Some appetite.

Photographer: David McNew/getty images

Give Trump's Infrastructure Plans a Chance

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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Donald Trump’s plans for infrastructure spending are finally materializing, and they already have no shortage of critics. But I think the critics should ease up, and give the president-elect a chance.

The plan’s most heavyweight critic is the Federal Reserve Chair Janet Yellen. In a recent speech to Congress, Yellen cautioned against spending too much on infrastructure, warning that a move could stoke inflation and reduce the government’s ability to use fiscal stimulus in the event of a recession.

Yellen is a very smart economist, but her warning seems a little misplaced to me. First of all, it comes just as the Fed is vowing to begin raising interest rates. Higher rates will make it more expensive for the government to borrow. Therefore, if the federal government intends to take on a bunch of debt any time in the next few years, now is the sensible time to do it, before rates begin to rise. Short-term interest rates are at 0.41 percent -- even in a recession, they can’t go much lower than that.

And the U.S. will need to spend on infrastructure in the next few years. The longer one postpones repairs to roads, the more expensive it gets. So waiting until the next recession hits -- which could be next year or not for another decade -- risks allowing U.S. infrastructure to fall further into a state of advanced decay. According to the think tank Smart Growth America, current road maintenance spending is only about a third of what it needs to be in order to maintain the system’s quality.

The threat of inflation, which Yellen hinted at but which many private-sector economists make explicit, also doesn’t worry me very much. Yes, in standard macroeconomic models, government spending drives up expected inflation. But those models have not performed well in the past decade, and their assumptions are highly questionable to begin with, so we should be wary of basing policy on their predictions.

When economists look for actual evidence that deficit spending drives up inflation, they find very little. A particularly glaring counterexample is Japan, whose deficits have been much larger than those of the U.S., but which has been mired in deflation for decades.

The argument about fiscal space is more plausible -- deficit spending now will drive up the national debt, which will make it politically harder to spend money on stimulus if a recession hits. This probably happened in the 2000s: George W. Bush’s administration drove up the debt with big tax cuts, making it politically more difficult for Barack Obama to spend money on stimulus when the Great Recession hit.

The U.S. economy is doing OK, and the majority of the Americans thrown out of work by the Great Recession now have jobs. Still, there are many prime-age workers who are out of the labor force, and might come back if a burst of infrastructure spending gave them opportunity to do something useful:

Still on the Sidelines
Employment rate, age 25-54
 
Source: Federal Reserve Bank of St. Louis

The longer these people stay out of the workforce, the longer their skills and work ethic decays. Getting healthy, prime-age Americans off of the couch and into the working world will make the economy more productive and more robust down the line. And since a large number of these couch-bound Americans are blue-collar men, construction seems like the perfect kind of job for them to do. Getting blue-collar men back into gainful employment might even have cultural benefits, like reduced drug addiction and suicide.

So while loss of fiscal space is a concern, it’s outweighed by the potential benefits of infrastructure spending. If Trump follows through on his pledges, it would take advantage of low rates, increase the employment rate for blue-collar men, and repair the roads before they fall apart. Those benefits are worth the cost.

Of course, it remains to be seen how much infrastructure spending Trump will actually attempt. So far, his main proposals have been tax credits for private construction, and an infrastructure bank. The infrastructure bank is a good idea, one that Democrats have long embraced. But it wouldn’t be enough, on its own, to fulfill domestic spending needs. As for tax credits, they’re less cost-efficient, since they don’t focus on repairing existing roads.

So if Trump really wants to make American infrastructure great again, he’s going to have to shell out some government money. Let’s wait a few months to see whether his plans become a little more substantial.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net