The Federal Reserve is worried.
At its December meeting, members of the Fed’s interest-rate-setting committee debated the likelihood of “more expansionary fiscal policy” during the next 12 months. That’s Fedspeak for increased infrastructure spending under incoming president Donald Trump. The concern is that more government spending could push inflation higher than normal, which would force the Fed to raise rates faster than it would otherwise—which would most likely be an unpleasant surprise for stock and bond markets.
Some analysts think Trump’s infrastructure plan has the potential to be the biggest road-building program since the 1950s. But Trump’s infrastructure plan is more like a wish list built on idealistic assumptions that’s unlikely to survive its first brush with political reality. In fact, of all Trump’s big ideas—tax cuts, deregulation, healthcare re-reform, renegotiated trade deals—the infrastructure plan is probably most likely to be gathering dust on the shelf a year or two from now.
Trump began last fall by proposing $1 trillion in new spending on roads, bridges and other projects, which would indeed be a historically large sum. But that was the campaign pitch; the goal now is $550 billion in spending, according to the Trump transition website. So the opening bid has already dropped by 45%.
Even more important is the way Trump wants to raise that money. The transition site doesn’t spell it out, but the plan Trump put out last fall relied largely on private investors to fund new infrastructure projects. The government’s role would be to offer an 82% tax credit on a portion of the private investment, as an incentive to draw private money, which might otherwise flow to investments deemed safer or more lucrative. The tax credits, representing the ultimate cost to taxpayers, would represent a small portion of the $1 trillion, and an even smaller amount if the real target is $550 billion.
The problem with getting private investors
The Trump plan—drafted by Wilbur Ross, Trump’s nominee for Commerce Secretary, and economist Peter Navarro, who will be a presidential advisor—went one step further. Trump also wants to offer US companies a repatriation holiday, by cutting the tax rate on overseas profits booked in the United States from the current rate of 35% to 10%. A company repatriating profits could cut its effective tax rate on that money to zero if it invested the right amount in infrastructure projects and took advantage of the 82% tax credit for that. On paper, the net cost to taxpayers would be nothing.