Whether you’re amused or outraged by the creative proposals to finance improvements to the Crosstown Commons probably depends on how often you travel the interchange at Minnesota 62 and Interstate 35W.
The Minnesota Department of Transportation claims that requiring private contractors to front nearly $100 million for a year is fiscally kosher. The Minnesota attorney general’s office argues it would be illegal.
I’m somewhat amused. I negotiate the bottleneck a few times per year. Commuters who stop-and-go their way through the gantlet might not find the ideas funny. Citizen hours wasted by congestion over the years must total tens of millions.
The interchange clearly needs to be rebuilt to handle greater traffic flows. The problem is that the state of Minnesota does not have the money right now. It will have it, officials claim, once the feds pony up funds in 2008. For work to begin sooner, they say, winning contractors must pay all the expenses and carry them for more than a year before any state reimbursement. The attorney general’s office says this will violate state law.
From an accounting standpoint, it is clear that states pay lower interest rates when they borrow.
To an economist, things are not so straightforward. Some of the lower interest rates states enjoy are due to the fact that federal income tax is not levied on interest earned on bonds issued by states. This makes such bonds attractive to investors and allows states to borrow cheaply. In effect, the federal government is subsidizing the state. But there is no lowering of cost to society.
In the long run, government spending can only come from taxing. The cost of rebuilding an interchange — plus any related interest — will reduce funds available for investment in private factories or equipment.
If money invested in rebuilding a road produces a higher payoff to society than if the same amount were left in the private sector, then the project makes us better off. If the return is lower, then society suffers. Interest rate differentials don’t matter in an economic sense.
In either case, the opportunity cost of government spending is the appropriate measure of the cost to society as a whole. Every economics major learns that.
The accountants have a point in the real world, however. Contractors will pay more interest to borrow $100 million than the state would. Their borrowing does not get any special federal tax treatment. So, Transportation Commissioner Carol Molnau’s option effectively discards any potential federal subsidy to state borrowing. Minnesota taxpayers eventually will have to pay contractors for their costs, including the interest they paid to float the project.
If there is no legal way for the state to float the project until the U.S. Treasury check arrives, the Legislature should correct this institutional failure. If the scheme is a strategy to avoid political embarrassment by suppressing visible state borrowing, the voters will have to render their judgment.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.