A potential pothole in Trump's infrastructure plan
Investors have cheered President-elect Donald Trump’s proposal to spend $1 trillion on infrastructure over the next 10 years. But economists are questioning the plan’s upside for the economy given its unusual and convoluted structure, which they say portends less actual infrastructure improvement and more private-sector profits.
Trump is calling for the government to avoid direct spending and borrowing by instead subsidizing private developers with massive tax credits for building roads, bridges and other projects. The developers would own the infrastructure and collect resulting cash flows from tolls or fees.
Critics call it backdoor borrowing, with less accountability than direct government spending, and they say the plan will result in emphasizing projects with private sector profit potential and fewer badly needed maintenance projects and improvements in underserved areas.
The details of Trump’s plan are sketchy, but generally it calls for tax credits equivalent to 82 percent of the equity private financiers spend on infrastructure. The idea is to leverage public money to lure private dollars and get more stuff built.
The liberal Economic Policy Institute argues the plan is unlikely to lead to much new investment because it’s driven more by ideology -- that private enterprise always trumps direct public investments in infrastructure -- than by rational policy.
The funding scheme could result in fewer new projects than a direct-spending plan as state and local governments simply change how they finance improvements now in progress to take advantage of the credits, the EPI noted in a report this month.
Another question: Will the plan provide a windfall to public-private partnership deals already in the works or provide incentives only for new ones?
Public-private infrastructure deals are prone to devolve into “crony capitalism” -- with developers securing bailouts when their projections for toll-collection totals prove too rosy, the EPI added. And often the most-needed improvements -- say lead-free water pipes in Flint, Michigan -- are unlikely to attract interest from private investors.
“Trump’s plan frames the infrastructure problem as a lack of innovative financing options,” EPI analysts Josh Bivens and Hunter Blair wrote in the report. “This is nonsense. The problem is that politicians don’t want to ask taxpayers to pay for valued infrastructure.”
Capital Economics is bullish on a Trump administration and Republican Congress, forecasting GDP growth of 2.7 percent for 2017 versus its preelection forecast of 2 percent. But its projection is built on tax cuts it expects for high-income earners and a lower corporate tax rate. It gives no credit to Trump’s promise of infrastructure investments.
Capital Economics expects the eventual infrastructure investment is likely to be “much smaller” than the headline number, and it noted that even $100 billion per year in new spending would represent a tiny fraction of U.S. GDP and fall well short of the $200 billion China spent on infrastructure in the first nine months of 2016.
“In practice, it takes a long time for most investment projects to deliver any major benefits, with costs typically overrunning in the meantime,” the firm stated in a research note. “Experience from many countries, including Japan and China, also shows that resources are often diverted to politically appealing schemes with limited economic return.”
A case can be made for the U.S. to borrow to make targeted investments in infrastructure, but the most prudent option -- maintenance of existing roads and bridges -- is “less glamorous and less politically attractive” than lassoing public-private partnerships, recently wrote Olivier Blanchard, a former chief economist for the International Monetary Fund. He’s now a senior fellow at the Peterson Institute for International Economics.
“By aiming at projects that can at least partly pay for themselves financially, they may generate the wrong kind of public investment,” Blanchard said. “Maintenance and the most useful projects may have high social returns, but they are likely to have low financial returns.”
