The Economist - USA (2022-02-26)

12 Leaders TheEconomistFebruary26th 2022

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early a year has  passed since Congressapproved the

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  inflation  that  is  plaguingAmericaand

which is higher than in other advanced economies.Italsogave

states and local­government 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 all­time high in 2021,andwillproba­

bly break the record again this year. Some arpamoneyisgoing

on sensible investments and into rainy­day 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 balance­sheet (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 efforts to enact

new  tax  cuts  and  social  programmes.  Iowa

plans  to  ditch  a  progressive  income  tax  in  favour  of  a  flat  tax,

while exempting retirement incomes. California’s governor, Ga­

vin Newsom, has proposed expanding the state’s health­insur­

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, pre­pandemic 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 health­insurance scheme for

the poor, the programme’s costs take up an ever­rising share of

statebudgets.Increasingfuelefficiencyhasreducedrevenues

fromthepetroltax,theprimarymeansstateshaveoffinancing

transportinfrastructure.ManystatesintheMidwestandNorth­

eastarelosingpeople,leavingthemwithinfrastructurethatis

toocostlyandtooextensiveforthosewhoareleft.

Allthemoreimportant,therefore,thatstategovernments

usethefederalwindfalltomaketheireconomiesmorecompet­

itive.Afewprinciplesshouldguidethem.First,theyshouldfa­

vour one­time investments over enduring commitments.

Cleaninguppollutionandupgradingancientcomputersystems

arelimitedprojectsthatwillbringbenefitsforyearstocome.

Manystatesalsohavebiginfrastructure­maintenancebacklogs

thattheywoulddowelltoreduce.Second,anynewlong­term

projectsshouldbechosenwithaneyetoen­

hancing productivity in a post­pandemic

world.Broadbandinternet,particularlyinill­

servedruralareas,isa primeexample.

Lastly,thetemptationoftaxcutsandsocial

programmesmustberestrainedbya regardfor

the future.Conservative forecastsoftax­rev­

enue growth should be grounded in economic

trends  rather  than  the  surge  in  income­  and

sales­tax 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 benefits 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 re­election. Alas, theyriskleaving

a fiscal time­bomb for future policymakers to defuse.n

America’s stateshavemoregreenstuffthangreymatter

Total state spending

United States, % of GDP

12

11

10

1614122010 212018

Wasting a windfall

Spending covid-relief money

E

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  buy­outs),  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 fifth of American public pen­

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

dowments sits in buy­outs, 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 firms have been well run and made

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

ity has gone through two boom­and­bust cycles since taking off

in the 1980s, its blend of financial and operational engineering

has  added  genuine  value  to  thousands  of  firms.  Since  the

mid­1990s private­equity funds have outperformed comparable

share indices over various time periods by two to six percentage

points  a  year.  As  banks  have  withdrawn  from  risk­taking  be­

Why private markets are likely to disappoint investors 

The private-equity delusion

Private markets