Tax Analysts Blog

Should We Borrow to Pay for Infrastructure? Eisenhower Thought So

Posted on Dec 2, 2016

You hear it so often it’s become commonplace: There’s never been a president like Donald Trump. In any number of ways, that truism is undeniably true. But in some respects, there are precedents for a President Trump, or at least for some Trumpian policies, including his still vague “borrow to build” plan for infrastructure.

Trump has been coy about the funding for his infrastructure program. At times, he has actually framed it in the conventional terminology of fiscal responsibility. Consider two bullet points from his website:

•   Leverage new revenues and work with financing authorities, public-private partnerships, and other prudent funding opportunities.

•   Harness market forces to help attract new private infrastructure investments through a deficit-neutral system of infrastructure tax credits.

The mere mention of “new revenues” seems significant, although I doubt it means “new taxes,” at least in any conventional sense of the phrase. His explicit endorsement of “deficit-neutral” tax credits further muddies the waters while still suggesting at least some level of fiscal responsibility.

But of course, not everyone thinks fiscal responsibility is the order of the day. Concerns about deficit neutrality seem unlikely to constrain the coming debate over tax reform, at least not much. And many observers, especially on the left,  think a good dose of deficit spending is just what this sluggish economy really needs.

If Trump decides to cast his lot with the deficit spenders – and I suspect he might – he would be in good company. Red ink is a bipartisan tradition in Washington, especially since Ronald Reagan upended traditional notions of fiscal conservatism with his 1981 tax cut. And in fact, the most obvious, on-point precedent for a debt-funded infrastructure plan was advanced by none other than President Dwight Eisenhower.

In both political and economic terms, infrastructure has been linked to fiscal stimulus for nearly a century. Generally speaking, Democrats have been the biggest fans of using debt-funded construction to jump-start a slow economy; the New Deal is only the most famous example of trying to use infrastructure spending as a countercyclical device.

But Republicans have embraced infrastructure stimulus, too. Indeed, the nation's most famous construction project -- the creation of the modern interstate highway system -- began with a vibrant debate on the virtues (and perils) of using debt to finance construction.

Eisenhower made the interstate system an early priority of his presidency. In July 1954 he proposed  a 10-year, $50 billion program of new highway construction (above and beyond existing expenditures). He underscored the need for completing a comprehensive highway system, insisting that modern roads would enhance motorist safety and support the nation's economic growth.

Ike created two executive branch working groups to formulate his plans for a massive highway program. One was chaired by retired Gen. Lucius D. Clay, an army engineer with sterling family connections and a reputation for competence.

In a biography of Clay, Jean Edward Smith related Clay's memory of his appointment to head the highway committee. Sherman Adams, Eisenhower’s chief of staff, "called me down," Clay recalled. " We had lunch with the President, and they were concerned about the economy. We were facing a possible recession, and he wanted to have something on the books that would enable us to move quickly if we had to go into public works. He felt that a highway program was very important."

Clay's recollection is important because it underscores the macroeconomic motivations behind Eisenhower's highway program. There were many reasons why the nation needed better roads. But the stimulus effect of large-scale construction, while rarely cited in public statements, was an important part of the Eisenhower’s thinking.

When Clay released his committee's final report, it  featured a construction program costing roughly $101 billion over 10 years -- $53 billion more than allotted under then-current law. The immediate need, however, was for $26 billion to complete urgent projects.

Even funding that smaller amount would be hard, given fiscal constraints. As highway historian Richard F. Weingroff recounts in his (outstanding) history of the Clay committee:

The Administration was committed to balancing the budget, so an increase in annual appropriations was out of the question. The Administration was reluctant to approve an increase in the national debt for a bond issue. Further, the Federal Government was embarked on a program of decreasing, not increasing taxes, so "we could not look to an increase in tax rates for the money to support this program."

The committee's solution to that puzzle involved the creation of an independent Federal Highway Corporation authorized to issue bonds in its own name but guaranteed federal support equal to the amount collected through federal taxes on gasoline and lubricating oil. Ultimately, the corporation could be expected to issue between $23 billion and $24 billion in bonds during its 10-year life span. Notably, those bonds would not count against the nation's debt limit (the extension of which was just as contentious in the 1950s as it is today).

Clay defended his financing scheme as a necessity. "There is one thing certain; we are not going to get an adequate highway program through the normal approach," he declared in one public speech explaining the plan. "If we are going to have an adequate highway program, we have got to have the courage to take bold measures now so that it will be available when the traffic growth reaches us."

Clay tried to normalize his financing proposal, casting it in terms designed to resonate with conservatives. "So perhaps we may say that we are recommending, rather than a pay-as-you-go policy, a pay-as-you-use policy, capitalizing the revenue of 30 years over and above the money required for primary and secondary roads so that we may have in 10 years a really and truly national system of highways feeding our principal cities throughout the country," he said.

Eisenhower forwarded the Clay plan to Congress, endorsing its financing scheme. In general, he said, taxes related to road use should be used to finance highway construction -- just not this time. "I am inclined to the view that it is sounder to finance this program by special bond issues, to be paid off by the above-mentioned revenues which will be collected during the useful life of the roads and pledged to this purpose, rather than by an increase in general revenue obligations," the president wrote.

But Eisenhower’s borrow-to-build was not to be. It met with stiff resistance on Capitol Hill, especially among conservative Democrats like Virginia Sen. Harry F. Byrd. The voices of fiscal restraint managed to kill Ike’s plan for debt-funded construction, and only after Eisenhower agreed to a slower, tax-financed building plan did the conservatives go along.

Should the defeat of Eisenhower’s original funding scheme worry contemporary champions of debt-funded infrastructure? After all, if Ike couldn’t pull it off, will Donald do any better?

Hard to say. But Trump has defied conventional wisdom time and again. And should he plow ahead with building plans that outstrip current revenues, Trump can at least claim a good pedigree for his spendthrift ways.

After all, don’t we all like Ike?

This post is drawn from a longer history  of Eisenhower’s highway program and its original funding plan, available from the Tax History Project at Tax Analysts.

 

Read Comments (1)

Mike55Dec 2, 2016

Interesting read, as always. It strikes me there's one huge difference between Eisenhower and our current elected officials: Ike knew exactly what he wanted to build.

What's being negotiated now is a blank check to be spent on "infrastructure." That could certainly mean bridges, roads, sewers, etc. (as the political rhetoric claims), but surprisingly enough it could also mean things like education spending, upgrades to federal IT systems, etc. For what it's worth, the last time voters were promised a large amount of new "infrastructure" ($300B back in 2009), 90% of the funds were spent on items in the latter category.

The reason this matters is that different types of infrastructure are best funded in different ways. One obvious example: Martin Sullivan wrote an excellent article about using a gas tax to fund new infrastructure spending... that makes perfect sense if we actually build roads and bridges this time around, but consider how silly it would be if we end up with the same 90/10 split between real infrastructure and generic federal spending that we experienced last time.

My idea: our elected officials should FIRST get busy identifying the $200B to $550B worth of projects they'd like to fund, THEN worry about how to raise the money. In the incredibly unlikely event that were to occur,* I suspect we'd discover that multiple funding sources make sense. Certain high risk projects (e.g., a hyper-loop connecting LA and Vegas) seem ready-made for public/private partnerships. More mundane items like highway and bridge repairs could be funded via some combination of gas taxes and debt. Either way the details matter, so it'd be good to have them.

*This won't happen because (1) it's a huge amount of work, (2) there was no real political fall out last time an infrastructure bill was not executed upon (most people seem to have not even noticed), (3) it will quickly become obvious this is a poor investment, and (4) the chances of a grand bargain between the parties could fall apart if reality were allowed to get in the way. Most folks in DC today seem to prefer the classic "let's hurry up and get this done before we all come to our senses!" method of governance to advanced planning.

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