Interview with Economy Chosun on Trump Infrastructure Plan

Economy Chosun (2016-12-07) A South Korean magazine, Economy Chosun, asked my opinion of the recent Trump plan.  Update: This has now appeared in print (in Korean). My answers (in English) below.

 Questions 

1.     What do you think about the US President Elect Donald Trump’s $1 Trillion 10-Year Infrastructure Plan? (Is it realistic? Much needed in consideration of the current economic/ overall infra conditions?)

While the US definitely has some infrastructure needs, these are highly localized and generally best addressed at the local and state level. Trump's proposed plan basically gives away money to private companies investing in selected infrastructure projects through tax credits. There is no guarantee these projects wouldn't have been built anyway, and there is little to no stimulus to the economy given the sector is near full employment now (resources spent on the new infrastructure project would have instead gone to something else). In the roads sector, it is hard to assess how much infrastructure is actually needed in the absence of road pricing. We give away roads at a large subsidy and then complain of shortages (i.e. congestion, a shortage of road space at given times of day). In the aviation sector, airports should be profitable. Almost all US airports are publicly owned and operated, while in other countries they are privately owned and/or operated, which liberates funds for investment. Similarly, US ports are publicly held, and would liberate a great deal of cash if privatized as in many other countries.

 2.    How do you expect such mega-scale plan would reshape US and global economy, both short-term and long-term? (inflation, employeement, debts, US benchmark rate, GDP growth, etc.)

The plan would increase the US debt, it is unclear whether those infrastructure projects would generate enough benefits to offset the debt created. While $1Trillion sounds like a lot of money, the US economy is currently $18 Trillion GDP annually, so over 10 years, it is about 0.5% of the total economy. It is also not clearly a net increase of $1Trillion in new infrastructure, some of that may have been built anyway, there is a very significant shell game aspect to this.

3.     Aren’t the situations similar in Europe and Japan? Do they also need a major infrastructure plans?

Japan (and Europe) have been investing more heavily in infrastructure over the past few decades than the US. Japan in particular is highly overbuilt in many places, that is, they have spent more on infrastructure than is warranted given the low growth of the economy and declining population.

 4.     What would be principles to follow to minimize possible side/negative effects and maximize positive economic impacts in national-level infral overhaul? 

Each project should be assessed on its full benefits and full costs. Full costs include not just infrastructure construction and lifecycle operation and maintenance, but also external costs like air pollution, carbon emissions, noise, crashes, and the like. Full benefits include the gains in accessibility provided by the project, that is, the potential consumer surplus the project produces. If the full benefits outweigh the full costs, the project is worth pursuing. Projects which are on the list of being worthwhile can be ranked, and all of the projects above the budget threshold selected. This will tend to favor maintaining existing investments (which have proven benefits and known costs, many of which are sunk, which would be lost if the investment has to be shut down) rather than new speculative greenfield investments.

This process is imperfect, but is far better than the methods currently used to assess which projects to pursue, which are largely politically driven for large projects.

If there is to be a federal role, it could be in the form of an infrastructure bank, which helps finance worthwhile projects that backers promote, and that have some means of paying back the loan (through for instance, tolls on roads, or land value capture from the real estate uplift associated with the project).

 5.     Are there lesson to be learned from the case of President Roosevelt's New Deal? 

If the economy were in the throes of depression, infrastructure investment for macro-economic purposes (i.e. Keynesian stimulus) might be warranted. With 4.9% unemployment, that is not the current situation. Construction in the New Deal was far more labor intensive than today, so the jobs benefits of infrastructure spending are not of the same order of magnitude as they were.

 6.     Why couldn’t (or didn’t) President Obama pursue national-level infra overhaul to revive economy after the global financial crisis?   

He did, the American Recovery and Reinvestment Act (ARRA) did invest in infrastructure. But in order to have macro-economic effects, projects had to be shovel ready. The only shovel ready road projects were those that (a) were going to be undertaken anyway, (b) projects that were shelved because they were not good investments, (c) projects like road resurfacing which are fine, but have little spillover effects. There is not a very long queue of already designed and waiting projects without funding, since there is no point in designing a project if there isn't going to be funding available. Design for large projects takes some time in the modern world, especially with environmental considerations, and the need to get political consent from the affected parties. All the easy projects (the low-hanging fruit) with high benefits and low costs were built long ago. There are few remaining projects which have high Benefit/Cost ratios.

 7.     Chinese governemtn set aside $40 billion for the “Silk Road Infrastructure Fund” in an effort to pursue its massive One Belt One Road (or ‘New Silk Road’) initiative. Do you think it is a good choice for China considering its economic conditions? 

That is for the Chinese to decide. I believe it has foreign policy and geopolitical implications as well as more traditional trade and transport rationales.

 8.     Can the United States and China work together in each other’s infrastructure projects to create synerge? (Or Can the US learn from China’s Silk Road project ?)

I would think there is not much synergy on the infrastructure projects. The Chinese have been looking to invest in a couple of US High Speed Rail projects, where the US has limited experience, but nothing has yet materialized. American firms do some consulting in China. China purchases US debt.  Both countries are capable of building their own infrastructure if they so choose.

 9.     If the world’s biggest and second biggest economic powerhouses (US and China) pursuing massive infrastructure plans, it could have a huge impact on global economy. What is your opinion on this? 

As I said above, I don't think the US investment is especially massive given the timeframe. I expect given current employment levels more spending would be somewhat inflationary in the relevant sectors (e.g. concrete, asphalt, steel, construction).