November 28, 2016

Trump's Problematic Infrastructure Plan

Emily Hamilton

Research Fellow

Christopher Koopman

Senior Affiliated Scholar
Summary

Much of federal spending on infrastructure is guided by politics and not sound policy. Politicians use these projects to convince their constituents that they're bringing home benefits from Washington. This approach makes it impossible to fund the most efficient projects at a reasonable cost.

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Much has been made of President-elect Trump's $1 trillion infrastructure plan. It became a key component of his campaign and has remained a central piece of the incoming president's agenda for his first 100 days in office. It even made an appearance in his victory speech, where he vowed to "rebuild our infrastructure, which will become ... second to none." While infrastructure spending is a goal that's likely to receive bipartisan support, recent history shows that federal infrastructure plans often result in wasted spending rather than improved transportation.

While long on rhetoric, the plan is so far short on details. However, his approach has included two different routes. It has been described as an effort to spend $1 trillion directly on "shovel-ready" projects (repairing roads and bridges and building schools). It has also been described as a tax credit program that would incentivize new, private sector infrastructure projects.

Regardless of which approach Trump and Congress choose, they are both problematic.

Beyond the fact that we can't afford to add $1 trillion to our mounting federal debt, direct spending on "shovel ready" projects creates incentives for recipients to divert attention away from the most needed projects toward those that fit the program's requirements. "Shovel ready," after all, was a major component of the 2009 stimulus bill. The result was wasted spending as localities fought to demonstrate that they had immediate plans for spending, rather than directing resources to much-needed infrastructure maintenance and new investments.

A giant pot of federal dollars, ready to be doled out to applicants, creates a strong incentive for local governments to overspend in the name of receiving more money. For example, in an effort to receive more money from the 2009 stimulus, one city changed plans for a government building to use small colorful tiles instead of the large, plain white tiles that were originally planned. The only goal was to drive up the cost of the project to receive more federal dollars. America's schoolchildren may benefit from investments in schools, but they won't benefit from having tiny elaborate tile work in an effort to secure extra federal spending.

Creating tax incentives may avoid some of the problems noted above, but it also carries its own risks. The plan would require the government to pick winners and losers among potential construction firms. Moreover, rather than paying for new construction with a transparent budget outlay, the plan would involve exchanging tax credits for the perceived benefits of a particular project. But how are these so-called beneficial projects determined? Will they focus on the greatest benefits to the largest number of people? Or will they be picked by congressmen hoping to bring benefits to their local constituents, secure campaign contributions from construction firms or even send projects to a firm that could employ them after their career in politics?

The problematic entanglements that grow out of public support for private enterprises has been on full display over the past decade. Wall Street bailouts, the government takeover of General Motors and the public investments in companies like Solyndraprovide case studies on why government should not involve itself in private businesses. And unlike directly funding projects with a single payment, public-private partnerships may leave taxpayers on the hook for subsidizing private companies indefinitely.

In spite of these risks, Trump's plan has the seed of a good idea. When private firms build infrastructure with the plan to profit from it, they build what is most needed where it is most needed. It also ensures that those who use it are the ones who pay for it.

For example, Japan has perhaps the world's best system of high-speed rail and urban transit. Rather than being a drain on taxpayers, these trains are funded by the riders who use them. By creating space for private firms to invest in infrastructure rather than entangling public and private interests, the Trump administration could create an environment that facilitates smarter infrastructure projects without introducing uncapped risk to taxpayers.

Much of federal spending on infrastructure is guided by politics and not sound policy. Politicians use these projects to convince their constituents that they're bringing home benefits from Washington. This approach makes it impossible to fund the most efficient projects at a reasonable cost. Trump is selling public-private partnerships as a fiscally prudent alternative, but experience shows that when government gets involved in private investment, private firms face large potential rewards while leaving taxpayers with all the risk. Instead, his plan should focus on creating projects that allow businesses to make the best decisions without worrying about the politics.

Building bridges and filling potholes could be a popular play for the incoming president, but so far his administration's proposals are on track to continue business as usual.