Backward Finance

Another month and another $2 trillion spending plan from President Joe Biden. And I understand he has another multitrillion dollar spending plan on deck for next month.

This month’s plan, the American Jobs Plan, was announced on the day before April Fools Day and is dedicated, at least partially, to infrastructure. In addition, he included a plan to increase corporate taxes to finance this infrastructure spending. I thought, wait a minute! President Biden wants to spend trillions on social justice projects financed by public debt while he wants infrastructure that will last many years to be financed by current taxes. That’s backwards.

In business school, I learned that companies borrow short-term to finance raw materials and inventories and borrow long term to finance plant and equipment. Operational expenses, like wages and salaries need to be covered by current revenues. Financing pay for workers by borrowing is unsustainable. Of course, countries are not businesses and do not operate like businesses (we could only hope). But there are some parallels that make sense.

Prior to the pandemic, the United States had run up the public debt to almost $23 trillion to finance the rapidly growing non-discretionary spending (transfer payments) and tax cuts. Government deficit spending is supposed to goose the economy but if you are constantly goosing the economy all you get is a sore butt. Economic growth from transfer payments and tax cuts is never sufficient to cover the missing revenue. Let me repeat that, never sufficient.

So why is President Biden trying to stick it to corporations in order to finance this infrastructure plan? The answer is that the Trump tax plan has stuck in the craw of the progressive left ever since it was passed (on a partisan party line vote), even though prior to the pandemic unemployment was at historic lows (especially for minorities) and the economy was booming (as long as you ignored the ballooning deficit).

The left was outraged when President Trump lowered the corporate tax rate from 35% to 21%. But the vaunted Nordic welfare states that Bernie and AOC say is their ideal form of government have corporate tax rates between 20% (Finland and Iceland) and 23% (Norway), although Denmark does charge some corporations 25%. They charge low corporate rates because they want their private sector to be competitive internationally so that there are good jobs for their citizens. But they don’t have swelling deficits from their bounteous welfare system because they charge a value added tax (like a regressive sales tax) of between 24% and 25%. The people receiving the benefits are paying for the benefits. And keep in mind that Sweden has more billionaires per capita than does the United States.

President Biden claims that his plan is a “once in a generation infrastructure proposal.” I think he has got it wrong. You shouldn’t have a generational infrastructure plan; you should have an annual infrastructure plan. The Federal Reserve estimates the assets of the federal, state and local governments to be around $13 trillion. If you estimate a thirty-year average life of government assets, these governments should be budgeting a total of around $433 billion every year to maintain and improve those assets. Some countries I have worked with have separate operational and capital budgets so they can pinpoint what maintenance, improvements and additions to its capital assets should be and how much they will cost. Furthermore, these same countries can borrow short-term to cover cash flow imbalances during the budget year (for example cash flows from tax collection can be lumpy), but they can only borrow long term to finance their capital budget. This makes a lot of sense to me.

Democrats try to convince the American people that if only the wealthy and large corporations paid their fair share then everything would be perfect in our country and no one else would have to pay anything. The wealthy just have to give up their Lamborghinis and their private jets (I’m talking to you, John Kerry) and we would eliminate poverty while getting everybody free healthcare and college tuition. Not going to happen. The public debt will just keep ballooning.

That leaves us with one of two conclusions. Either President Biden and the Democrats don’t really understand how economics works or they want to pull the wool over your eyes to maintain their grip on power.

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President Biden’s infrastructure plan calls for $174 billion (mostly in tax credits and subsides) to promote the use of electric vehicles in order to reduce carbon emissions. The market, however, already seems to be switching to electric vehicles pretty quickly without $174 billion of taxpayers’ money. All that these subsidies are likely to do is to slow down the technological advancements that have driven down the cost of electric vehicles to make them more competitive.

There is another little problem with the president’s plan. Right now, while transportation is responsible for 29% of greenhouse gas emissions in the US, electric power accounts for 28%. Reducing the use of fossil fuels by switching to electric vehicles will only increase the use of electric power. Switching to wind and solar can supply some of the increased demand for electric power, but they account for less than 11% of the US energy supply and there are limitations on their widespread usage.

If the Democrats and environmentalists truly want to reduce carbon emissions, then the infrastructure plan needs to include nuclear power plants. France has the lowest carbon emissions per capita of any country in the G20 but they accomplished this feat by having nuclear power plants supply 44% of the power to their electric grid. France actually has a lower usage of renewables than the US.

The last US nuclear power plant was commissioned in 1990 making it over thirty years old. And keep in mind that the process to build the plant started in 1974. The US has two nuclear power plants under construction while 39 have been shut down. China, meanwhile, has 11 nuclear plants under construction and plans many more.

But the Biden plan right now only includes $61 billion (3% of the total plan) for an item that includes advanced nuclear power but also includes carbon capture, hydrogen, floating offshore wind turbines, and rare earth element separation technologies as well as electric vehicle charging infrastructure. Given that each nuclear power plant costs around $6 to $9 billion each and takes a decade or more to build because of government red tape, that does not mean much additional power from nuclear in the near future. Given the guaranteed opposition of environmentalists, that near future may stretch far into the future.

Reliance on wind and solar to power the US into the future is magical thinking. Right now, the left’s good intentions do not match the realities of power generation. If we are going to compete with China on the international stage, we need access to abundant energy to power our industries as well as our military.

President Biden would do more good by unleashing America’s nuclear energy sector. The most modern nuclear power plant in the country is using fifty-year-old technology. And it took sixteen years from the start of the construction before the plant was commissioned and started providing energy. Surely, we can do better. Adding the most modern, safe and efficient nuclear power plants to our grid will require reasonable regulations and deterrence of frivolous lawsuits more than billions of dollars of government money.

There will be better energy alternatives than reliance on nuclear fission at some time in the future. But we have to get to that future first.