Financing Tomorrow's Infrastructure: Challenges and Issues Proceedings of a Colloquium (1996) / Chapter Skim
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I. OVERVIEW
I. OVERVIEW
Pages 1-20
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On that basis, the present preoccupation with budget deficits (which relate to money flows) as a justification for reducing infrastructure investment (resource flows)
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The issue of intergenerational equity is fundamental, he noted. The way we value the interests of future generations, typically through market rate discounting, has a profound impact on the equity of decisions we make today.
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Local governments concerned with keeping taxes low and containing service costs, partly because of reduced revenues from property taxes, are not likely to invest in infrastructure. The demographic trend toward significantly older property owners, who are traditionally reluctant to support public expenditures for schools and other improvements, provides an interesting counterpoint to the impetus toward intergenerational equity raised earlier by Dr.
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Financial planning is fast becoming a standard part of infrastructure planning. The Intermodal Surface Transportation Efficiency Act (ISTEA)
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New public mechanisms, like funds from Section 1012 of the Intermodal Surface Transportation Efficiency Act (ISTEA) , have not been applied, however, for a variety of reasons, ranging from lack of imagination to the fact that they are complex and resemble derivatives.
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Humplick suggested that financing transportation infrastructure will remain in the public sector, the Greenway notwithstanding, but other infrastructure projects are likely to be privately financed. In any case, we need a new, more flexible financing model for transportation projects.
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As we will see, confusion between resource flows and money flows affects public opinion regarding deficits and decisions about which infrastructure investments are worth making and which are not. After discussing resource flows and money flows, I want to talk about fixture generations and the discount rates we use to evaluate infrastructure investments.
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Experience with infrastructure investments in the telecommunications and electric utility industries indicates that the absence of competition or the regulatory mechanisms we have put in place to replace competition may lead firms to invest too little or too much. Public policies involving government mandates, public financing, or subsidy programs may be necessary to ensure that monopolies do not withhold investments in order to keep supplies low and prices high or overinvest to exploit regulatory commitments to cover costs.
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This is an example of what economists call "opportunity cost." This sort of choice arises whether the Finding comes through borrowing, taxation, or some other source. But if resource flows are what matter, then what is the importance, if any, of budget deficits, i.e., financing public expenditures via borrowing rather than taxation?
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A somewhat more sophisticated way of viewing this is what economists call the "Ricardian Equivalence Theorem." On that account, deficit financing does not matter because, if the government borrows now, it creates a future tax liability because of the need to pay on the bondholders from which it borrowed. If governments and individuals can borrow at the same rate, people will view that filture tax liability as a financial burden equivalent to what they would have borne if they paid taxes today rather than let the government borrow.
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Nonetheless, they show that money flows may not be very important compared to resource flows. However, there is a lot of concern regarding financing, and some of it is justified.
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Of course, if the alternative is financing by increasing taxes now, we will create similar effects in the present. Ascertaining which is worse or when these effects balance involves subtle, complex estimates of discount rates and marginal tax burdens.
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The decision to make a public investment in infrastructure is a decision to direct resources away from current consumption and private investments to benefit people in the future. The firstorder question is whether or not to build.
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Accepting market-based discount rates as the standard for weighing future benefits against present costs implies accepting whatever pure time preferences we happen to hav~ow we choose the present over the fixture in our private saving and investment decisional appropriate. Accordingly, this leads us to the opportunity cost standard for evaluating infrastructure investments by requiring that investments produce a stream of
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Public finance textbooks contain a variety of attempts to rig market rates to conform better to ethical viewpoints. For example, a great deal of attention is devoted to whether we should use pre-tax market rates or post-tax returns as measures of the discount rate.
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The tulip-people example illustrates how there can be a difference between what markets tell us to do and the right thing to do. We cannot decide if future benefits of infrastructure investment or environmental protection are worth present costs simply by looking at market rates of return.
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ETHICAL JUSTIFICATIONS FOR DISCOUNTING The contrast so far between the economic and ethical perspectives on discounting is extreme, largely because a meaningfid discount rate eventually means that, at some point, future generations count for very little in current policy calculations. However, the discipline of ethics is not quite so simple.
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The conclusion I draw is that we ought to think about our current spatial discount factors~ow much we count benefits to people elsewhere in the world, elsewhere in our country, elsewhere in our communities-as opposed to worming about the huge ethical problem of comparing claims over time The debate about how to judge the benefits of future infrastructure investment against present costs is important, but it ought not to keep us from recognizing serious problems in the here and now that we should, perhaps, invest in solving as well.
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One, if you think the reason demand is increasing over time is because economies are developing over time, that is an argument for positive discounting because it shows that people will be wealthier. On the other hand, if you think the reason demand for infrastructure is increasing over time is that alternatives are becoming more expensive, then people will be effectively less wealthy without the investment, arguing for a lower discount rate.
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I am not sure that it has a direct real effect, however, because the important factors are not money flows but resource flows. To get a real effect, you have to trace the accounting effect to a resource flow.
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