How to Make Trump's Infrastructure Plan Work
A central part of President-elect Donald Trump’s economic plan -- extra spending on roads, bridges and other infrastructure -- could give the U.S. (and the rest of the world, for that matter) a welcome economic boost. But the benefit won’t last unless the plan is well designed.
New forecasts from the Paris-based Organization for Economic Cooperation and Development -- a respectable outfit, as these things go -- say that a combination of tax cuts and higher public spending could add nearly a full percentage point to U.S. economic growth in 2018. (Thanks to higher global demand, the rest of the world could see a rise of about 0.3 percentage point). The government’s debt burden, measured as a percentage of this larger gross domestic product, could decline.
This isn’t quite the ringing endorsement you might think. Even bad investments, including the proverbial burying and digging up of banknotes, deliver a short-term boost to GDP so long as the economy has spare capacity. The challenge is to spend money in ways that boost supply, making the economy more productive in the longer term. If the money goes to a bunch of well-connected contractors without increasing the economy’s productive capacity, a great opportunity will be squandered. A mismanaged stimulus could be worse than none at all, adding to the country’s debts without improving its ability to pay them back.
So what should Trump do?
First, keep it simple. Trump’s advisers have suggested using some $137 billion in tax credits to encourage private investment in infrastructure. Problem is, this can obscure the true cost of projects, put too much emphasis on returns to private investors, and subsidize investments that would have happened anyway. Instead, the government should take advantage of its low borrowing costs by doing more of the spending itself, especially on unglamorous tasks (such as road repair and improvement) that can be started quickly and offer good returns to taxpayers.
Second, be prudent. Uncontrolled deficit spending can spook bond investors, pushing up the government’s borrowing costs and eroding the advantages of infrastructure investment. To avoid that, Trump must set out and stick to a clear fiscal-stimulus plan -- one that explains how the U.S. will control its budget deficits in the longer run. In effect, proposals to broaden the tax base and/or restrain spending on entitlement programs have to be part of any credible infrastructure plan.
Third, be accountable. The 2008 stimulus program included an oversight board and a website where citizens could report abuses and track how taxpayer money was being spent. Trump’s plan should meet at least the same standard of transparency. Otherwise, corruption and cronyism will make it less effective and undermine future support for smart fiscal policy.
Clarity, prudence and desire for accountability: These aren’t Trump’s signature virtues. It might be asking a lot -- but this will have to change, or else his bold and potentially valuable ideas on infrastructure will come to nothing.
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