Negotiate Now, Build Soon, Pay Later

Here’s a modest suggestion for moderate senators looking to work out a deal on infrastructure spending: Don’t worry about paying for it.

The U.S. political system is less gridlocked and dysfunctional than many people think. But there are still profound disagreements between Democrats and Republicans about tax policy. Democrats look at a generation-long run of soaring income and wealth inequality and believe passionately that the most fortunate need to be paying more. Republicans look at a generation-long slowdown in productivity and believe passionately that there need to be incentives for more investment.

My Bloomberg colleague Tyler Cowen denounced President Joe Biden’s plans for higher capital gains taxes as a fundamental abrogation of American values, which he says should include “valorization of wealth.” Most of my progressive friends thought that was just about the craziest thing they’d ever read.

This is a much wider gap than a disagreement about the ideal balance of funds between grants to state highway departments and grants for mass transit, or how much money should go to rural broadband vs. the nation’s electrical grid. The good news is that, somewhat surprisingly, there is still no fundamental economic need to offset new spending with tax cuts or reduced spending elsewhere.

Despite a somewhat inflationary environment and a huge run-up in debt during the pandemic, the federal government’s borrowing costs remain exceptionally low, with 30-year bond yields at less than 2.5% and rates actually negative in inflation-adjusted terms.

Financial conditions like this probably won’t persist after the passage of Biden’s rescue plan, or be sustainable in the context of clearly rising nominal wages and prices. So it made sense for Biden to be talking about doing infrastructure spending in a way calculated to reduce the long-term budget deficit.

But the numbers don’t lie: Capital is extremely cheap at the moment.

And while it wouldn’t necessarily be wise for Congress to pour more short-term stimulus into the economy, it should work to identify worthwhile medium-term projects and just do them. Don’t worry about the money. Historically low interest rates make the cost-benefit analysis of the economic and social effects of any given infrastructure undertaking very compelling.

Republicans are within their rights to refuse Democrats the tax hikes they crave, and to oppose any spending they regard as genuinely harmful. But a more healthy dynamic would see them coming up with their own projects to fund.

At least one important strain of Republican tax thinking comes from the exact same place as Democratic enthusiasm for public infrastructure — a sense that, in a world of soaring tech profits and low interest rates, America needs to do more to drive tangible investments in the physical world.

Rather than try to make Biden settle for a smaller bill and fight about how to pay for it, a wise Republican might offer Democrats more spending in exchange for making the Tax Cuts and Jobs Act’s business-expensing provisions permanent. That would be a double-pronged attack on the problem of underinvestment in the physical world — generous outlays on both private- and public-sector investment.

Of course, moderate Democrats have been in the vanguard of the deficit-hawk movement since at least the 1990s, and they may find this idea alarming. But they should remember that the budget reconciliation process allows them to pass a bill on a party-line vote.

Squeezing infrastructure spending into a reconciliation framework the way progressives are advocating is very awkward. But the process is ideally suited to making tax changes; that’s what Republicans did to pass their 2017 tax cut, and it’s what Democrats could do to pass a tax increase next year if they deem it necessary. In fact, an express track for deficit reduction was the original purpose of the procedure when it was devised in the 1970s. Using it for transformative legislation is a newer idea and it’s never worked very well.

For now, money is cheap and the parties might as well try to agree on something other than taxes. If spending becomes an issue later, then a tool exists to raise money later. In the shorter term, the path forward for Democrats and Republicans seems clear: They should agree to disagree about how to pay for stuff, and just start building it.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Matthew Yglesias writes the Slow Boring blog and newsletter. A co-founder of Vox and a former columnist for Slate, he is also host of "The Weeds" podcast and is the author, most recently, of "One Billion Americans."

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