state and local tax burden that is about half the rate paid by the rest of the residents. If the rich had been paying the same tax rates as everyone else, pensions could have been fully funded, debt would be lower, and there would be no crisis. If the rich started paying their share now, Connecticut could end its austerity policies and begin to restore services and investments.

There are a number of useful and possible reforms in how the state spends money. But without increased revenue from those who can afford it, those reforms would have little effect. And "reforms" like the golden handcuffs — the spending cap, bond cap, volatility cap and bond lock — only make matters worse by making it almost impossible to raise and spend the needed revenue.

Conclusion

Over the next ten years, Connecticut faces increased costs. The golden handcuffs adopted in 2017 guarantee a sharply shrinking pie for operation of the state: education, children, elderly, health care, public safety. The effects will be felt from state parks to DMV offices. When we call to complain, there will be no workers left to answer the phones.

We will see continuing attacks on public workers and public services, and increased pressure to turn over everything — schools, transportation, public safety — to private corporations for their own profit. Everyone (except the very wealthy) will be pitted against one another for a rapidly shrinking slice of the pie.

Unions, the DUE Justice Coalition, advocacy groups like CT Voices for Children, and progressive state legislators are advancing positive alternatives.

The most immediate priority is to urge the repeal of the bond lock, before it goes into effect in May. Once that happens, it will be far more difficult to fix Connecticut's regressive tax and spending priorities.



--
John Case
Harpers Ferry, WV

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Dan Little: Declining industries [feedly]

Declining industries
http://understandingsociety.blogspot.com/2018/01/declining-industries.html

Why is it so difficult for leaders in various industries and sectors to seriously address the existential threats that sometimes arise? Planning for marginal changes in the business environment is fairly simple; problems can be solved, costs can be cut, and the firm can stay in the black. But how about more radical but distant threats? What about the grocery sector when confronted by Amazon's radical steps in food selling? What about Polaroid or Kodak when confronted by the rise of digital photography in the 1990s? What about the US steel industry in the 1960s when confronted with rising Asian competition and declining manufacturing facilities?

From the outside these companies and sectors seem like dodos incapable of confronting the threats that imperil them. They seem to be ignoring oncoming train wrecks simply because these catastrophes are still in the distant future. And yet the leaders in these companies were generally speaking talented, motivated men and women. So what are the organizational or cognitive barriers that arise to make it difficult for leaders to successfully confront the biggest threats they face?

Part of the answer seems to be the fact that distant hazards seem smaller than the more immediate and near-term challenges that an organization must face; so there is a systematic bias towards myopic decision-making. This sounds like a Kahneman-Tversky kind of cognitive shortcoming.

A second possible explanation is that it is easy enough to persuade oneself that distant threats will either resolve themselves organically or that the organization will discover novel solutions in the future. This seems to be part of the reason that climate-change foot-draggers take the position they do: that "things will sort out", "new technologies will help solve the problems in the future." This sounds like a classic example of weakness of the will -- an unwillingness to rationally confront hard truths about the future that ought to influence choices today but often don't.

Then there is the timeframe of accountability that is in place in government, business, and non-profit organizations alike. Leaders are rewarded and punished for short-term successes and failures, not prudent longterm planning and preparation. This is clearly true for term-limited elected officials, but it is equally true for executives whose stakeholders evaluate performance based on quarterly profits rather than longterm objectives and threats. 

We judge harshly those leaders who allow their firms or organizations to perish because of a chronic failure to plan for substantial change in the environments in which they will need to operate in the future. Nero is not remembered kindly for his dedication to his fiddle. And yet at any given time, many industries are in precisely that situation. What kind of discipline and commitment can protect organizations against this risk?

This is an interesting question in the abstract. But it is also a challenging question for people who care about the longterm viability of colleges and universities. Are there forces at work today that will bring about existential crisis for universities in twenty years (enrollments, tuition pressure, technology change)? Are there technological or organizational choices that should be made today that would help to avert those crises in the future? And are university leaders taking the right steps to prepare their institutions for the futures they will face in several decades?

 -- via my feedly newsfeed

Weed Prices Across USA [feedly]

Weed Prices Across USA
http://ritholtz.com/2018/01/weed-prices-across-usa/

Marijuana Mapped: the Price of Weed Across the U.S.

 Updated on 

It's relatively cheap in Seattle, and L.A. and San Francisco are pretty competitive, but it's an entirely different story on the East Coast, especially in the nation's capital.

We're talking marijuana prices, of course. According to the 2018 Cannabis Price Index, a study compiled by Seedo, a Tel Aviv-based company that produces devices for home growers, the average cost in Seattle is $7.58 a gram, while it's a whopping $18.08 in Washington. In New York City, which consumes more marijuana than any other metropolis on Earth, the average price is $10.76.

According to Seedo, the data (collected in December and January) matters because it helps to show the kind of tax revenue that could be collected if weed was legalized -- something that Canada plans to do later this year. In Toronto, where the price is C$9.64 ($7.82), the city could generate as much as C$152 million per year if it levied tax at the same rate as cigarettes, the study shows, while the Big Apple could collect $354 million.

It's still unclear how Canada will actually set prices. Federal and provincial governments have agreed to split the proceeds from cannabis taxes, with 75 percent of the proceeds going to provincial authorities, who will oversee cannabis distribution.



 -- via my feedly newsfeed

Can Economic Populism Preempt Political Populism? [feedly]

Can Economic Populism Preempt Political Populism?
https://www.project-syndicate.org/videos/can-economic-populism-preempt-political-populism

Harvard University Professor Dani Rodrik argues that while political populism stifles pluralism and undermines liberal democratic norms, economic populism is occasionally necessary. In some cases, it may even help forestall the arrival of its more dangerous cousin.

 -- via my feedly newsfeed

“Inflicted Starvation”: The link between conflict and famine [feedly]

"Inflicted Starvation": The link between conflict and famine
http://www.globalpolicyjournal.com/blog/31/01/2018/%E2%80%9Cinflicted-starvation%E2%80%9D-link-between-conflict-and-famine

"Inflicted Starvation": The link between conflict and famine

Haisley Wert - 31st January 2018

Haisley Wert, MSc Development Management candidate, reflects on a recent public lecture from Alex de Waal, Executive Director of the World Peace Foundation and Research Professor at The Fletcher School, about his new book, Mass Starvation: The History and Future of Famine

Alex de Waal, Executive Director of the World Peace Foundation and Research Professor at The Fletcher School, squarely addressed dangerous misconceptions about starvation during the lecture "Mass Starvation: The History and Future of Famine". Hosted by the LSE Firoz Lalji Centre for Africa on the evening of Thursday, January 25th, 2018, he was joined by discussants Clare Short, Former UK Secretary of State for International Development, and Professor Mary Kaldor, Director of the Conflict and Civil Society Research Unit at the LSE. The talk accompanied the recent release of Professor de Waal's book by the same title.

Clare Short lauded his clarity and resonance in the publication, explaining: "a lot of the [famine] discussion…is so emotional…[that] it's ignorant… The value of the book is to make discussion much more informed about what causes hunger and famine". de Waal changes the conversation, escorting starvation (the causal and controversial cousin of famine) into the room and appropriately politicizing it.

Mass starvation, he implored, is the "issue of our time". Yet, it is conceived of as an archaic misfortune, confined vaguely to the great geographical expanse of Africa. There is the misperception that technology is eclipsing its ravages, as people conflate famine with chronic hunger, ameliorated in the public eye by new food production mechanisms that are boons to swelling, increasingly urbanized amalgamations of populations.

"Just google 'famine'", he readily and not-so-rhetorically insisted, pulling up quadrants of images summoned by the search engine. One doesn't need to scour all corners of the internet to observe that famine conjures images of deserts, atrophied crops, and skeletal subjects. The narrative around famine is abstract and pity-based, rather than empirically-grounded and infuriating. In response, de Waal systematically and substantively unpacks seven main famine fictions in his work. Bookending the collection are two weighty and resolute ideas that redress the problem and reinforce the solution:

Starvation is the problem, and famine is the outcome. It comes from the transitive verb, to starve, which means that humans inflict it upon each other. In fact, the man who coined the word 'genocide' focused more intently on rations over gas chambers. We need to shift out attention to the man-made atrocity of the problem.

And, as alluded to, which also served as a pre-Question and Answer parting note:

"We must celebrate the global liberal humanitarian world order…" so that we can uphold it. We have welcomed in the changing time of decreasing autocracy, openness, informational freedom, more democracy, and correspondingly, heightened responsiveness and accountability of publics and governments. De Waal metaphorically contextualized his argument: if the peasant were analogously up to his or her neck in water before, in effect, liberalism has lowered the water level. Small waves could no longer sweep him under. But there is never a moment where democratic values should be taken for granted, as "large rogue waves" are increasingly common and devastating.

Development economist Amartya Sen would take heart in this entreaty. As he wrote in his 1999 piece, Democracy as a Global Value, "in the terrible history of famines in the world, no substantial famine has ever occurred in any independent and democratic country with a relatively free press" (Sen 1999: 7 and 8). This greater call to value civic engagement and uphold democratic duty is practicable on even the level of the individual.

Broadening his case, at the core of de Waal's argument are seven terse truths that international constituencies need to confront to end mass starvation as a war-implement:

  1. Famines are "less lethal" than they have been in any previous time. Although they have instigated over 100 million deaths since 1870, about 40 years ago, this death toll plummeted off a graphic precipice. The consequence of famine now is migration. With a well-enacted and cohesive strategy in action, famines are possible to end.

  2. The most "recent leading cause" of famine is armed conflict. Subsequently predominant factors include active political repression and emerging from an armed conflict. These three statuses make up more than 75% of all famines. The remaining quarter or so of famines, that occurred without conflict or repression, are largely featured in the nineteenth century.
  3. Famine is not mainly an African phenomenon. Between 1870 and 2010, about half of all famines occurred in China. Only 10% of famines occurred in Africa, as inflicted in the colonial and post-colonial periods, and they are much less severe.

  4. Famines are "exceptional and multi-causal". With the exception of China in the 1950s, in most famines, infectious diseases perpetrate murder in numbers far greater than any other factor. Some famines are directly inflicted by poor governance. Other political reasons, alongside ecological or economic events, can also influence conditions of starvation.

  5. Starvation is not caused by over-population. Food consumption is a relatively "small drag on our resources". As we approach finite boundaries, "the pinch will be felt somewhere else".
  6. Famines are inflicted along four degrees of intention, three of which are anthropocentric. Second degree famines, "famines of recklessness", where "public authorities pursue policies that are the cause of famine, [of which] they are aware", have been the most prominent degree of infliction in contemporary times. Mass starvation in Yemen, a result of the Saudi and Emirati blockade (as supported by the United States and United Kingdom) is an example of second degree famine.

  7. "There is enough law on the books to criminalize famine", and the fact it hasn't been "publically vilified" is a problem of misinformation and apathy. Alex de Waal calls for a commitment where "leaders will not let this occur, and the public will demand this of them". Clare Short agreed that criminalization of starvation would be critically conducive to its amelioration.

Alex de Waal confronts starvation in a pithy and powerful way, dispelling a pervasive and fundamentally misled public narrative. We must necessarily understand mass starvation as a human-made tool of repression to effectively engineer its demise.



 -- via my feedly newsfeed

Bernstein:Real-time estimates of potential GDP: An important, new paper from the Full Employment Project [feedly]

Real-time estimates of potential GDP: An important, new paper from the Full Employment Project
http://jaredbernsteinblog.com/real-time-estimates-of-potential-gdp-an-important-new-paper-from-the-full-employment-project/

You ask me, the important DC event of the moment wasn't last night's State of the Union address. It's the far less scrutinized meeting going on at the other end of town, over at the Federal Reserve.

Later this afternoon, the Fed's interest-rate-setting committee will release their monetary policy statement. They are widely expected to pause this month in their "normalization" campaign, i.e., not further raise the interest rate they control.  But their statement will likely reinforce their view that the economy is at full employment, its resources are fully utilized, and their policy thrust will continue to shift from achieving full employment to maintaining price stability. Simply put, more rate hikes are forthcoming.

Their view is not broadly supported by the inflation data, as I'll show in a moment, but according to an important new paper released this morning by CBPP's Full Employment Project (FEP), the Fed's perspective, along with that of other influential economic institutions, like the CBO, has a more fundamental problem: potential GDP is higher than they think it is.

Potential GDP is the level of economic output produced by an economy at full utilization. If you think of the economy as a water glass, full employment implies the glass is filled to the brim. Now, if you're the Fed, to avoid a spill (inflation), you must stop pouring when you think you're at the brim. But what if the glass is bigger than you thought? Then the risk is that you'll stop pouring too soon, at great cost to those who haven't yet had a drink!

Our new FEP paper, by Olivier Coibion, Yuriy Gorodnichenko, and Mauricio Ulate (CGU) makes precisely that latter case:

"CBO's and other similar estimates of potential output are too pessimistic, and as such, they encourage policymakers, such as those at the Federal Reserve, to accept lower levels of potential than those which could be achieved. This pessimistic view and associated policies could be extremely costly to U.S. households…Most recently, this has led to some frequently used estimates of potential GDP that are as much as $1.2 trillion, or nearly $10,000 per household, below our preferred estimate."

What do CGU know that the potential-GDP low-ballers don't? They borrow a statistical method from a paper by Blanchard and Quah that they claim does a better job separating out temporary and permanent shocks to the economy, thereby getting a more accurate bead on the size of the water glass.

Here's why that's so important. Suppose the economy gets whacked by a negative shock like the bursting of a credit bubble. Demand falls sharply and a bunch of people temporarily leave the labor market. A bunch of firms cut back on their investment. Recession ensues. That's a classic, temporary demand shock. The fundamental supply factors that drive long-term economic growth—labor supply, innovation, the amount of capital per worker—haven't been permanently thrown of course. Once balance sheets recover and credit flows resume, the economy should make up its losses and revert back to its previous growth rate.

Contrast that with a permanent supply shock, like the one with which we and some other advanced economies are currently dealing: an aging population. Absent a big increase in immigration flows (now we're back to Trump's speech), that lastingly slows the long-term growth of the labor force and thus lowers potential GDP.

The problem that CGU document is that current statistical methods employed by the Fed, CBO, and others conflate these two types of shocks, often mistaking temporary downgrades for permanent ones. That, in turn, leads policy makers, like those meeting across town as we speak, to underestimate the size of potential GDP. There's more room in the glass than they think.

To be clear and fair to all, no one, including CGU, knows the actual size of the glass, which is growing and shrinking all the time in ways that are beyond our capacity to accurately measure, especially in real time. So, while their method is an improvement over the dominant ones in use today, we must be humble about our ability to accurately measure potential.

This is one of the points emphasized by Olivier Blanchard (recall that he was one of the progenitors of the method used by CGU) who was kind enough to provide the FEP with a short comment on CGUs paper. Blanchard writes:

"The basic point of the note by Coibion et al is an extremely important one. Current methods of estimation of potential output do not distinguish between different sources of shocks behind output fluctuations…[CGU's analysis] is clearly an improvement upon existing methods…But there are limits to it.  Some of these limits can be addressed, by looking at more variables, and so on. Some not so easily. In short, it is a better tool, but it is not a magic one. It must be added to, not replace, the existing panoply.

To me, the best tool remains the inflation signal, at least as far as the labor market, and unemployment, goes. Inflation is the canary in the mine, and a very reliable canary. If the labor market is too tight, if unemployment is below the natural rate, workers will ask for higher wages, firms will be willing to offer higher wages either to keep them or recruit new ones, firms will start increasing prices in order to cover higher marginal cost, etc."

Which brings us full circle back to the Fed's meeting. The last reading of their preferred inflation gauge—the core PCE—was up 1.5 percent in 2017, another in a multi-year series of downside misses re their 2 percent target. Some gauges of inflation expectations are tilting up some, and market interest rates have nudged up a bit too, but none of the indicators are signaling serious price pressures. I agree with Blanchard re the limits of CGUs or anyone else's statistical estimates of potential GDP. But the fact is that the inflation record is strongly consistent with their findings.

We must, therefore, consider the possibility that the glass is bigger than we thought it was, that current methods conflate temporary with permanent shocks, and that there's more space between actual and potential GDP than the Fed thinks. Closing that gap could make a world of difference to those who are still thirsting for the benefits of the current expansion to come their way.



 -- via my feedly newsfeed

Links for 01-30-18 [feedly]

Paul Krugman: Bubble, Bubble, Fraud and Trouble [feedly]

Paul Krugman: Bubble, Bubble, Fraud and Trouble
http://economistsview.typepad.com/economistsview/2018/01/paul-krugman-bubble-bubble-fraud-and-trouble.html

"This will end badly":

Bubble, Bubble, Fraud and Trouble, by Paul Krugman, NY Times: The other day my barber asked me whether he should put all his money in Bitcoin. And the truth is that if he'd bought Bitcoin, say, a year ago he'd be feeling pretty good right now. On the other hand, Dutch speculators who bought tulip bulbs in 1635 also felt pretty good for a while, until tulip prices collapsed in early 1637.
So is Bitcoin a giant bubble that will end in grief? Yes. But it's a bubble wrapped in techno-mysticism inside a cocoon of libertarian ideology. And there's something to be learned about the times we live in by peeling away that wrapping. ...
In principle, you can use Bitcoin to pay for things electronically. But you can use debit cards, PayPal, Venmo, etc. to do that, too — and Bitcoin turns out to be a clunky, slow, costly means of payment. ... There's really no reason to use Bitcoin in transactions — unless you don't want anyone to see either what you're buying or what you're selling, which is why much actual Bitcoin use seems to involve drugs, sex and other black-market goods. ...
So are Bitcoins a superior alternative to $100 bills, allowing you to make secret transactions without lugging around suitcases full of cash? Not really... Bitcoin ... is ... an asset whose price is almost purely speculative, and hence incredibly volatile. ...
Oh, and Bitcoin's untethered nature also makes it highly susceptible to market manipulation. ...
But what about the fact that those who did buy Bitcoin early have made huge amounts of money? ...
As Robert Shiller, the world's leading bubble expert, points out, asset bubbles are like "naturally occurring Ponzi schemes." Early investors in a bubble make a lot of money as new investors are drawn in, and those profits pull in even more people. The process can go on for years before something — a reality check, or simply exhaustion of the pool of potential marks — brings the party to a sudden, painful end.
When it comes to cryptocurrencies there's an additional factor: It's a bubble, but it's also something of a cult, whose initiates are given to paranoid fantasies about evil governments stealing all their money (as opposed to private hackers, who have stolen a remarkably high proportion of extant cryptocurrency tokens). ...
So no, my barber shouldn't buy Bitcoin. This will end badly, and the sooner it does, the better.


 -- via my feedly newsfeed

Three Key Questions About the Trump Infrastructure Plan [feedly]

Three Key Questions About the Trump Infrastructure Plan
https://www.cbpp.org/research/federal-budget/three-key-questions-about-the-trump-infrastructure-plan

As part of his State of the Union address on Tuesday, President Trump is expected to make a pitch for Congress to act this year on an infrastructure package that he has described as investing $1 trillion or more.  His Administration has promised it will release an initial proposal to kick off the legislative process in the coming weeks.

Trump's promise to invest more than $1 trillion in infrastructure isn't new: he first made that commitment months before the 2016 election, though his Administration did not provide further details through his first year in office.  But as we await a more detailed proposal, several questions should be considered in evaluating a potential infrastructure plan.  First, will the plan reflect a meaningful — and much needed — boost in federal infrastructure spending, or will any new resources be offset by other policy changes the Administration favors that would reduce other support for infrastructure over time?  Second, will the proposal be designed in a way that funds necessary infrastructure — or will it prioritize projects that provide profitable returns for wealthy investors and end up excluding many of the most needed investments?  Finally, will the proposal include budget cuts designed to "pay for" the package that would harm low- and moderate-income people?

Will Trump's Plan Boost Federal Infrastructure Funding?

BE ON THE WATCH FOR A "BAIT AND SWITCH" AT THE HEART OF HIS PROPOSAL — PROPOSING A HIGH-PROFILE NEW INITIATIVE WITH ONE HAND WHILE TAKING AWAY IMPORTANT FUNDING FROM INFRASTRUCTURE WITH THE OTHER.In his address, President Trump will likely tout a $1 trillion-plus infrastructure program that would be supported by $200 billion in federal resources.  But his agenda to date suggests that we should be on the watch for a "bait and switch" at the heart of his proposal — proposing a high-profile new initiative with one hand while taking away important funding from infrastructure with the other.

As described below, the new commitment may be far less than advertised.  Even as the White House focuses on the trillion-dollar number, the actual federal commitment will be only a small fraction of that, and it may be poorly targeted.[1]  And the Administration has made clear, in its fiscal year 2018 budget and other public statements, that it intends to pursue simultaneous cuts to other infrastructure spending — putting forward cuts that, even when combined with a new initiative, would eventually reduce annual federal funding for surface transportation over time.

Last week, at a conference with the U.S. Conference of Mayors, White House lead infrastructure advisor D.J. Gribbin suggested that the Administration would support cuts to programs like mass transit and Amtrak to help pay for the new initiative.[2]  This approach would be consistent with the President's fiscal year 2018 budget, which proposed $2 billion in immediate cuts to discretionary funding for the Department of Transportation from 2017 to 2018, including a 49 percent cut to Amtrak, a 49 percent cut to mass transit capital investment grants, and elimination of the TIGER program, which has supported some of the most innovative local infrastructure projects over the last eight years.  The 2018 Trump budget also called for an 18 percent cut to the Army Corps of Engineers' civil works programs, which support construction, maintenance, and operation of things like inland waterways, dams, flood control structures, and harbors.  It also proposed eliminating Agriculture Department programs that assist rural communities in building and upgrading drinking water and wastewater treatment systems, and sharp cuts to Department of Housing and Urban Development programs that fund renovation and construction of affordable housing.

While the 2018 budget did not specify funding levels for these programs beyond 2018, the cuts would likely grow for the rest of the decade, as the budget proposed growing cuts in overall non-defense appropriations,[3] the budget category that includes a substantial share of transportation funding.  If funding for the Departments of Veterans Affairs and Homeland Security (both of which the budget would increase in 2018) were to grow just with inflation between now and 2027, other domestic programs — including programs that fund infrastructure investments — would be cut in half, on average.  And with the total cuts in non-defense discretionary funding growing steadily, the Transportation Department cuts almost certainly would grow after 2018 as well.

And on top of those cuts, the Trump Administration has proposed what would be in effect a major and permanent cut in the Highway Trust Fund. Currently, dedicated revenues for the Highway Trust Fund are insufficient to cover ongoing "baseline" surface transportation spending from year to year, largely due to the erosion over time of the value of the gas tax, the trust fund's main revenue source.  In response, lawmakers have repeatedly passed legislation transferring money into the trust fund to keep infrastructure spending from falling, most recently in 2015 with the FAST Act, which fully funded the trust fund through 2020.[4]

President Trump's budget proposed a radical departure from that approach, proposing that — beginning in 2021 — the Highway Trust Fund spend no more in a given year than the dedicated revenues it receives.  In practice, that would mean significant cuts in Highway Trust Fund spending that would grow over time, reaching $20 billion a year by 2027 and extending indefinitely.[5]  And importantly, while this decline in Highway Trust Fund spending is a sharp departure from past policy, it does not require any special action; it is the policy outcome that will occur if Congress doesn't act to bolster Highway Trust Fund revenues. 

Within a few years, the overall net impact of these policies — the new $200 billion Trump initiative combined with the cuts to Highway Trust Fund spending and other transportation programs — would be large and growing annual cuts in infrastructure spending.  As the Congressional Budget Office noted in its analysis of the President's 2018 budget, "The President's proposals for discretionary spending would reduce appropriations for other accounts that provide funding for infrastructure, such as those for ground transportation and water resources.  Those reductions would largely offset the proposed increase in mandatory spending on infrastructure [the placeholder for a new initiative] over the 2018-2027 period."[6]  The combined impact of the Trump Administration's policies should be considered in evaluating any infrastructure plan — especially since an infrastructure package passed now may remove future pressure for Congress to address Highway Trust Fund gaps or to provide more robust federal funding for infrastructure.

Will the Plan Support the Infrastructure Projects We Need Most?

The second question to consider in looking at a new infrastructure proposal is what kinds of projects it will support.  A leaked draft of the White House's plan[7]and previous Administration statements give significant reason to be concerned that President Trump will pursue an approach that would not support many needed projects, while shifting costs to states, localities, and individuals and potentially providing opportunities for lucrative private-sector gains.  And Trump's approach may be especially inadequate in providing for investment in areas that the Administration is simultaneously proposing to cut, like mass transit.

The core of this approach can be seen in the leaked draft's commitment to direct half of any new funding towards an "Infrastructure Incentives Initiative."  According to the draft, this initiative would provide grants for a range of projects to entities that include states, localities, nonprofits, and private entities with public sponsorship.  But the initiative would also require that any federal grant account for no more than 20 percent of a project's cost.  Fully 70 percent of the selection criteria would be based on the ability to secure non-federal revenue to pay for a project.  In other words, this initiative's primary purpose is to find someone else to provide most of the revenues needed to build new infrastructure.

Of course, if designed correctly, securing additional investment from non-federal entities — including states, cities, nonprofits, and the private sector — could well be part of a comprehensive approach to rebuilding our nation's infrastructure.  But focusing so much of a new initiative on outside investment stacks the deck in favor of certain projects at the expense of others, and risks underinvesting in areas of greater need.

First, any promise that the package adds up to $1 trillion or more in investment — despite providing only $200 billion in federal resources — is likely an illusion, even setting aside the potential cuts described above.  It hides the fact that delivering on the President's promised infrastructure investments would be possible only by shifting the costs to states and cities, which must raise their own revenues, or to individual citizens in the form of tolls or fees that would make a project attractive for private investors.  If another entity must pay for at least 80 percent of a project's cost, the Administration is effectively punting on how the revenues to pay for new infrastructure will be found.  As a result, any claim that the plan is supporting a certain amount of infrastructure investment (by, for example, multiplying the appropriation by five) is far less than meets the eye — ignoring the fact that the investment will only occur if states, cities, and individuals are willing and able to pay more.

Second, this approach likely limits these grants to a pool of projects that can most easily attract outside funding, which would exclude some of the most needed investments.  If states and cities are to provide financing, only those states and cities that have the ability and the political will to raise new revenues from taxes will be able to benefit, leaving some of the areas most in need of infrastructure investment even further behind.  At least 30 states closed budget shortfalls this year or last year,[8] and states' fiscal situations are uncertain in the wake of the tax bill.

Alternatively, if the plan relies on public-private partnerships, it would prioritize investments that produce a commercial return (typically, those that can raise fees from users).  So while the leaked plan draft suggests that a broad range of infrastructure types would be eligible, projects like repairing bridges, filling potholes, or providing clean water in low-income communities would be difficult to fund, as they don't lend themselves to tolls or other revenue streams.  And other areas with pressing infrastructure needs — like renovating affordable housing or modernizing public schools by, for example, providing adequate heating and cooling or other basic repairs — aren't made eligible for grants at all in the draft plan.  At the same time, the financing of these projects, including through regressive taxes, could put a greater burden on low- and moderate-income people, who already tend to pay a greater share of their income (and time) on transportation.  That would be an especially troubling outcome in the wake of a tax bill that disproportionately benefits the wealthiest Americans.

Finally, under this structure, public funds could simply provide a windfall for projects that might occur anyway or that have little public benefit.  So long as a private investor can secure the sponsorship of some public entity, it could be eligible for a federal grant — even, if it were building infrastructure that overwhelmingly benefitted wealthier communities.  Further, spurring "economic and social returns on investment" would account for only 5 percent of the selection criteria, according to the leaked plan.  This means that a basic idea behind government investment in infrastructure — providing for public goods with widespread benefits that would not be supported through other means — would be deprioritized substantially relative to a grantee's ability to raise funds independently.  The public benefits of any new investments also could be undermined if, as reported,[9] they come with a significant rollback of environmental protections.

Some other components of the draft plan, like grants for rural infrastructure, would be predominantly provided by an allocation formula.  While rural areas do face special challenges, by apparently waiving federal requirements that normally apply to transportation funding, the Administration may be designing these grants largely as a political giveaway, rather than as an approach intended to support those unique needs.  Combined with the other cuts to infrastructure spending described above, the likely result would be an overall shift away from the highest-need areas.

Will the Plan Be Accompanied by Harmful Offsets?

A major unknown around the Trump infrastructure plan is whether and how the Administration plans to offset the proposal's cost.  Leaked White House documents don't answer the question, although Administration officials have suggested that their preferred approach includes cuts from other domestic spending, even beyond the infrastructure programs described above.[10]

That creates the possibility that any potential benefits of an infrastructure package would be offset — or more than offset — by the damage caused by painful cuts elsewhere.  Both the 2018 Trump budget and congressional Republican budget proposals indicate where some of these cuts might be found; the Trump budget would have cut programs focused on low- and moderate-income households and communities by $2.5 trillion over ten years, for example.[11]  But the premise that an infrastructure bill should be paid for through such cuts should be rejected, especially following the enactment of a tax bill that will cost at least $1.5 trillion over the next decade and provide tax cuts weighted towards the wealthy and large corporations.[12]

Indeed, in the context of a potential infrastructure bill, the recent tax bill was both a missed opportunity and a step backwards.  Members of both parties had previously suggested that an infrastructure plan could be funded with the one-time revenue received through a mandatory repatriation tax on U.S. multinational corporations' foreign profits.[13]  Rather than taking that approach, however, last year's tax plan effectively used that revenue to help pay for permanent corporate tax cuts.  The revenues are one-time, but the tax cuts are permanent, resulting in a long-term increase in the deficit as a result of that approach — and eliminating the possibility of using the revenues in an infrastructure package.  And by making it more challenging for states to raise revenues by limiting the state and local tax deduction, the tax bill counteracts the Trump Administration's apparent push for states and localities to raise their own money to pay for new infrastructure projects.

More broadly, the question of offsetting budget cuts points to a likely problem at the center of any Trump Administration plan.  As the Trump and congressional GOP budgets demonstrate, Republican leaders appear averse to both significant increases in federal spending and any increase in federal revenues.  Yet addressing the major infrastructure needs we face — whether deferred maintenance or new projects — requires committing new federal resources.  Without that, the Trump Administration and congressional Republicans' overall agenda remains at odds with a legislative package that could effectively address the nation's infrastructure needs.

End Notes

[1] It is also a smaller boost in federal resources than other proposals that have been made in recent years, including from the Obama Administration.  The final Obama budget included over $300 billion for its 21st Century Clean Transportation Plan; see https://obamawhitehouse.archives.gov/sites/default/files/omb/budget/fy2017/assets/budget.pdf.

[2] Jacob Fischler, "Trump Adviser Says Infrastructure Push Won't Have New Revenue," Roll Call, January 25, 2018, https://www.rollcall.com/news/politics/trump-adviser-says-infrastructure-push-wont-new-revenue.

[3] David Reich, "Trump Budget Would Cut Non-Defense Programs to Half Their 2010 Level," CBPP, May 23, 2017, https://www.cbpp.org/blog/trump-budget-would-cut-non-defense-programs-to-half-their-2010-level.

[4] Federal Highway Administration, "Fixing America's Surface Transportation Act of 'FAST Act': A summary of Highway Provisions," July 2016, https://www.fhwa.dot.gov/fastact/summary.cfm.

[5] Office of Management and Budget, "A New Foundation for American Greatness — President's Budget FY 2018," p. 36, May 2017, https://www.whitehouse.gov/sites/whitehouse.gov/files/omb/budget/fy2018/budget.pdf.   

[6] Congressional Budget Office, "An Analysis of the President's 2018 Budget," July 13, 2017, https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/52846-apb.pdf.

[7] Jonathan Swan, "Scoop: Read the draft White House infrastructure plan," Axios, January 22, 2018, https://www.axios.com/draft-white-house-infrastructure-plan-1516644555-0d43f417-6ccd-43f7-9eae-3ccbe711314d.html.

[8] Michael Leachman and Michael Mazerov, "How Should States Respond to Recent Federal Tax Changes?" CBPP, January 23, 2018, https://www.cbpp.org/sites/default/files/atoms/files/1-23-18sfp.pdf.

[9] Juliet Eilperin and Michael Laris, "White House plan would reduce environmental requirements for infrastructure projects," Washington Post, January 26, 2018, https://www.washingtonpost.com/politics/white-house-plan-would-reduce-environmental-requirements-for-infrastructure-projects/2018/01/26/b15bd66a-0248-11e8-8acf-ad2991367d9d_story.html?utm_term=.597072822b3a.

[10] Lauren Gardner and Tanya Snyder, "Democrats cool to Trump's infrastructure pitch," Politico,December 14, 2017, https://www.politico.com/story/2017/12/14/democrats-trump-infrastructure-pitch-223057.

[11] Isaac Shapiro, Richard Kogan, and Chloe Cho, "Trump Budget Gets Two-Thirds of Its Cuts From Programs for Low- and Moderate-Income People," CBPP, September 29, 2017, https://www.cbpp.org/research/federal-budget/trump-budget-gets-two-thirds-of-its-cuts-from-programs-for-low-and-moderate.

[12] Chye-Ching Huang, Guillermo Herrera, and Brendan Duke, "JCT Estimates: Final GOP Tax Bill Skewed to Top, Hurts Many Low- and Middle-Income Americans," CBPP, December 19, 2017, https://www.cbpp.org/research/federal-tax/jct-estimates-final-gop-tax-bill-skewed-to-top-hurts-many-low-and-middle-income.

[13] Melanie Zanona, "Lawmakers Want Infrastructure Funded By Offshore Tax Reform," The Hill, March 24, 2017, http://thehill.com/policy/transportation/infrastructure/325555-lawmakers-want-infrastructure-funded-by-offshore-tax.



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