President Trump has proposed spending $1 trillion over the next decade on public and private investment in infrastructure. The CATO Institute’s Ryan Bourne has just published an excellent analysis of the whole issue. Here are the highlights:
Any new federal spending must take into account that federal public debt now stands at 77% of GDP and is likely to keep rising given the demographic pressures on entitlement spending. This means that the long-term outlook for public finances is dire.
With a current low unemployment rate of 4.4% and a high of 6 million job openings, the economy does not need more government stimulus at the present time.
Bridge quality has improved substantially since 1990 (see chart) although roadway congestion has become more acute (second chart). Rail and transit systems appear to be the main areas with observable deterioration.
The difference between state highways (which are in good condition), local roads (which are in fair condition) and transit systems (which are in poor condition) is simple: state road maintenance is paid almost entirely out of user fees (gasoline taxes), local road maintenance is paid for by a combination of taxes and user fees (motor vehicle registrations and parking meters) while transit maintenance is paid for almost entirely out of taxes.
The above indicates that the following policy framework should be followed:
Privatize areas where government is not needed such as airports, air traffic control systems and railways (Amtrak).
Localize decision making as far as possible such as decentralizing responsibility for transportation infrastructure back to the states.
Remove payment barriers for charging users. This could reduce the cost of capital investment required for highway systems by 30%.
Level the playingfield for private sector funding. Currently interest income received for investing in municipal bonds is tax free which is not the case for private debt.
Conclusion. “Rather than imposing further costs on taxpayers, the Trump Administration should prioritize localizing decision making, removing regulatory barriers to private investment, encouraging use of user fees and removing tax exemptions for public investment.”
As the readers of this blog well know, I am very concerned about the fiscal and economic direction our country has been taking in recent years. I voted for Hillary Clinton in the 2016 presidential election because of Donald Trump’s crude and sleazy behavior. However we need basic change in the U.S. and Mr. Trump is clearly a change agent.
As the new Trump administration begins to take shape, here is what I see happening:
Treasury Secretary designee, Steven Mnuchin, says that tax cuts for both upper-income and middle class taxpayers will be offset by “less deductions that pay for it.” Revenue neutral tax rate cuts will increase both consumer and investment spending, without increasing our debt, and will give the economy a huge boost.
Health and Human Services Secretary designee, Rep Tom Price, is an expert on health-care and wants to replace the Affordable Care Act with a new healthcare program which provides more consumer choice at a much lower cost.
The Great Rebuilding. Infrastructure investment is needed but it should be accomplished with a lower corporate tax rate and repatriated profits of multinational corporations to avoid increasing the deficit.
Holdback on excessive fiscal stimulus. With the unemployment rate down to 4.6%, a dollar which has already appreciated 40% since 2011, and tax cuts on the way, inflation and higher interest rates are in the offing. Let’s not overdo it.
Living on borrowed time. As shown in the above chart, interest rates are very, very low and are likely to rise significantly in the near future. When this happens, our massive public debt (on which we pay interest) of 76% of GDP will become very expensive to service. Ouch!
Conclusion. One can see a Trump agenda emerging which has the potential to be very successful if it is coupled with overall spending restraint.
The economy added 321,000 jobs in November, the most in one month since January 2012.
The unemployment rate of 5.8% remains steady and is down from 7% in November 2013.
The average hourly earnings for workers is up by 2.1% from a year earlier.
Economic growth for the third quarter is up 3.9% from the previous quarter.
The deficit for the 2014-2015 fiscal year was “only” 2.8% of GDP and is predicted by the Congressional Budget Office to drop to 2.6% for the current year.
The price of a gallon of gasoline has dropped to $2.71 on average, its lowest level since 2010 and is still dropping.
The New York Times predicts that the “Brighter Economy Raises Odds of Action in Congress.” Jason Furman, Chairman of the White House Council of Economic Advisors, is quoted as saying that “At least there will be less of a philosophical debate on infrastructure, tax reforms and expanding exports. You can have that agenda because the economy is not in free fall.” These three items would make a great agenda for the 114th Congress in the following way:
Infrastructure. The continuing drop in the price of gasoline offers the opportunity to replenish the inadequately funded Highway Trust Fund in a fiscally responsible manner. Congress should raise the federal gasoline tax above its current 18 cents per gallon to a level which is sufficient to fund the entire federal share of highway construction and repair.
Tax reform. Individual and corporate tax reform will give the economy a huge boost. The idea here is to lower tax rates in a revenue neutral way by closing loopholes and deductions.
Expanding Exports. What’s needed here is to give the President fast track negotiating authority so that Congress has to vote any trade agreement up or down without modification. This is the only way to get other countries to make concessions.
Of course there are many other issues which need to be seriously addressed by the new Congress. But relatively quick action on just these three less controversial items would be a great start!