Should Infrastructure Spending Be Centralized?

Donald Trump has raised the issue of America’s crumbling infrastructure during his election campaign. He has periodically mentioned that American economy needs a bout of infrastructure spending. Estimates state that the infrastructure overhaul will cost the Trump government more than $1 trillion. However, the United States is already deeply in debt. Even though they have the largest economy in the world, they are still living beyond their means.

This brings us to the question as to whether the federal government should be financing these infrastructure projects. There is no doubt that an infrastructure overhaul is required. However, is it possible that this overhaul be structured in such a way that it does not negatively impact the finances of the federal government and the nation?

In this article, we will look at the flaws of this centralized model of spending. We will also look at some alternate solutions.

The Logic behind Centralized Infrastructure Planning

Many critics have been arguing that infrastructure spending should be a local issue and not a federal one. A person living in Hawaii should not be contributing to build roads in Chicago, Illinois. Why can’t the people of Hawaii and Chicago both manage their own infrastructure?

The most common response to this argument is that people in Hawaii may also consume goods and services that originate in Chicago. Hence, they should also pay their share! However, this logic is deeply flawed. This is because surely there are some companies in Chicago which export products to another country like Denmark. Now, by the above logic, citizens of Denmark should also be taxed to build the infrastructure in Chicago!

The above example does prove that the onus of building infrastructure lies in the people who live in the state and not on the consumers of their goods or services. When goods and services are produced in the state, the most direct beneficiaries are the state government which gets to collect taxes. Also, the people of the state find employment. Hence, it is in their best interest to keep the infrastructure in good condition. The consumers already pay a price for the goods that they consume. They should not have to pay any more in the form of taxation.

Does The State Have Enough Resources?

Another common objection to decentralizing the infrastructure spending is that the state does not seem to be capable of handling such huge projects. Infrastructure projects involve spending billions of dollars. They also require expertise and technical acumen. Many critics doubt the state’s competency to execute complex projects. Hence, they suggest that such projects are better off under the purview of the federal government.

This logic also seems flawed when you analyze the situation further. The United States is one of the largest and most economically powerful nations in the world. The states in USA are also huge entities from a financial standpoint. The economy of many states like California, Georgia, Washington etc. are larger than countries like Denmark, Norway, Austria and even Sweden. If these countries can execute infrastructure projects then so can individual states. The states are fully capable of handling these infrastructure projects from a financial as well as a technical point of view. They can handle complex projects like building and maintaining dams, bridges and airport terminals.

The Problem with Centralized Spending

The real reason why infrastructure spending is maintained at the federal level is more political than economic. Federal governments find it easier to borrow than the state governments. The entire world knows that the dollar is issued by the Federal Reserve. Hence, the probability that the issuer of the debt will default on currency denominated in its own debt is negligible. The federal government can therefore raise money at lower interest rates. This interest rate advantage is more than frittered away when we consider the cost of allocating these funds to different states. Not only is it inefficient and unfair, but it also costs a lot of money!

On the other hand, when federal government handles infrastructure spending, President Trump can borrow as much as he wants. He can do that without the need to immediately raise the taxes and cover the increased costs. Hence, he can promise to build infrastructure in the inner cities of America and make it appear as if it was built for free! People want infrastructure but they do not want raised taxes. Hence, centralized spending seems to be a political goldmine!

The problem is that in the long term, the people of United States will accrue a lot of debt. Also, the benefits of this debt will not be equally distributed. Since the federal government is spending the money, they might allocate some funds to non-viable projects. Also, there is a lot of politicizing of this spending. The states due for election in the near future receive a lot more funds than other states.

To sum it up, centralized spending on infrastructure does not make economic sense. However, since it is politically beneficial this is how the United States has been functioning for a long time. This is also the reason that United States finds itself under crushing debt and this debt burden is likely to exacerbate in the near future.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.