By John Miller
Everyone from Larry Summers, establishment wunderkind economist, to the International Monetary Fund (IMF) to progressive policy wonks at economic think tanks believes infrastructure spending is key to curing what ails the U.S. economy and other advanced economies. Even President Trump promises a $1 trillion infrastructure program as a key part of his plan to make the U.S. economy great again.
A $1 trillion infrastructure proposal would have its attractions, even one coming from the Trump administration. Public (government) investment of that size could go a long way toward putting our failing infrastructure in working order and could boost economic growth and create jobs. The prospect of a large-scale infrastructure program was enough to get labor leaders to meet with Trump in the White House, and for the Democratic Party leadership to offer to work with Trump on infra- structure legislation. And unlike Obama, Trump might be able to get the Republican Congress to enact a sizable infrastructure plan.
Nonetheless, questions abound. What is it about infrastructure spending that has turned it into an economic wonder drug in the minds of economists of different political stripes? Just how defective would a Trump infrastructure program be should infrastructure ever make it to the top of Trump’s policy agenda? And just what would constitute a progressive infrastructure program?
Jonesing for Infrastructure Spending
Much like desert wildflowers, calls for public investment from mainstream economists lie dormant for years only to blossom with each new prolonged economic downturn. On cue in 2014, nearly six years after the official end of the Great Recession, Lawrence Summers, former Treasury secretary and World Bank chief economist, began championing what he called the “secular stagnation” hypothesis. Summers argued that the United States and other industrialized economies have been suffering for more than two decades from a chronic lack of demand—a shortfall of both private and public spending not just inducing a temporary recession but also causing long-term (or “secular”) economic growth to slow. And to over- come decades of ever-slowing economic growth, underemployment, and stagnant wages, Summers called for a program of enlarged and sustained public investment.[i]
Nor is Summers alone among establishment economists in recommending substantial public investment to counteract today’s economic stag- nation. Christine Lagarde, the managing director of the IMF, has also endorsed public investment in infrastructure as “especially important” for coun- teracting the “new normal” of ongoing economic stagnation in the economies of the United States, Europe, Japan, and other advanced nations.[ii]
The Good: What Infrastructure Investment Could Do
There is much to recommend a program of public investment. To begin with, the heart of any public investment program is infrastructure spending. That spending is crucial to the economy. Our roads, bridges, pipelines, railways and bus lines, ports, airports, and electric power grid and energy systems undergird production in almost every sector of the economy and support our day-to-day lives. Spending public money to repair and modernize our infrastructure is a wise investment.
That investment is much needed. U.S. infrastructure earned a grade of D+ from the American Society of Civil Engineers (ASCE), which probably comes as no surprise after the collapse of a bridge in Minneapolis, the failure of levees in New Orleans, and lead-leeched drinking water in Flint, Michigan. But the aggregate figures of the disrepair of U.S. infra- structure are no less alarming than those disasters. Some 10 percent of bridges are structurally deficient, highway congestion continues to mount, 40 percent of buses and a quarter of rail assets are in poor or marginal condition, aging drinking water systems are near the end of their service life, and a patchwork electrical grid held together by aging equipment is riddled with bottlenecks, and risks longer and more widespread blackouts. That partial list says nothing about our failure to invest in alternative energy sources or to expand broadband to sup- port rural communities. These mounting infra- structure deficiencies have increased the cost of doing business and reduced the disposable income of households by as much as $3,400 a year according to the ASCE. More hours spent commuting, longer travel time with congested airports and highways, unreliable power and water sources, and other obstructions drive up costs for business and prices faced by consumers, reducing their purchasing power.[iii]
U.S. infrastructure is in such disrepair because of a crippling decline in public investment. U.S. net public investment (subtracting depreciation) relative to the size of the economy has fallen from 2 percent of GDP in 1970 to about 0.6 percent of GDP in 2015. In the Eurozone, net public investment had turned negative by 2012, no longer able to renew its already inadequate investments. A recent study conducted by the McKinsey Global Institute found that from 1992 to 2013 relative to the size of their economies, public investment levels in the United States, Canada, and Western Europe were lower than in Africa and less than one-third of the level of public investment in China.[iv]
U.S. infrastructure spending is now $1.4 trillion short of the $3.3 trillion the ASCE says is needed in the next decade to bring U.S. infra- structure “into a good state of repair.” While that shortfall is spread across the different categories of infrastructure spending, $1.1 trillion of it comes from the lack of investment in surface transportation, where spending falls 54 percent short of its needed funding. The dollar amounts of their shorfalls are smaller than for surface transportation, but the underfunding is even greater for public parks and recreation (89 percent), dams (88 percent), and levees (88 per- cent) and nearly as large for schools (43 per- cent) and on hazardous and solid waste (also 43 percent).
U.S. infrastructure spending is now $1.4 trillion short of the $3.3 trillion . . . needed . . .
In addition to being much needed, public infrastructure investment would boost eco- nomic growth in the United States and other advanced economies weighed down by linger- ing economic stagnation. In the short term, more public infrastructure investment increases total spending in the economy. The effect of public investment on output, especially in a slack economy, is potentially “quite large,” according to Summers’ research.[v] IMF researchers assign a similarly large bang for the buck of a dollar of public investment on output. They estimate that a dollar of public investment increases output by $1.50 in the first year, and that number rises to $3.00 over time. The IMF researchers’ estimates of these multiplier effects, as economists call them, like Summers’ estimates, assume a slack economy with low interest rates for public borrowing.[vi]
Public infrastructure investment has other positive economic effects as well. It can enable, or “crowd in” in economic parlance, private investment by boosting productivity and reducing costs across the economy but particularly in manufacturing. Higher levels of public infra- structure investment also contribute to faster economic growth over time as they enlarge the productive capacity of the economy. Finally, the U.S. economy has grown more quickly when it has been supported by higher levels of public investment than when it was not. For instance, Political Economy Research Institute economists Robert Pollin, James Heintz, and Heidi Garrett-Peltier report that, in the period from 1950 to 1979, “public infrastructure investment and economic growth rise together,” while “public infrastructure investment and economic growth fall together” in the period from 1980 to 2007.[vii]
Summers is convinced that deficit-financed large-scale public investment would not push government debt to unsustainable levels. The real interest rates for government debt are near zero in today’s economy. (For instance, the interest rate on a ten-year Treasury bond is 2.3 percent, barely higher than the 2.2 percent rate of inflation over the last year.) And Summers’ estimates of the effect public investment has on economic output suggest that public investment projects would generate enough revenue to ser- vice the associated debt. The IMF sees it the same way in their October 2014 Economic Outlook report.[viii]
. . . A $1 trillion investment in infrastructure would create more than 11 million jobs over the next ten years.
Finally, faster economic growth and the direct effect on employment would create jobs that are still needed. Despite a low official unemployment rate, a large number of workers in need of a job are overlooked by the traditional unemployment statistics. These workers are either only marginally attached to the labor force or forced to work part-time even though they want a full-time job. Pollin, Heintz, and Garrett-Peltier found that an infrastructure pro- gram of $100 billion in 2017 dollars would create between 1.4 million and 1.7 million new jobs in 2009. The number of jobs created varied by the type of infrastructure. But $1 billion spent on the water system, building schools, transport systems, or energy projects would create more jobs than a $1 billion tax cut on household consumption would have. A recent study by Anthony Carnevale and Nicole Smith, economists at the Georgetown University Center on Education and the Workforce, estimated that a $1 trillion investment in infrastructure would create more than eleven million jobs over the next ten years. They find that the new jobs would likely go overwhelmingly to men (92 percent), and just over half those jobs (55 percent) would likely be held by workers with no more than a high school education. The jobs would last for the life of the infrastructure projects, a decade in this case, although the need for workers to maintain, repair, and update infra- structure would be ongoing.[ix] Whatever public infrastructure investment does to create new jobs would empower workers to push up their wages, which have stagnated for most workers in the eight years since the official end of the Great Recession.
Trump’s Infrastructure Flimflam
The evidence is clear: A properly targeted and sufficiently large program of public infrastructure investments can compensate for the lack of private investment plaguing the advanced economies and repair deteriorating infrastructure, while it boosts economic growth and creates jobs.
But with each passing month, the likelihood of the Trump administration proposing an infrastructure program grows more remote. Infrastructure spending has slipped off the Trump agenda. And the Trump administration’s first “budget blue- print” would cut 13 percent from department of transportation funding, key for any infrastructure program, and would make even deeper cuts in nondefense discretionary spending, nearly half of which goes to public investment.
Finally, despite all his talk of a $1 trillion infrastructure program, Trump was never interested in enacting a public investment program, or in spending enough money to return our infrastructure to good repair, or in targeting our most crucial infrastructure needs for improvement. Rather, his campaign proposal would open critical areas of government investment to private profiteering. Here’s how. A slim campaign white paper written by Wilbur Ross and Peter Navarro, then senior campaign advisors and now Secretary of Commerce and head of the Trump trade council, respectively, outlines how the Trump plan would work. The $1 trillion of infrastructure spending would be generated from an initial outlay of $167 billion.[x] The $167 billion would come from selling equity positions in infrastructure projects to private investors who would then leverage their position by borrowing five times that amount over a decade to finance the projects they now own. But to make that happen would cost the government $140 billion in the form of an 82 percent tax credit (reduction in taxes) on each dollar invested. The tax credit, as Ross and Navarro put it, would “encourage investors to commit such large sums.” The 82 percent tax credit, however, would only apply to projects with a dedicated source of revenue, such as tolls or user fees, which would attract private investors. In addition to being able to buy up infrastructure at 18 cents on the dollar, the Ross and Navarro plan anticipates that investors will earn a 9 to 10 percent rate of return on their initial equity investment. And they promise that their plan would raise $1 trillion to fix our infrastructure without costing taxpayers a dime. The $140 billion of tax credits would be paid for from taxes on new construction jobs and profits created by the projects.
. . . [T]he Trump administration’s first “budget blueprint” would cut 13 percent from department of transportation funding . . .
But a plan that would sell off much of U.S. infrastructure capable of generating fees, pro- vide wide profits margins, and hand out large tax breaks that would allow private investors to buy up infrastructure at a deep discount is what it appears to be: a get-rich-quick scheme for the already rich.
The Trump plan is also at odds with the role that infrastructure plays in the economy. Trump’s privatization scheme dictates exactly what kind of infrastructure projects would be undertaken. Infrastructure spending would go exclusively to new projects that generate fees and tolls—projects such as toll roads, and utilities where those who do not pay can be excluded. But the distinguishing character of most infrastructure is the nonprivate or public character of its benefits. For instance, hazardous waste clean-up and the repair of public schools benefit all of us. But those projects don’t generate a revenue stream nor does repairing levees or leeching lead from water systems or maintaining the roads and bridges of rural areas. Mass transit projects can generate a revenue stream but seldom enough to function without public subsidies. Under the Trump plan, none of these projects would be funded even though their widespread benefits often do more to improve our economy and our day-to-day life than benefits from infrastructure that can be privatized. Finally, as economist Edward Glaezer emphasizes, economists have found that “the highest returns are from fixing existing infrastructure.”[xi]And those projects go unfunded in the Trump plan, as well.
. . . [A] plan . . . that would allow private investors to buy up infrastructure at a deep discount is. . . a get-rich-quick scheme for the already rich.
Despite the promised zero sticker price, we would pay plenty for the Trump infrastructure privatization plan. To begin with, there are the tolls and fees we would pay to use the new private infrastructure. That is unlikely to go down easy. Tolls are collected on just six thousand of the four million miles of roads in the United States. Toll facilities are expensive to maintain and cause congestion. On top of that, tolls and fees, which act as a consumption tax, are regressive, taking a larger share of the income of low- and middle-income users than from others.
And taxpayers would not get off the hook. Trump’s privatization scheme would leave unfunded the truly public infrastructure projects that provide the biggest bang for the buck when it comes to increasing output. That makes the claim that the initial $140 billion the plan ponies up to pay investors’ their 82 percent tax credit can be financed out of tax revenues generated by economic growth especially suspect. With insufficient growth, taxpayers will be left to pick up the tab (either in the form of lost government services or higher taxes) for a huge tax cut for wealthy investors who will now own much of our infrastructure. And those costs will be greater than what it would have cost the government to borrow the money at today’s historically low interest rates.
Trump’s privatization scheme will leave unfunded the truly public infrastructure projects that provide the biggest bang for the buck . . .
Actually, the Trump infrastructure plan is unlikely to boost economic growth or add to the number of jobs in the economy. For a tax credit plan to work, it must commission projects that would not have been undertaken anyway, and must not be financed by monies that would have been invested elsewhere in the economy. Neither of those conditions is likely to be met in the Trump infrastructure plan. Economist Douglas Holtz-Eakin, president of the conservative American Action Forum, warns that under the Trump tax credit plan, the new capital devoted to infrastructure would “shift” from one place to another. For the nation as a whole, a big chunk of that’s a wash.”[xii] And with little or no increase in investment, the Trump infrastructure plan will add little or nothing to economic growth or employment. That is not a job’s plan, but “a trap,” as Ronald Klain, who oversaw the Obama stimulus package, the American Recovery and Renewal Act, from 2009 to 2011, puts it.[xiii]
Ugly Choices and Progressive Possibilities
Public investment dedicated to renewing and expanding our infrastructure and providing the spending needed to quicken economic growth and create jobs is desperately needed. But the Trump tax credit, privatization plan, despite being sold as a $1 trillion infrastructure plan, would not cure what ails our economy or restore our infrastructure to working order. When it comes to this element of Trumponomics, we should do as economist Gerry Epstein recommends, “just say no.”[xiv] Where I work, we place a real premium on politeness, so I would suggest that we “just say no thank you.”
But do say yes to progressive public infrastructure proposals. For instance, The People’s Budget of the Congressional Progressive Caucus (CPC) devotes $2 trillion of public investment over the next decade to repair and expand our infrastructure.[xv] That infrastructure spending would clean up drinking water pipes, update our energy grid to support renewable power resources, support public transportation, and expand broadband, and rebuild public schools.
How historically unprecedented is the CPC’s proposal? An additional $2 trillion would more than restore U.S. infrastructure spending relative to the size of the economy to levels of the late 1970s, the post-World War II peak. An additional $2 trillion dollars would also lift infrastructure spending beyond the average 1.36 percent of GDP during the New Deal years from 1933 to 1937, but still fall well short of the 2.96 percent of GDP level of infrastructure spending in 1933—the year Roosevelt launched the New Deal—according to the calculations of Brookings Institute economists Adie Tomer, Joseph Kane, and Robert Puentes.[xvi]
Today, just as in 1933, we face critical problems. To confront today’s economic and environmental crises, Robert Pollin has proposed a “green new deal agenda, capable of delivering both a viable path to near-zero emissions and climate stabilization, as well as expanding good job opportunities.” The heart of his proposal is to commit to investing 1.5 percent of GDP in infrastructure projects “that would dramatically improve energy efficiency standards and to expand the supply of clean renewable energy.”[xvii]
. . . [W]ith little or no increase in investment, the Trump infrastructure plan will add little or nothing to economic growth or employment.
In the last analysis, fixing our infrastructure, taking on global warming, and overcoming economic stagnation are political problems rather than economic ones. With sufficient political will—and political might—we could enact a program of large-scale public investment that would be both worthwhile for its own sake and has been shown to effectively create jobs.
[i] See Lawrence H. Summers, “U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound,” Business Economics 49, no. 2 (2014): 65-73.
[ii] See Christine Lagarde, “The Challenge Facing the Global Economy: New Momentum to Overcome a New Mediocre,” Georgetown University, October 2, 2014, available at http://www.imf.org/ external/np/speeches/2014/100214.htm.
[iii] American Society of Civil Engineers, “Failure to Act: Closing the Infrastructure Investment Gap for America’s Economic Future,” 2016, available at http://edrgroup.com/pdf/ASCE2016FailuretoActReport.pdf .
[iv] McKinsey Global Institute, “Bridging Global Infrastructure Gaps,” June 2016, available at http://www.iberglobal.com/files/2016-2/Bridging-Global-Infrastructure-Gaps_mckinsey.pdf.
[v] See Summers, “U.S. Economic Prospects,” 72-73.
[vi] Abdul Abiad, Davide Furceri, and Petia Topalova, “The Macroeconomic Effects of Public Investment: Evidence from Advanced Economies” (IMF working paper, May 2015), available at www.imf.org/en/Publications/ WP/Issues/2016/12/31/The-Macroeconomic- Effects-of-Public-Investment-Evidence-from- Advanced-Economies-42892.
[vii] See Robert Pollin, James Heintz, and Heidi Garrett-Peltier, “How Infrastructure Investments Support the U.S. Economy: Employment, Productivity and Growth,” Alliance for American Manufacturing, January 30, 2009, available at http://www.americanmanufacturing.org/research/entry/how-infrastructure-investments-support-the-u.s.-economy-mployment-producti.
[viii] The International Monetary Fund, Economic Outlook, October 2014. See Chapter 3: “Is It Time for an Infrastructure Push? The Macroeconomic Effects of Public Investment,” pp. 75-114, available at http://www.imf.org/ external/pubs/ft/weo/2014/02/.
[ix] See Anthony P. Carnevale and Nicole Smith, “Trillion Dollar Infrastructure Proposals Could Create Millions of Jobs,” Center on Education and the Workforce, Georgetown University, avail- able at https://cew.georgetown.edu/wp-content/ uploads/trillion-dollar-infrastructure.pdf.
[x] See Wilbur Ross and Peter Navarro, “Trump versus Clinton on Infrastructure,” Trump Campaign, October 27, 2016, available at http://peternavarro.com/sitebuildercontent/site builderfiles/infrastructurereport.pdf
[xi] See Brad Plumer, “Senate Democrats Have a $1 Trillion Infrastructure Plan—and Its Very Different from Trump’s,” Vox, January 24, 2017, available at https://www.vox.com/ policy-and-politics/2017/1/24/14369666/ democrats-infrastructure-plan-trump.
[xii] See Steven Mufson, “Economists Pan Infrastructure Plan Championed by Trump Nominees,” The Washington Post, January 17, 2017, available at https://www.washingtonpost.com/business/economy/economists-pan-infra structure-plan-championed-by-trump-nominees/2017/01/17/0ed1ad5e-dc5e-11e6-918c-99ede3c-8cafa_story.html?utm_term=.6f2d0b7e8678
[xiii] See Ronald A. Klain, “Trump’s Big Infrastructure Plan? It’s a Trap,” The Washington Post, November 18, 2016, available at https://www.washingtonpost.com/opinions/trumps-big-infrastructure-plan-its-a-trap/2016/11/18/5b1d109c- adae-11e6-8b45-f8e493f-06fcd_story.html?utm_term=.7c0dae398fd5.
[xiv] See Gerald Epstein, “Trumponomics: Should We Just Say ‘No’?” Challenge 60, no. 2 (2017): 104-21.
[xv] See The Congressional Progressive Caucus, “The People’s Budget: A Roadmap for the Resistance FY 2018,” available at https://cpc- grijalva.house.gov/the-peoples-budget-a-road map-for-the-resistance-fy-2018/.
[xvi] See Adie Tomer, Joseph Kane, and Robert Puentes, “How Historic Would a $1 Trillion Infrastructure Program Be?” Brookings, March 12, 2017, available at https://www.brookings. edu/blog/the-avenue/2017/05/12/how-historic- would-a-1-trillion-infrastructure-program-be/.
[xvii] See Robert Pollin, “Greening the Global Economy”,Boston Review of Books (Cambridge: MIT Press, 2015).