The Economist (2022-02-26) Riva

12 Leaders TheEconomistFebruary26th 2022

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early a year has passedsinceCongress approvedthe

American Rescue Plan Act (arpa), promisingspendingof

$1.9trn, equivalent to 9% of gdp. Many, includingthisnewspa-

per, worried that such federal largesse looked excessive.Those

fears have been borne out. arpahelped create a surgeofdemand

that contributed to the inflation that is plaguingAmericaand

which is higher than in other advanced economies.Italsogave

states and local-government agencies over $650bn—morethan

they knew what to do with.

They are keen to spend it, one way or another.Outgoings

from the states reached an all-time high in 2021,andwillproba-

bly break the record again this year. Some arpamoneyisgoing

on sensible investments and into rainy-day fundsthatwillhelp

states weather the next recession. But too many

states are lavishing federal dollars on dodgy

projects that look better in a campaign ad than

on a balance-sheet (see United States section).

State legislators in Massachusetts are fond

of diverting money intended to help schools

reopen towards building new football pitches

instead. More worrying are the efforts to enact

new tax cuts and social programmes. Iowa

plans to ditch a progressive income tax in favour of a flat tax,

while exempting retirement incomes. California’s governor, Ga-

vin Newsom, has proposed expanding the state’s health-insur-

ance programme to undocumented immigrants—for an addi-

tional $2.2bn a year. These initiatives are creating big liabilities

that may prove unsustainable in the years to come, as the funds

from Washington ebb and America’s economy returns to its

tamer, pre-pandemic rate of growth.

When that tide goes out it will become painfully clear that

states are facing structural problems. Although the federal gov-

ernment has picked up much of the tab during the pandemic for

spending on Medicaid, the public health-insurance scheme for

the poor, the programme’s costs take up an ever-rising share of

statebudgets.Increasingfuelefficiencyhasreducedrevenues

fromthepetroltax,theprimarymeansstateshaveoffinancing

transportinfrastructure.ManystatesintheMidwestandNorth-

eastarelosingpeople,leavingthemwithinfrastructurethatis

toocostlyandtooextensiveforthosewhoareleft.

Allthemoreimportant,therefore,thatstategovernments

usethefederalwindfalltomaketheireconomiesmorecompet-

itive.Afewprinciplesshouldguidethem.First,theyshouldfa-

vour one-time investments over enduring commitments.

Cleaninguppollutionandupgradingancientcomputersystems

arelimitedprojectsthatwillbringbenefitsforyearstocome.

Manystatesalsohavebiginfrastructure-maintenancebacklogs

thattheywoulddowelltoreduce.Second,anynewlong-term

projectsshouldbechosenwithaneyetoen-

hancing productivity in a post-pandemic

world.Broadbandinternet,particularlyinill-

servedruralareas,isaprimeexample.

Lastly,thetemptationoftaxcutsandsocial

programmesmustberestrainedbyaregardfor

thefuture.Conservativeforecastsoftax-rev-

enue growth should be grounded in economic

trends rather than the surge in income- and

sales-tax receipts during the pandemic. To avoid sudden budget

shortfalls, tax cuts can be designed to kick in only above a

threshold of revenues, as in North Carolina in the past. And

states would do well to pilot social programmes before charging

ahead—unlike Colorado, which is spending $13m this year to

build the bureaucracy for a universal preschool programme that

does not yet exist and whose benefits are unproven.

arpais only part of the states’ federal bonanza. Still more

money from Washington is set to come their way as the $1.2trn

Infrastructure Investment and Jobs Act, passed in November

2021, is implemented. Ambitious governors and state legislators

are eager to spend their way to re-election. Alas, theyriskleaving

a fiscal time-bomb for future policymakers to defuse.

America’s stateshavemoregreenstuffthangreymatter

Total state spending

United States, % of GDP

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Wastingawindfall

Spending covid-relief money

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veryone whohas an investment portfolio or is in a pension

scheme knows that they are exposed to the gyrations of the

stockmarket. Only some are aware that a rising share of their

savings pot has been invested in private assets, including priv-

ate equity (leveraged buy-outs), privately held debt and infra-

structure and property holdings. And most would be surprised

to know how big this exposure has become. Private equity and

property alone make up almost a fifth of American public pen-

sion funds’ portfolios. A whopping 39% of large American en-

dowments sits in buy-outs, venture capital and real assets. Priv-

ate assets have become the opium of the savings industry be-

cause they are assumed to generate high returns. As our special

report this week explains, this belief may be a delusion.

Private investments have gone mainstream in part because

the best private investment firms have been well run and made

the most of their opportunities. For example, while private equ-

ity has gone through two boom-and-bust cycles since taking off

in the 1980s, its blend of financial and operational engineering

has added genuine value to thousands of firms. Since the

mid-1990s private-equity funds have outperformed comparable

share indices over various time periods by two to six percentage

points a year. As banks have withdrawn from risk-taking be-

Why private markets are likely to disappoint investors

The private-equity delusion

Private markets