There’s a lot of ink being spilled — or is it pixels rearranged? — over the size, shape, merits and even existence of a Trump Administration infrastructure plan. Infrastructure was one of just a handful of substantive policy talking points in the campaign, and the President-elect reiterated this one on election night. It also appears that this might be one area where there is some interest on the part of Democrats in Congress in working with the incoming administration.
While there’s one campaign-vintage white paper the sketches out a way that private investors might get tax credits for investing in infrastructure projects, and also some rumbling about using the taxes on repatriated corporate profits now avoiding US taxation by being parked overseas, there isn’t actually a definitive infrastructure proposal. So while will continue to track this issue as it develops, for now, we’ll just give you a quick guide to what is being said, by whom about what might be in the offing.
All we have to go on so far on the outlines of a Trump Administration infrastructure plan is a month-old campaign document. Peter Navarro and Wilbur Ross have produced a sketchy, 10-page white paper asserting that an 82 percent tax credit for private investment in infrastructure could attract about $167 billion in private equity, and leverage enough debt to support $1 trillion in infrastructure spending. It goes on to assert that the cost to the federal government would be offset by the tax revenues paid by workers and businesses, making the plan revenue neutral. The “revenue neutral” claim is almost certainly wrong, because it assumes that none of these workers would be employed in the absence of the plan, and also that workers would pay a 28 percent tax rate on all of their earnings (28 percent is the marginal rate of taxation for many blue collar workers, but not the average tax rate).
The most prominent critic of this proposal to date is Paul Krugman, writing in The New York Times, in an article entitled: “Infrastructure Build or Privatization Scam.” Krugman sees the proposal as dubious and rife with prospects for cronyism. Why, he asks, is it necessary to involve private investors at all–especially when public borrowing costs are so low, and the projects in question are public assets? In addition, requiring projects to repay investors from a stream of revenues effectively excludes the most needed and highest leverage investments–like maintenance and repair–and pushes investment in things we don’t need: like more toll highways. Finally, Krugman points out that little of the investment is likely to be “additional” — i.e. projects not undertaken anyway, which obliterates the claim that the proposal will be revenue neutral.
Similarly, former Clinton campaign adviser, Ronald Klain thinks the Trump infrastructure plan is a trap. In a Washington Post Op-Ed Klain warns that “There’s no requirement that the tax breaks be used for incremental or otherwise expanded construction efforts; they could all go just to fatten the pockets of investors in previously planned projects.” In Klain’s view, the tax breaks would produce little or no new jobs or investment, but they would worsen the deficit, and then be used as an excuse to cut other domestic spending.
Writing at Vox, Brad Plumer concludes “Donald Trump’s infrastructure plan wouldn’t actually fix America’s infrastructure problems.” Plumer offers a good introduction to many of the practical and political pitfalls associated with trying to move to a private investment model for infrastructure. To date, there’s been little actual experience with public-private-partnerships (PPPs), and many have failed. The need to generate project revenues to repay investors skews investment decisions in favor of the kinds of infrastructure that are already relatively well-funded and systematically overlooks other investments that may have larger social or environmental benefits.
The University of Minnesota’s David Levinson is highly skeptical of the utility of public-private-partnerships as a vehicle for addressing our most pressing transportation needs. In a post at his Transportist blog, argues that the fiscal analysis of the tax credit overlooks opportunity costs, that tax credits wouldn’t leverage a substantial pool of tax-free capital (pensions, overseas investors), that many socially valuable infrastructure investments don’t generate the revenue that would attract private investment and that a sale-and-lease-back arrangement might be a better means of privatizing assets than a complex tax credit scheme.
Democratic congressional leaders are succumbing to highway propaganda, at least in the view of Angie Schmidt and Ronald Fried, writing at Streetsblog. The key problem with our transportation system is not so much a lack of resources, but a systematic bias toward projects that aim at expanding highway capacity and neglecting maintenance. The so-called report cards produced by the American Society of Civil Engineers, and others, are a misleading basis for setting investment policy.
Yonah Freemark echoes many of the concerns raised by Krugman, but also questions whether we need a massive increase in transportation spending, especially if it goes to create new road capacity. Even if transit investments continue to get 20 percent of federal transportation funding (and that’s a big “if”), the effect would be strongly biased to subsidizing additional driving; as Freemark writes, far from “a reaffirming of the status quo; it would represent a dramatic incentive to get many more people driving.” Since tax credits are paid for via reduced general fund revenues, the finance scheme amounts to a subsidy for driving paid for by the general population.
Politico takes the temperature of key Republican and Democratic leaders on Capitol Hill. Committee chairs Bud Shuster and John Thune both voiced concerns about “how to pay for it.” It also looks like the Trump Administration may be backing away from the campaign white paper; one set of advisers are calling for the tapping tax revenue repatriation of corporate profits now parked overseas, while another is floating the idea of an infrastructure bank–which was Hillary Clinton’s campaign proposal. The infrastructure debate may end up producing strange political bedfellows, with many Democrats eager to see more transportation spending, and many Republicans leery of the prospect.
While Republicans in Congress are stressing their fiscal skepticism over infrastructure, conservative economists are nearly apoplectic. George Mason University economist Tyler Cowen, sees the Trump proposal as a slightly re-branded version of the Obama stimulus package. In an opinion piece at Bloomberg — “The Trouble with Trump’s Infrastructure Plan”–Cowen argues that the GDP gains associated with greater infrastructure investment will be illusory, because more government spending will crowd out productive private investment, sucha as “[writing] business plans, building client lists, developing marketing strategies, cultivating customer relations” and that the additional debt to finance infrastructure today will necessarily lower GDP growth in future years.
In a piece pitched as a response to Paul Krugman, Tim Worstall takes different tack. Writing for Forbes, “Paul Krugman’s Terrible Misunderstanding of Trump’s infrastructure plans,” Worstall sings the praises of utility privatization, pointing out that in the UK, private water operators are more productive and efficient that public utilities. There’s a robust debate about the merits of privatization, but its hard to claim that if privatization is economically sensible that it would need an 82 percent tax credit for equity investment to pencil out. As Worstall concedes, “such a plan could degenerate into a mad scramble to collect the taxpayers’ cash.”
Economist Brad DeLong, looking for ways to push the incoming Trump Administration in a politically neutral, technocratic direction, thinks that a major investment in infrastructure could be productive common ground. But Delong share’s Krugman’s concerns that the current proposal of a tax credit for private investment would essentially do nothing to either stimulate the economy, nor address the nation’s infrastructure challenges.
.. at the moment it does indeed look like money for nothing: have the government pay for projects most of which would have been built by privates anyway, and then entrench monopoly pricing of what ought to be free public-good infrastructure for a generation: a zero on the short-term Keynesian boost to employment and production, a zero on the medium-term Wicksellian rebalancing to allow the normalization of interest rates, and a zero on boosting America’s long-term potential by filling some of the infrastructure gap.
And rather than just focus on roads, DeLong also has in mind broadening the definition of infrastructure:
The first natural place for positive technocratic policy to focus on is, therefore, in making the very strong case for a real and substantial infrastructure construction-led fiscal expansion–and making sure that people remember that investing in the human capital of twelve year olds is a very durable piece of infrastructure indeed. The math that shows that at current interest rates borrow-and-build is indeed a no-brainer for the economy is math that is correct, and math that ought to be very familiar to Donald Trump. (emphasis added).
We’ll continue to follow this issue closely at City Observatory. Stay tuned.