President-elect Trump has made a $1 trillion infrastructure investment one of his first priorities as president, promising in his victory speech early Wednesday morning to “rebuild our highways, bridges, tunnels, airports, schools, hospitals.” As Goldman's economics research team points out, Trump's plan, as detailed in a report released by his economic advisers Wilbur Ross and Peter Navarro, calls for $1 trillion of spending over 10 years to be funded largely by private sources which would be repaid with tax credits and usage taxes (i.e. toll roads).
His infrastructure plan calls for up to $1 trillion in additional spending over ten years, most of it privately financed. A memo released in late October by Mr. Trump’s economic advisors Wilbur Ross and Peter Navarro detailed a plan to finance up to $1 trillion in infrastructure spending over ten years, equal to $100bn per year or about 0.5% of GDP. We previously estimated that a spending boost of this size would reduce the unemployment rate by about 0.3pp and raise inflation a touch, leading the Fed to eventually hike one or two more times by 2019 relative to a baseline without the infrastructure package.
The plan described by Ross and Navarro would be largely privately financed, but encouraged by tax credits. The plan would seek to incentivize the private sector to increase investment in infrastructure projects that would be supported by future usage fees, such as road tolls. Ross and Navarro suggest that 17% of the initial investments could be financed with equity and the remainder with debt. The government would then provide a tax credit equal to 82% of the equity to reduce the cost of financing. The large role of debt-financed private investment in Mr. Trump’s infrastructure plan implies that a significant increase in interest rates could be a hurdle for the plan’s feasibility.
While Trump would like to make his infrastructure plan a cornerstone of his presidency there are some questions about it's feasibility. The first question is can such a massive infrastructure plan pass Congress. Trump’s financial plan, if the numbers actually pencil, would essentially sidestep the political funding squabbles by focusing mostly on private investment, a concept that both parties generally support. That said, as the Wall Street Journal points out, the plan could face some push back from Democrats who have been pushing for more public funding.
Mr. Trump appears to be more focused on infrastructure than many Republicans in Congress are. That said, his proposal, which relies on tax credits, might attract more Republican support than a spending plan of the same size. Moreover, there is significant Democratic support for additional infrastructure investment, which raises the possibility that it could be combined with the tax reform legislation discussed earlier to increase support for the overall package.
For now, members of Congress of both parties and transportation advocates say they are optimistic lawmakers can reach a bipartisan deal to provide some of the needed funding to update roads, power lines and airports. According to the McKinsey Global Institute, the U.S. needs to boost infrastructure spending by 0.7% of gross domestic product between now and 2030 to meet the demands of a growing economy.
Both parties have said they agree on the need for new spending on infrastructure, but the challenge has been finding the money to pay for it. An Obama administration proposal to use new revenue from a corporate tax overhaul didn’t get through Congress last year. In December, lawmakers cobbled together a $305 billion measure using a reserve account held by the Federal Reserve.
The next question is whether Trump's plan can truly be funded without public dollars. Trump's economics team argues that the proposed tax credits would be offset by income taxes paid by workers employed by new projects and corporate taxes paid by contractors. That said, the assumption implies that those workers wouldn't otherwise already be working. Moreover, while certain types of infrastructure projects lend themselves to private financing, projects like toll roads, airports or water systems where funds can be segregated and investors can be paid a return on invested capital, other projects like pure maintenance work are more difficult to fund privately.
Ross and Navarro argue that the plan would be revenue neutral because the tax credit would be offset by revenue raised from taxes on income earned by workers employed by the infrastructure projects and on profits earned by contractors. However, their calculations both assume that the workers employed would not otherwise be earning taxable income and assume a tax rate that looks somewhat optimistic under the tax plan proposed by the Trump campaign. We expect that the Congressional Budget Office and Joint Tax Committee would find that the plan increased the deficit under their methodologies.
Meanwhile, as CNBC points out, the construction labor markets are already very tight so finding incremental labor for such massive projects could be tough. That said, we suspect Trump knows where the find some unemployed auto workers in OH, PA, MI and WI that would love to have those jobs.
Construction companies are already scrambling to fill open positions. Some 221,000 construction jobs were open in September, according to the latest data from the Bureau of Labor Statistics, which is more than four times the number at the start of 2012.
Some two thirds of construction contractors report having a hard time finding skilled workers, according to a survey earlier this year by the Associated General Contractors, a trade group. The shortages were most pronounced in the South and Midwest, where three-quarters reported having a hard time filling skilled job openings.
"These workforce shortages are not going to go away in the near future," said Stephen Sandherr, the group's CEO, adding that they have "the potential to undermine broader economic growth by forcing contractors to slow scheduled work or choose not to bid on projects, thereby inflating the cost of construction."
That's showing up in higher wages needed to recruit and keep construction workers. Nearly half of the contractors surveyed have raised base pay rates, and a fifth have boosted benefits or offered bonuses.
"We're having to dig harder and deeper to find truck drivers," said William Sandbrook, CEO of U.S. Concrete. "We've increased wages, and we've added quarterly bonuses, so it's in their interest to stay for the next three months."
While it's unclear exactly how Trump's infrastructure plan will develop from here, it is at least refreshing to see public discourse over how our publicly elected officials might actually accomplish something over the next 4 years.