How a Trump Infrastructure Bank Could Soak Taxpayers
Politicians have fretted over, debated and vowed to fix America's crumbling infrastructure. For four decades.
Donald Trump, in his election-night victory speech, is the latest to pledge to give the nation a facelift, using American-made steel and employing American workers. "We're going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals," he said. Construction stocks zoomed on the news.
Where will he get $1 trillion for such an ambitious plan? Trump's chief strategist, Stephen Bannon, isn't worried. The controversial chairman of Breitbart News Network said in a Nov. 15 interview that he's the biggest proponent in Trump-land of borrowing for these public-works projects because negative interest rates are "the greatest opportunity to rebuild everything." He enthused:
Shipyards, ironworks, get them all jacked up. We're just going to throw it up against the wall and see if it sticks. It will be as exciting as the 1930s, greater than the Reagan revolution.
He also predicted the spending binge would make old-fashioned conservatives "go crazy." He's right.
Some House Republicans have already warned they'll oppose spending that isn't paid for. A possible source of funding could be corporate-tax reform, in which profits parked overseas are lured home with a lower rate, generating new tax revenue. But this would net a one-time windfall of $250 billion, tops. And some Republicans say that money should go toward paying for tax cuts, not federal projects.
Another possible financing source is an infrastructure bank, an idea pushed by Hillary Clinton that Trump criticized during the campaign. Now, however, he is considering it, according to Steven Mnuchin, the Wall Street scion who was Trump's top campaign fundraiser and is now a potential Treasury secretary.
This is troubling, and not just because it would be another turnabout for Trump. In the campaign, he said Clinton's bank would be controlled by politicians and bureaucrats who could direct most of the money to favored donors.
But this risk is just as great under Trump's infrastructure plan as it was in Clinton's. While she would have had the government directly spend $275 billion over five years 1 , he wants to rely heavily on private financing and $137 billion in tax credits.
Two advisers, private-equity investor Wilbur Ross (a candidate to be Trump's Commerce secretary) and economist Peter Navarro, in a 10-page white paper, say the tax credits should equal 82 percent of what investors put in as equity. I'd take that deal. It would require me to have only a small amount of skin in the game and, even if the project failed, "major revenue shortfalls could occur without impinging" on the equity or debt financing it, the paper states.
Trump's advisers also say their plan would pay for itself in new tax revenue paid by profitable construction companies and the workers they hire, a claim that even conservative think tanks call dubious.
Ron Klain, who oversaw Obama's $800 billion stimulus spending program from 2009-2011, calls the Trump plan a trap. "It’s a tax-cut plan for utility-industry and construction-sector investors, and a massive corporate welfare plan for contractors," he wrote in a Nov. 18 Washington Post op-ed.
Adding an infrastructure bank to the mix raises even more worries. Typically such institutions begin with seed capital provided by taxpayers. The bank pairs that with private funds to issue bonds, guarantee loans issued by other lenders, or make direct loans itself. By leveraging $25 billion in government funds 10-to-1, a bank could theoretically generate up to $250 billion in financing.
The problem is that pension funds, hedge funds and other private parties will only back projects that produce a lucrative and steady stream of revenue to cover operating costs, interest and principal on the debt, and dividends to repay their investment.
Most of the physical structures that undergird the economy -- for example, non-tolled roads, sewage-treatment plants, train stations and schools -- produce little or no revenue. The same is true for spending on routine maintenance. Unless Congress wants to allow tolls throughout the interstate highway system and privatize schools, bridges and tunnels, it's hard to see how an infrastructure bank would fix most of the things Trump cites.
Choosing among the many projects that deserve funding could also be ticklish. If Trump doesn't want Washington bureaucrats or politicians involved, who would decide? An independent staff, overseen by a board, might be an answer. But what happens if a hedge fund seeks backing for, say, a luxury casino-resort catering to the wealthy?
Such a project would be low risk and likely to have the requisite revenue stream, but what public purpose would it serve beyond providing temporary construction jobs? Besides, if it's a safe bet, it could easily get funding through the public markets. Unglamorous projects, like mass transit and removing lead contamination from drinking water, would fail to attract investor interest and therefore wouldn't get funding.
How would the bank insulate itself from political interference, either from pressure to fund projects favored by Trump's construction-business friends or to oppose plans in states or cities with Democratic governors or mayors?
There's also the matter of capital shift, in which companies behind already-planned construction seek infrastructure-bank financing, resulting in no net new spending or hiring.
Public-private partnerships such as an infrastructure bank may seem like a practical solution for getting big jobs done. But the Trump plan so far is as much of an open invitation to waste, fraud and abuse as Clinton's was.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Michael R. Bloomberg, the majority owner of Bloomberg LP, is a co-founder of the group, Building America's Future, that promotes infrastructure spending.
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