There is, thankfully, less to President-elect Donald Trump’s plan to boost infrastructure spending than meets the eye. During the campaign, Hillary Clinton proposed spending $275 billion on roads, bridges, rail-transit systems, and the like over ten years. Trump said we should spend $550 billion: a number he chose because it was twice hers. Sometimes he has talked about a trillion dollars in infrastructure spending. But a paper from Trump’s advisers calls for $137 billion in tax credits, which they hope will call forth the rest of the trillion dollars.
Proponents of an infrastructure-building boom, who have usually been on the left rather than the right, have generally made three arguments for it. A fourth may have more validity.
The first argument is that with interest rates low, there has never been a better time to borrow money to invest in infrastructure. This view rests on a fallacy. It assumes that low interest rates reduce the costs of an infrastructure project while its benefits remain constant. But if interest rates have fallen in part because the country’s potential for economic growth has also fallen — which is the view of many economists — then the assumption is wrong. In that case, the potential economic benefits of a project are also lower.
The second argument is that a deficit-financed infrastructure boom will stimulate the economy. This argument is based on the familiar Keynesian view that increased deficit spending can get an economy out of a slump. It puts money in people’s pockets, they go spend it, which puts money in other people’s pockets, etc. This was the argument that the Obama administration employed to justify its stimulus bill in 2009, which included a heavy infrastructure component. Trump’s advisers take this argument far. They say that his tax credits will pay for themselves: More people will be working, and they’ll pay taxes, so the federal government will come out even. But the argument is a poor fit for our circumstances, since we are not in a recession. We are in an economic expansion, and at such times Keynesianism calls for reducing deficits. And with unemployment already low, infrastructure spending is likely to move already-employed workers from one activity to another, so there will be no revenue windfall.
Anyway, deficit spending is not expansionary if it causes monetary policy to tighten. Since the economic crisis of 2008–09, the Federal Reserve has tried to keep its preferred measure of inflation running between 1.5 and 2 percent per year. If it sticks to that target, a building boom cannot do much to stimulate the economy: As soon as inflation threatens to rise above 2, the Fed will raise interest rates to bring it back down. The Fed could instead determine that a little extra inflation is worth tolerating for a little extra growth. In that case, however, the infrastructure spending would not be necessary: The Fed could raise its inflation target without that spending.
The third argument for more infrastructure spending is that we need the roads, runways, and so on. This case is often overstated. During the campaign, Trump echoed a generation of Democratic politicians in saying that our bridges are “crumbling.” The Department of Transportation’s count of structurally deficient bridges has, in contrast, been continually falling since the early 1990s (even as the total number of bridges has risen). But it is surely the case that some infrastructure spending could yield benefits down the line that justify the cost.
Whether federal resources will go to the most useful projects is a different question. Governments tend to spend too much building new roads and not enough maintaining existing ones, for example. Infrastructure may not be produced cost-effectively, either, although Trump and his advisers say he will tackle two of the causes of inefficiency: union pay scales and red tape.
Japan is a cautionary tale about the promise of infrastructure-led development. It has spent more than $6 trillion since 1990 to upgrade its infrastructure. All those tunnels, trains, and airports have not resulted in increased economic growth. And Japan is not an anomaly.
In a 2014 paper for the International Monetary Fund, economist Andrew Warner looked at data from 124 countries over 50 years. He found “very little” evidence that big pushes for infrastructure investment led to increased long-term growth. He pointed to some chronic problems with such investment, including poor selection of investments (since policymakers and construction firms have more incentive to see that money is spent than to see that it is spent wisely) and poor information (key actors having no incentive to produce realistic forecasts or economic analyses, they are not produced).
The political prospects of Trump’s infrastructure plan are uncertain. Conservative Republicans in Congress are unenthusiastic about it. Some Trump advisers have discussed allaying their concerns about deficits by using revenue gained from corporate-tax reform to fund the tax credits. But many Republicans prefer to use any windfall revenues to finance tax cuts, not infrastructure spending. If Trump is emphatic enough about this priority, though, party loyalty may triumph over their policy views.
Democrats are meanwhile split on Trump’s infrastructure plan. Nancy Pelosi has said she will work with him on it. But some Democrats oppose doing anything to cooperate with him. Others have faulted the design of Trump’s plan. Trump’s tax credits would cover 82 cents of every dollar in costs for private investors, which they consider much too generous. Some of those credits would be wasted, they argue, on investments that would be made anyway. And as generous as the credits are, some worthwhile investments will not generate profits for investors.
Whether or not infrastructure spending will help the economy, however, it could do a lot to help Trump. The Fed may offset its stimulative impact on the economy as a whole, but many particular people would still benefit. Particular places, too: States that happened to have a lot of infrastructure projects deemed worth funding — Wisconsin, perhaps? Pennsylvania? — would come out ahead from a new infrastructure-building boom. The total number of jobs in the country might not go up. But a lot of the people who got jobs working on infrastructure projects would be grateful to the president who brought it about. The best argument for passing a big infrastructure bill, in other words, is a political rather than an economic one.