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Investments in Infrastructure Versus Transfer Payments and Budget Fixes

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State and local governments are poised to receive a large portion of funding from the American Rescue Plan (ARP) as direct budget subsidies to make up for pre-COVID and COVID shutdown shortfalls.


A relatively smaller portion will also be given to those same governments to use with broad discretion.  Whether the windfall will be used for infrastructure projects that have the potential to contribute to the long-term economic health of the concerned community or simply injected as direct payments to individuals and budget shortfalls is of particular interest.  


Revitalization of blighted civic areas, transportation improvements, new civil structures, and other projects can lead to community improving its economic outlook through the life of the projects and beyond[1].   The tangible infrastructure has its benefits, but so do the improvements in labor assets through their work on the projects.  The skills and experience that are utilized in infrastructure projects persist and enhance the community after the construction of the project is completed.  Trade, supervision, and construction equipment utilization can shift over to maintenance, other public projects, and private construction relatively seamlessly.  Downstream the expenditures from earned incomes also contribute to economic growth.


Within the ARP program, states and municipalities will be competing for program project money.  This competition could serve to improve the cost/benefit return of completed infrastructure proposals and projects.  Well thought out infrastructure investments can produce additional economic activity, improve property values, and add to the tax base.  In contrast, direct cash payments to individuals and governments has a long record of hurting the causes of good government and economic activity.


The Wall Street Journal, Barrons, and The Economist describe the downsides[2] of large payments to individuals particularly and implicitly.  The leading cause of unemployment is now high bank balances (M1 Money Supply) and additional unemployment insurance benefits that have caused many people to consider whether it is worth going back to work.  This occurs at a time when the economy and infrastructure projects are clamoring for additional workers.  From the Economist’s perspective, paying people to stay out of work is exactly the opposite of what we need. 


The country of Saudi Arabia has, in recent years, set about a program of weening its populous off of oil entitlements. Despite decades of government funded direct payments from oil revenues, the country has systematically failed to develop a diverse economy as most of their potential labor and entrepreneurship have been “locked up” by government entitlement payments.  The very generous guaranteed income program is being replaced by a very ambitious infrastructure project that is hoped to transform the economy into a productive one.


For governments that can choose between good infrastructure projects and budget/transfer payments, the choice is clear.  Cash entitlements destroy effective and productive behavior patterns at the individual and government levels.  Good infrastructure projects expand economic and human potential.


[1] https://www.treasury.gov/resource-center/economicpolicy/Documents/infrastructure_investment_report.pdf

[2] Inflation and high interest rates