Can Trump Really Save U.S. Infrastructure?

From Politicians routinely denounce the deterioration of America’s infrastructure while skimping on funding needed improvements. The American Society of Civil Engineers (ASCE) issues an infrastructure report card every four years and lays out projected costs of these potential infrastructure investments and, in effect, repairs. This election year President Trump in his campaign promised to do something about our infrastructure.

His advisors and others have proposed ways to fund a new infrastructure program, possibly linking it to repatriation of corporate cash trapped overseas. More than half the infrastructure spending deficit identified by the ASCE is accounted for by projects that affect major energy producers and users, including transportation and electricity production.

Infrastructure improvement may encourage greater electricity sales or make room for more motor vehicles on the road. It is also conceivable that some of these programs will make energy users more efficient and may further depress already weak kwh sales growth.

We do not know which it is. But the infrastructure investment potential associated with just the energy sector alone is substantial. As a result, we believe energy investors should consider scenarios that assume a meaningful federal presence with a focus on private sector capital participation.

Let’s leave aside the obvious question: why does a government that can borrow virtually unlimited amounts of money at very low rates of interest need to do anything other than borrow the money to fix infrastructure?

ASCE’s last report card projected that the USA needed to spend about $450 billion per year to maintain an “adequate” level of infrastructure through 2020. This compares with actual expenditures projected at about $250 billion per year–a large annual as well as cumulative shortfall. Adding that additional $200 billion per year supposed “shortfall” to annual U.S. infrastructure spending would raise GDP by roughly 1 percent–a clear boost to a slow growing economy.

Would these funds go into energy investments as a means to kick start other programs favored by the new Trump administration like, for example, boiler modifications for aging coal plants or promoting nuclear power? No matter how generous the subsidy, we doubt that a resurgence of “king coal” is in the offing.

But as we’ve noted before, conservative governments on both sides of the Atlantic have long had a soft spot for commercial nuclear power regardless of its high relative cost. At a minimum we would expect renewed interest in a Yucca Mountain type of permanent nuclear waste depository, streamlined reactor licensing and funding for a next generation commercial nuclear reactor design. Nor would we be surprised to hear renewed proposals for the Clinch River “breeder” reactor or, possibly, molten sodium (thorium) technology. At this stage, though, it is difficult to know where the money will go.

The Trump-proposed infrastructure financing plan seems like an indirect and relatively expensive way to raise infrastructure funds, at least relative to ordinary tax-advantaged municipal debt. Their proposal, as briefly spelled out in an article by incoming Commerce Secretary Ross, would provide a tax credit to private investors to cover a large part of their infrastructure-related equity investment. This might also involve a government guarantee of associated project debt as well. In other words, the government would provide the bulk of investment funds, typically 80+ percent, while the private, equity investor injects a modest portion of capital. The resulting situation of public subsidy with private control is a neoliberal feature we may see more of, especially in areas like education.

Some politicians have suggested another tack. At present, U.S. non-financial corporations have over $1 trillion kept abroad, supposedly to avoid U.S. taxation. Given the need to fund their overseas investments and operations, not all this overseas cash is excess to corporate needs and available for repatriation.

Politicians of every variety want to repatriate those funds. They have offered to levy a low tax rate on the money to induce corporations to repatriate the cash. One proposal uses the tax collected on repatriated funds to be invested in infrastructure spending. But a reduced 10 percent tax on repatriated funds would not go very far in providing the level of necessary funds.

What would corporations do with their newly repatriated cash? Many observers on Wall Street simply expect more of the same–accelerated repurchases of common stock rather investing in productive assets that might actually create new jobs in the economy. But $1 trillion of incremental infrastructure capex could finance at least four years of our “deficit” in infrastructure spending.

The new President’s reputation as a dealmaker precedes him. But can he induce U.S. domiciled multinational corporations to repatriate cash and help fix America’s infrastructure with an offer they can’t refuse? No/low taxes and a decent rate of return on invested infrastructure-related cash seem like fairly attractive inducements.

But this type of policy solution presupposes that our nation’s economic difficulties are on the asset side of the nation’s balance sheet. As a result, more investment would be the logical answer. If our problem is instead excessive leverage, both individual and corporate, and too much income being required merely to service existing debt, then asset focused solutions will prove less than satisfactory. Shifting to the income statement, if our economic problem is one of inadequate demand or subpar top line or revenue growth, then we can only conclude with the question, if he builds it, will prosperity arrive?

The iShares S&P Global Infrastructure Index (NASDAQ:IGF) closed at $39.58 per share on Friday, up $0.26 (+0.66%). Year-to-date, the largest ETF tied to infrastructure-focused stocks has gained 10.14%.


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