President-elect Donald Trump is aiming to boost US economic growth by aggressively lowering taxes and increasing government spending. Another fiscal kick is expected to come from Trump’s efforts to deregulate lots of industries.
Last week, Melissa and I discussed Trump’s proposals for reducing corporate taxes. We concluded that the cut in the effective rate might not be as great as the cut in the statutory rate, though it will still boost corporate earnings significantly, as Joe and I discussed yesterday. Today, we come to a similar conclusion about Trump’s infrastructure investment promises.
The media headlines suggest that Trump will increase infrastructure investment by $1 trillion over the next 10 years. However, that eye-popping figure is the goal of the stimulus, not the actual amount of government spending. Funding for much of the targeted investments isn’t likely to come directly from the federal government, but rather from tax credits and other incentives. By the math laid out below, the actual cost to the federal government will be far less than $1 trillion, and even might be revenue-neutral.
Trump shouldn’t have too much trouble reaching the seemingly lofty $1 trillion goal because the expected total stimulus from his program--including investment and tax incentives, and deregulation components--will make it hard to determine the amounts of stimulus created from each; it seems there will be plenty of overlap. For example, as we discussed in our 12/5 Morning Briefing, corporations (possibly just manufacturers) might be granted the option of electing 100% up-front tax deductions for investments in equipment and structures, as opposed to depreciation over years--a potential boon to infrastructure investment spending (assuming that factories are defined as “infrastructure,” of course).
In any event, executing fiscal-spending plans as bold as the $1 trillion advertised could be stymied by a lack of laborers in a US economy that appears to be very close to full employment. Spending that bold could cause inflation to overheat. On the other hand, in the current environment, wages may still have some room to run and productivity growth might improve.
Our bottom line is that Trump’s fiscal punch might be more like a shove. It might be just enough to propel the US economy out of its slow-growth trap without causing it to overheat. Furthermore, the targeted nature of Trump’s plans seems to be aimed right at the industries and workers that need it most. Industrial companies like US Steel already are declaring their enthusiasm for the expected regulatory breaks and tax windfalls under Trump, per CNBC’s 12/8 interview with the company’s CEO.
Consider the following:
(1) Privately funded. Trump’s pre-election 10/22 100-day action plan doesn’t tie any specific dollar amounts directly to federal spending. It states that that the administration will fight for the passage of the American Energy and Infrastructure Act, which “leverages public-private partnerships, and private investments through tax incentives, to spur $1 trillion in infrastructure investment over ten years. It is revenue neutral.”
Further, the sixth out of the seven actions to protect the American worker is to “lift the Obama-Clinton roadblocks and allow vital energy infrastructure projects, like the Keystone Pipeline, to move forward.” The seventh is to “cancel billions in payments to U.N. climate change programs and use the money to fix America’s water and environmental infrastructure.” Neither mentions the use of federal dollars.
No specific mention of federal dollars to be used is made on the “Energy Independence” section of the “Great Again” policy website dated 11/21 either. Rather, it discusses unleashing the “billions of dollars in projects held up by President Obama.” For example, Wilbur Ross and Peter Navarro, who were economic advisers to Trump during the presidential campaign, wrote in a 10/27 report that the blocked Keystone XL Pipeline project “would have amounted to an $8 billion investment in U.S. infrastructure.” (By the way, Ross is a close friend of Trump and his pick for US Commerce Secretary. That role may be expanded under Trump, as discussed in a 12/9 FT article.)
There are some specific dollars listed under the “Transportation & Infrastructure” section of the President-elect’s website. It states: “Americans deserve a reliable and efficient transportation network and the Trump Administration seeks to invest $550 billion to ensure we can export our goods and move our people faster and safer.” It isn’t clear to us if that’s incremental to the $1 trillion noted above. We doubt it. It may not even be completely incremental to what the federal government is spending now. Congress approved a six-year $305 billion highway bill last December, as pointed out a 11/15 article in The Atlantic.
(2) Government-supported. In their report, Ross and Navarro outline “The Trump Private Sector Financing Plan” to encourage “innovative” financing for infrastructure construction. It leverages a government-supported “equity cushion” to absorb the risk required by lenders. By the authors’ math, detailed in the report, “financing a trillion dollars of infrastructure would necessitate an equity investment of $167 billion.” To “reduce the cost of the financing, government would provide a tax credit equal to 82% of the equity amount.” That translates to $137 billion, which is big, but not as big as $1 trillion!
Furthermore, Ross and Navarro argue that those tax credits would pay for themselves from the tax revenues generated from the projects. In addition, the tax credit could convert a tax liability into an infrastructure investment for companies with overseas earnings, say the authors--that is, if companies leverage the credit in tandem with the separately proposed 10% repatriation tax, which we discussed last week. Companies could bring back the funds, use them to invest in infrastructure, and eliminate the repatriation tax burden, they say.
From the report: “The mechanics of this are straightforward: Repatriate $1 billion, incurring $100 million of tax, and invest $121 billion in the equity of an infrastructure project. The 82 percent tax credit on the $121 thereby fully extinguishes the repatriation tax so at the end of the day they have a $121 million infrastructure equity investment and no tax bill while the US has more and new infrastructure.”
Another competing proposal comes from Congressman John Delaney (D--MD). He discussed his May 2013 “Partnership to Build America Act” in a segment on CNBC on Monday titled “Democrats in Trumpland.” Delaney proposed a means to fund $750 billion dollars in infrastructure investment. Like the scenario discussed above, it doesn’t require any appropriated funds. Support for it is questionable, and the logistics are complicated. Separately, a 12/12 MarketWatch article claims that under Trump, private investors could get the authority to raise household prices for tolls and service fees on infrastructure usage in return for equity investments in it.
(3) Unworking men targeted. In any event, whether the stimulus is too little or too much, is it too late? Will it even work at or close to full employment? Job openings are at record highs. Unemployment is at record post-recession lows. Now, there are a lot of workers on the sidelines of the labor force who aren’t counted in unemployment data. Many of them are retired. But an unusual cohort of prime-working-age men “neither employed nor in education or training” (NEETs) has been on the rise. That’s per a 9/1 WSJ opinion piece titled “The Idle Army: America’s Unworking Men.” Navarro and Ross observe: “At present one-sixth of the 18 to 34 year old prime working age population is either unemployed or in prison and the minority group statistics are even worse. Infrastructure could help solve this sociological tragedy.” Maybe so.
Many of those out-of-work men are low-skilled, undereducated, and discouraged, and some have even become mentally disabled. Some have lost jobs to overseas manufacturing or technology. Many workmen might have given up on reentry into the workforce if manual labor doesn’t pay what it used to. Labor shortages already have been visible throughout the construction industry. That was evident in a 10/21 update on jobs from the Associated General Contractors of America (ACG). But in a 12/2 AGC report, the association’s chief economist claimed: “The industry would be adding more high-paid jobs if local, state and federal officials were investing more to build new and repair aging infrastructure.”
(4) Fed views. Over the summer, Fed Vice-Chair Stanley Fischer and FRB-SF President John Williams began vocalizing a strong need for fiscal policy to jump in to revive US economic growth. More recently, FRB-Chicago President Charles Evans suggested that substantial spending on infrastructure would be ill-timed, according to a 12/5 Chicago Tribune article. The US labor market is “kind of tight,” he said. The article noted: “In such an environment, he said he wouldn't favor a program to build roads, bridges and other infrastructure merely [to] stimulate the economy. But he said the country needs a program for building highways, bridges ‘and things we need.”
FRB-SL President James Bullard discussed the “new policies being developed in Washington” in a 12/5 speech. For now, Bullard continues to recommend a low and slow approach to interest-rate increases even in the new political environment. That could change, he said, if productivity is significantly impacted in the medium term by deregulation, infrastructure spending, or tax reform.
During November, Yellen warned fiscal policymakers against adding too much to the national debt, a 11/17 NPR article discussed. According to the article, her concern is that there wouldn’t be much fiscal space remaining if the US economy were to encounter a shock down the road. Nevertheless, the article noted that she didn’t see a reason to change her guidance on the Fed’s gradual path of rate increases after the election.
At her press conference today, we expect that Yellen will say that monetary policy is still set for a gradual normalization of monetary policy. However, she will also probably say that the outlook for fiscal policy is evolving, and that could influence the course of monetary policy in the coming year.
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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