As basic as it gets.

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Some Things Only Government Can Do

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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These are dark days for those of us who believe that public goods such as infrastructure and scientific research are essential functions of government. Decades of attacks by libertarians, not all of them well-informed, have made conservatives and much of the public skeptical toward the provision of public goods. Increased spending on transfer payments -- health care in particular -- has squeezed government finances, leaving less room for public goods. And the perpetual partisan brinksmanship that has turned the U.S. political process into a series of dramatic standoffs and last-minute deals has made long-term infrastructure and research spending much more difficult. 

But there are some isolated signs of promise. For example, in an overwhelmingly bipartisan vote, the House of Representatives just approved a big boost to medical research through the National Institutes of Health. And now Congress is trying to settle on a plan for long-term transportation funding, though it has gotten bogged down in procedural issues. The main sticking point has been Congress's reluctance to raise the gas tax, which hasn't been increased since 1993. The new plan is to close some of the loopholes that let U.S. corporations avoid corporate taxation by keeping earnings overseas. Instead of taxing profits only when they are repatriated, the bill would tax them annually, which would raise the amount of revenue collected. The hope is that this will be enough to pay for the road and bridge repair and other infrastructure maintenance that the U.S. so desperately needs. 

There are some problems with this plan, however. First of all, it would increase the effective corporate tax rate on U.S. companies. Many economists view the corporate tax as the most harmful of all, since business investment is particularly sensitive to taxes: Raise the rate and businesses invest less, which hurts employment and growth. The U.S. has the highest corporate tax rate in the developed world. But because companies are able to use various loopholes to reduce the tax (many companies pay no tax at all) U.S. businesses end up paying about the same as businesses in Europe or other rich countries. The U.S. just ends up wasting a little extra money on accountants and lawyers. Closing the tax loopholes would cut out a lot of those accountants and lawyers, but by raising the effective tax rate, it would hurt the economy. 

A better way to fund roads and bridges is with a vehicle-miles traveled (VMT) tax. This taxes every vehicle for each mile traveled. This tax pays for public goods by taxing the very people -- drivers -- who benefit most from those public goods. But we don't have a VMT tax; we have a gasoline tax. And raising the rate of a current tax is probably easier, politically, than creating a new kind of tax. Also, the gas tax has advantages that the VMT tax does not, such as reducing carbon emissions by discouraging gas-guzzling vehicles. 

So really we just need to raise the gas tax to pay for roads and bridges. But there is a big problem with this. Republicans, over the years, have gotten very used to opposing any tax increase whatsoever. As Jonathan Chait of New York magazine acerbically puts it, "Republicans oppose tax increases for any reason at all, because, as Grover Norquist has taught them, raising taxes even a tiny amount makes the baby Reagan cry." 

This would be OK, if Congress were willing to cut spending in other areas to fund public goods. For example, we could cut outlays on health care. But even Republican politicians don't like to do this and, in fact, they often increase it, as President George W. Bush did with the Medicare Part D prescription drug benefit. 

So what's happening is that transfer payments for things such as health care are slowly squeezing out funding for public goods. U.S. leaders aren't willing to raise taxes to pay for road repair and research, and they also aren't willing to cut other spending. So roads and research -- the kind of government spending that benefits all Americans but doesn't have a natural lobby or constituency -- are getting short shrift. That's a bad outcome for economic efficiency and will shrink the pie over time, leaving less to go around for everyone. 

I don't understand the political process, so I don't know the solution to this problem. But the first step -- and the step that economists can help with -- should be to re-establish popular understanding of the value of public goods. For example, scholars have been researching the importance and effectiveness of infrastructure funding for many years. Evaluating research spending is harder, since the benefits are long-term, diffuse and complex. But some evidence does exist. And there is plenty of theory, dating back at least to Paul Samuelson's landmark theory of public goods. The more the public, and politicians, knows about this strand of research, the less it will fall victim to mindless bashing of this essential government function.

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

To contact the author on this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net