The Federal Reserve is worried.
At its December meeting, members of the Fed’s interest-rate-setting committee debated the likelihood of “more expansionary fiscal policy” during the next 12 months. That’s Fedspeak for increased infrastructure spending under incoming president Donald Trump. The concern is that more government spending could push inflation higher than normal, which would force the Fed to raise rates faster than it would otherwise—which would most likely be an unpleasant surprise for stock and bond markets.
Some analysts think Trump’s infrastructure plan has the potential to be the biggest road-building program since the 1950s. But Trump’s infrastructure plan is more like a wish list built on idealistic assumptions that’s unlikely to survive its first brush with political reality. In fact, of all Trump’s big ideas—tax cuts, deregulation, healthcare re-reform, renegotiated trade deals—the infrastructure plan is probably most likely to be gathering dust on the shelf a year or two from now.
Trump began last fall by proposing $1 trillion in new spending on roads, bridges and other projects, which would indeed be a historically large sum. But that was the campaign pitch; the goal now is $550 billion in spending, according to the Trump transition website. So the opening bid has already dropped by 45%.
Even more important is the way Trump wants to raise that money. The transition site doesn’t spell it out, but the plan Trump put out last fall relied largely on private investors to fund new infrastructure projects. The government’s role would be to offer an 82% tax credit on a portion of the private investment, as an incentive to draw private money, which might otherwise flow to investments deemed safer or more lucrative. The tax credits, representing the ultimate cost to taxpayers, would represent a small portion of the $1 trillion, and an even smaller amount if the real target is $550 billion.
The problem with getting private investors
The Trump plan—drafted by Wilbur Ross, Trump’s nominee for Commerce Secretary, and economist Peter Navarro, who will be a presidential advisor—went one step further. Trump also wants to offer US companies a repatriation holiday, by cutting the tax rate on overseas profits booked in the United States from the current rate of 35% to 10%. A company repatriating profits could cut its effective tax rate on that money to zero if it invested the right amount in infrastructure projects and took advantage of the 82% tax credit for that. On paper, the net cost to taxpayers would be nothing.
There’s one huge catch, though. Private investors only typically put money into infrastructure projects when there’s a guaranteed revenue stream backed by tolls or other types of user fees that can’t be revoked. Some private infrastructure investing already exists, but it hasn’t really caught on in the United States. The Trump model relies on private debt for a considerable part of the financing, and without tolls or user fees, there’s no cash flowing back to investors to make debt payments and compensate investors. Without that, the model simply doesn’t work.
So Trump, in essence, has proposed an infrastructure program that would require little or no taxpayer money, but would only work on projects where user fees provide a cash flow back to investors. There are a few projects that fit the profile, such as airport renovations that can be funded in whole or part by airport fees tacked on to ticket prices. There are a couple of privately owned and operated toll roads in the United States, such as the Chicago Skyway and the Indiana East-West toll road. But the prospect of imposing tolls on roads or other facilities that are currently free is a nonstarter in Congress and just about every state capital, except for unusual cases where a municipality is desperately strapped for money or private funding for a new project may be the only way it gets built.
It’s possible Congress could come up with a different plan to boost infrastructure spending the old-fashioned way, through taxes. But there seems to be little appetite for that. Democrats might go along, but they’re the minority in both chambers. House Speaker Paul Ryan is a budget hawk who says he doesn’t support a big boost in taxpayer funding for roads and bridges, and enough Republicans probably agree with him to squelch any big new programs—especially with all the other priorities Republicans are pursuing.
So Trump has proposed a novel infrastructure program that’s only applicable to a handful of projects, while Republicans in Congress are looking the other way and Democrats have no truck on the matter. The big question on infrastructure spending is always, where will the money come from? For the next few years, the answer is probably nowhere.
Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman.