Spend Now! It’ll Save Us Money.

Evan Soltas is a contributor to Bloomberg View.
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Here's something completely wrong in the argument that the U.S. government can't afford to keep spending: Spending now will actually save the taxpayer a whole lot of money.

The logic is simple. Our government has a big list of projects that are deferrable but inevitable. Bridges must be repaired. Airports must be renovated. Electric grids require maintenance. Few of these are urgent. All of them, however, must receive funding sooner or later. And it's cheaper to do that now, with negative inflation-adjusted interest rates on federal debt and idle resources in construction, than it is later.

Deficit hawks arguing against infrastructure spending are making an error straight out of Economics 101. They're confusing accounting cost with opportunity cost.

The debt incurred by infrastructure spending is an accounting cost. And it's almost entirely irrelevant, because accounting makes a comparison between that action and doing nothing. This is a false comparison. Unless you are fine with bridge collapses and brownouts, doing nothing is not in the set of policy options.

That's why you have to look at opportunity cost, which represents the "sacrifice" of the next best alternative -- delayed infrastructure spending.

Such calculations show sharply negative opportunity costs given any reasonable set of assumptions. Spending on infrastructure now rather than later, in other words, generates enormous savings for the government. Those savings could be returned to the taxpayer through taxes lower than they would be in the scenario where we delay infrastructure investment. Or it frees up public funds or additional government programs.

And these savings are substantial. Suppose that the real interest rate for the government's long-term debt will average 3 percent over the long run. (This assumption is historically accurate.) The current real interest rate for long-term debt is about zero. Assume, also, that government finances its infrastructure spending with 20-year Treasury bonds.

In this simple model, the government saves 80 cents for every dollar it spends on infrastructure by the time the bond matures. With such discounts, the federal government should be completing almost every infrastructure project on its to-do list. Even if there's only a 50 percent chance that such work needs to be done, it makes fiscal sense to do it now.

This is why the "Fix-It-First" infrastructure program President Barack Obama proposed in his 2013 State of the Union makes sense. The argument doesn't require a belief in Keynesian economics. All it requires is a basic understanding of how debt works. Yes, we would spend more money, but only in a shallow accounting sense. We'd save it -- and a lot of it -- relative to the alternative.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Evan Soltas at esoltas@gmail.com