Republican presidential candidate Donald Trump and Democratic rival Hillary Clinton both promise billion-dollar increases in infrastructure spending to boost the economy and wages.
This spending is mostly wasted because the effects on growth are limited, writes Stephen J. Entin, senior fellow at the Tax Foundation in Washington.
“It does no good to pave additional roads if there are no additional goods being produced to ship over them,” he writes in Investor’s Business Daily. “Commuters may appreciate an easing of traffic congestion, but they will be driving to the same limited jobs and limited paychecks as before.”
The economy has grown an average of 2.2 percent a year since emerging from recession in 2009, the weakest recovery since World War II. Wage growth has been equally lackluster, never exceeding 3 percent during the same period.
“After eight years of a pitiful expansion, the business cycle is clearly not the problem, and infrastructure is not the solution,” Entin says. “We are at a full-employment 'equilibrium,' given current policy. The problem is, the equilibrium is at too low a level of capital stock and jobs. What is needed is a permanent expansion of productive capacity.”
He says a better policy would be to lower corporate taxes and change the way depreciation is calculated so that private industry can put money to work better than the government can.
“Governments do not feel they have to earn a return on their capital spending, the way the private sector does,” Entin writes. “As a result, governments are content to put money into projects with little or no net benefits, diverting resources from private uses yielding greater economic gains.”
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