Financing State and Local Government Infrastructure Investment

In this note, I will examine policy that might encourage greater public infrastructure investment. Much of the discussion will center around H.R. 1452, a bill that was introduced to the House of Representatives in 1999. This bill provided a novel financing method, the primary purpose of which was to provide interest-free loans to state and local governments that would use the money to improve infrastructure. However, at that time, the bill was opposed by the Federal Reserve, for reasons that will be discussed below. For this, and perhaps for other reasons, the bill died an untimely death. There now seems to be growing support for a new bill that would retain most of the features of H.R. 1452. In addition, there are two developments that might have reduced objections to this proposal. First, it has become widely recognized that the U.S. economy is headed toward recession. Even Chairman Greenspan recently testified that growth may have fallen to zero, prompting his support for President Bush's tax cuts. Second, Chairman Greenspan also publicly worried about the prospect that on the basis of projections of budget surpluses, the Treasury (and the Fed) will soon run out of public debt to be purchased. This is, I believe, a particularly appropriate time to renew discussion of the need for greater public infrastructure investment. Not only has our nation suffered through nearly 3 decades of low investment of public infrastructure investment, but it is also highly likely that we have entered a downturn that will turn into a " hard landing ". Thus, it is vitally important to stimulate growth. While I believe that large tax cuts are urgently needed to stave off a hard-landing, we also need to begin thinking of ways to increase spending in a socially useful manner. It is difficult to perceive a more worthy cause than public infrastructure investment. Further, as designed, H.R. 1452 would have created public debt that could replace Treasury debt that is expected to be retired over the coming decade. This would provide the Fed with an instrument for open market operations, and would allow the Treasury to purchase public debt if it should ever reach the point that all publicly-held Treasury debt had been retired. Act would have provided for creation of non-interest bearing loans to state and local governments for the purpose of funding capital projects. A Loan Agreement would be established between the Treasury …