Trumps Budget on Infrastructure

May 25, 2017

Conservative and libertarian fears about Donald Trump’s infrastructure rhetoric will be somewhat allayed by today’s budget. In the presidential campaign and early days of the administration, there was much talk of “shovel ready projects” and “creating jobs” with $1 trillion of new investment, which sounded suspiciously like a federal stimulus package and vastly more borrowing. But that language was nowhere to be seen in this new document. In fact, infrastructure as a pressing issue was somewhat downplayed.

Where once it was talked about as the third priority behind healthcare and taxes, President Trump’s opening message did not feel infrastructure important enough to list in the “eight pillars of reform.” Healthcare, tax, immigration, education, welfare, regulation, energy and reductions in federal spending were front and center, but infrastructure appeared in a B-list of “additional priorities” alongside student loan reform and paid parental leave.

Good infrastructure is of course important to an economy’s productive potential. But with the unemployment rate as low as 4.4 percent, construction unemployment lower than in 2007 and interest rates rising, there was little robust argument for an infrastructure stimulus, even if one subscribes to Keynesian economics. In fact, rushing through projects without assessing “bang for the buck” would have allowed a dogs dinner of rent-seeking and undermined long-term productivity through bad project selection, whilst doing nothing to stimulate the economy today.

It’s very welcome then that this budget instead emphasized the need for long-term reform of how infrastructure is “regulated, funded, delivered, and maintained.” In a move that will upset the Senate Democrats, it explicitly repudiated the idea that a huge increase in federal funding is the solution. It recognizes that “underlying incentives, procedures and policies” are more important to allow infrastructure responsive to demand.

As such, it proposes a few market friendly policies and principles to improving things. States would be responsible for more funding more of their own infrastructure, allowing tailored solutions to local needs. Air traffic control would be privatized, just as in countries such as Canada. The permitting process would be reviewed and streamlined to prevent long delays to projects, which add cost and uncertainty.

Yes, there is still provision for an additional $200 billion of federal spending over a decade. But even on this, the budget outlines that the primary purpose of the funding will be to harness in other non-federal funds, whether private or state, to get the desired $1 trillion additional investment. As an example of what will count towards this target, the budget chalks up the Keystone Pipeline, meaning it will include projects given approval by the federal government that otherwise might not have happened.

There are naturally lots of unanswered questions. How will projects be selected? Will the administration use robust cost-benefit analysis, or will politics and a desire to support certain industries with federal funds play a role? Will the administration be willing to embrace other measures, such as greater use of user fees within transportation infrastructure? Will there be any policy measures to try to harness private investment, such as the Navarro-Ross tax credits (which would narrow the tax base)? Is Trump envisaging a greater role for public-private partnerships and, if so, how will the federal government seek to avoid the problems of contract design, which plagued widespread use of them in Britain? And will the administration see the logic of abolishing regulations that raise the cost of construction, such as the Davis-Bacon Act and Buy American regulations as part of their supply-side push?

These, presumably, will all be answered in due course. But taking today’s brief insight at face value, the focus on the longer-term and on supply-side barriers to achieving better infrastructure mark a sharp and welcome break from the kind of agenda Trump originally seemed to have in mind. 



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