The Highway Bill Takes Congress on a FAST Track to More Debt

Sometime within the next few days, Congress will pass, with great fanfare, what it proudly calls a $305 billion, five-year transportation bill. But while the measure will authorize much needed infrastructure spending, it won’t pay for much of it.

More than one-third of the $305 billion would simply be borrowed. The measure, which some clever staffer dubbed the Fixing America’s Surface Transportation (FAST) Act, is little more than a faster way to increase deficits and debt.

According to the Congressional Budget Office, the measure would put the Highway Trust Fund back in the black through 2020. How? By transferring $70 billion in general revenues to the fund.

But, of course, the federal government is more than $13 trillion in debt. It doesn’t have $70 billion to transfer to the highway program, or to anything else for that matter.  Not to be impolite, but there is only one way the Treasury can get this money. It will have to borrow it and, yes, add to the debt.

The bill comes up with another $53 billion over 10 years by tapping surpluses held by the Federal Reserve banks.  It would immediately draw about $20 billion from the bank funds. Then, by capping the allowed surplus at $10 billion, drain what CBO figures will be another $2 billion to $4.7 billion each year through 2025.

This gimmick won’t add to the deficit as CBO officially scores it. But it will increase government borrowing by another $53 billion. It is complicated--just the way Congress likes it. Here is an explanation from former Fed governor Larry Meyer from back in 2000 which also proves, I suppose, that there are no new bad ideas.

Transfers of Federal Reserve surplus to the Treasury provide no true budgetary savings….Imagine that the Congress wished to enact some new spending program that would cost $500 million. In the absence of any new revenues or reductions in outlays on other programs, the Treasury would need to issue $500 million of debt to the public to fund the expenditure….  Now suppose that, instead, the Congress decided to "finance" the spending program by transferring $500 million from Federal Reserve surplus to the Treasury. To obtain the funds to transfer to Treasury while maintaining the stance of monetary policy, the Federal Reserve would need to sell $500 million of Treasury securities from its portfolio to the public. The public would wind up holding $500 million of additional Treasury debt, and the government would increase its net interest cost--exactly the same outcome as if the Treasury just sold the debt directly to the public. Thus, financing an additional $500 million outlay through a surplus transfer is exactly equivalent to borrowing from the public…. The fact that budgetary rules count transfers of Federal Reserve surplus as revenues for the purpose of calculating the budget deficit is an anomaly of federal budget accounting.

That’s not the end to the gimmicks.  The bill would raise $6 billion by selling oil from the Strategic Petroleum Reserve--starting in 2023. And, for at least the third time in recent memory, Congress would order the IRS to turn over the collection of bad debts to private collectors. CBO says this will raise about $2.5 billion over 10 years. But the last two times Congress made the IRS do this, the program was abandoned after failing miserably.

The reason for all this gimmickry is simple. Terrified lawmakers won’t raise taxes. The once-conservative principle of a user-funded highway system has given way to mindless no-tax pledges. So, somehow, the same lawmakers who rail against deficits and debt are happy to borrow-and-spend when it comes to FAST.

One can certainly argue that with Treasury interest rates so low (yesterday, 10-year bonds paid 2.23 percent), borrowing to build infrastructure makes perfect sense. Former Treasury Secretary Larry Summers has been making this case for years.

But if that’s what Congress and President Obama want to do, I wish they’d just say so instead of relying on fiscal legerdemain to pretend that this highway bill is actually funded. It is not. Not even close.