What really happens with the money spent on 'infrastructure'?
In explaining the difference between an asset and an expense, my intermediate accounting professor used the following example. He asked, when you go into a grocery store and buy beer, what is the beer you receive? An asset or an expense? They answer, it's an asset. After you drink it, it is an expense.
So what does this example have to do with the Biden administration's plan to invest in the nation's infrastructure? Plenty. With a little further information, it is the basis for understanding what Congress and the president's administration can't seem to understand — government does not make investments. In fact, with very few exceptions, government departments do not record depreciation of anything owned. This is because governmental accounting does not follow Generally Accepted Accounting Principles (GAAP). From the ways in which they handle budgets, you might say, Congress doesn't even apply simple mathematics.
Governmental accounting follows rules and regulations as defined and proposed by The Governmental Accounting Standards Board (GASB). Our federal government is not very good at following even those standards. Congress seems to invent rules whenever it wants to — for example, using the Social Security fund as an asset instead of what it is — a liability. You could call it insanity because it is. That's a subject for another article.
Some time ago, I read the tax proposal of the Ways and Means Committee during the Obama administration. The Republicans had control of the House and the Senate in the 114th Congress, which ended in 2017. The committee's website stated that it welcomed input from taxpayers. I sent a proposal that recommended a reinstatement of the Investment Tax Credit, first proposed by President Kennedy. It was passed into law with the Revenue Act of 1962. I suggested a few modifications to encourage increased investment in the United States economy. I received a response only from a staffer at my congresswoman's office and nothing from anyone else. The response was just thank you. Not much else like "we read your proposal."
There was one major concern I had about the bill as proposed by the Republicans: the unlimited amount of the Section 179 deduction for personal property used in a trade or business. This is another example of Congress making up its own accounting rules that are clear violations of sound accounting practice. While it can be argued that tax accounting is not intended to follow GAAP, extreme deviations from sound finance and accounting practices are what cause major problems in business. Think about Enron and World Com among other recent accounting scandals. The Investment Tax Credit would make for a better tax proposal than raising the ceilings on section 179.
The difference between what the Biden administration and the Democrat-led Congress are proposing, with their so-called "infrastructure bill," and what the Republicans did with the tax law under President Trump is the difference between an expense and an asset.
In accounting, expenses and assets are both debits. The difference is, the expenses are a debit on the income statement, and assets are a debit on the balance sheet. In other words, one is an investment, and one is an expense. With the Republican bill, the economy of the United States is invested in by the taxpayers; corporations, partnerships, and small businesses. The Democrats' bill is paid for with government handouts — an expense.
The theory the Democrats are holding to is Keynesian economics, which does work in certain economic situations — like during World War Two. The mechanisms used are investment in infrastructure, unemployment benefits, and education. Even Keynes knew, however, that his theory does not apply universally. For one thing, one of its side-effects is an increase in inflation. We are seeing that already, and we haven't yet had the spending that is being proposed. The current inflation rate is the highest since 1992.
Keynesian theory has as a premise the idea of stimulating the economy by "priming the pump," similar to starting a gasoline-powered engine. You add a little to the carburetor to start the engine. If you add too much fuel, the carburetor gets flooded and stalls the engine. The same thing will happen to the economy when it's flooded with too many dollars: it stalls.
Allowing the private sector to invest in the economy creates assets. With the spending proposed by the Democrats, all that investment will be expensed. Very little will be tangible assets that will continue to supply the economic growth needed to maintain a growing economy. It is the difference between buying a brewery and buying cases of beer. This doesn't even consider the fact that there will be an astronomical amount of debt. Nancy Pelosi apparently is concerned about that only when there is a Republican administration.
With estimates that as much as 95% of Biden's infrastructure bill is going to anything but infrastructure, the money spent on that 95% will end up in the same place as that beer in your refrigerator — after it's been fully expensed. That is not a way to stimulate our current economy. Investment is best when it comes from the private sector.
So, raise a glass and say, "Cheers, Joe!"
David Ennocenti is a retired accountant and graduate of the State University of N.Y. at Buffalo, School of Management with a degree in accounting and finance. He passed the CPA examination in 1983. His writing has appeared in the American Thinker, USA Today, The New York Times, and several other publications. His screenplay, Sniper Queen, was an official selection of The Artemis Women in Action Films Festival. He is a past winner of the Writer's Digest Annual Competition.
Image via Piqsels.
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