President-elect Donald Trump’s chief strategist Steve Bannon has said he wants the new administration to fund a “trillion-dollar infrastructure plan.” Bannon’s vision is an 1850s dream of shipyards and iron works, neither of which is actually infrastructure and both of which are oversupplied in today’s world economy. If the incoming administration and the Republican Congress really want to make American infrastructure great again, they can do so by financing upgrades, aligning risk and reward through privatization, and streamlining procurement and permitting processes.
No one has a firm idea on the amount of infrastructure upgrades that America needs. Bannon and Trump’s $1 trillion figure appears to be a guess. In 2013, the American Society of Civil Engineers estimated the cost of repairing the nation’s infrastructure at $3.6 trillion (including a $1.6 trillion funding gap), but their assessment was a consultant’s wish-list ignoring the reasonably good condition of U.S. infrastructure by developed-world standards.
Nor is there much agreement on exactly what infrastructure is. The ASCE includes $629 billion for school structures and parks in its infrastructure plan. Both schools and parks are capital-intensive, public responsibilities, but unrelated to the sinews of transportation and commerce. ASCE only briefly mentions infrastructure investments in cybersecurity and anti-terrorism protection, but just last month, hackers attempted a cyber-ransom of the San Francisco Municipal Transportation Agency light-rail system. Earlier this year, the Wall Street Journal documented armed attacks on a California electrical substation, plus dozens of other break-ins.
Given the danger that real infrastructure needs will be neglected in favor of rent-seeking by politically connected insiders, both House speaker Paul Ryan and Trump’s pick for Commerce secretary, financier Wilbur Ross, have advocated harnessing private investment in public infrastructure through the Internal Revenue Code. Both plans could speed upgrades of existing, privately owned infrastructure, such as pipelines, freight rail, and electric utilities. Where it is practical to collect user fees, the plans could spur privatization of inefficiently run public and quasi-public infrastructure. As the New York Times’s Tyler Kelley has reported, the Ohio River’s crucial Lock No. 52 (built in 1929) operates toll-free and, not coincidentally, at the edge of failure, while a replacement lock has been under construction for 25 years. Privatization and user fees (the modus operandi for America’s efficient freight railroads) could provide the funds necessary to upgrade the Army Corp of Engineers’ vast, decaying inland-waterway system. Similar solutions might work for other limited-access systems, such as rapid transit, passenger rail, municipal-water systems, hydropower, airports, and ports.
As the Wall Street Journal’s Spencer Jakab notes, the Ryan and Ross plans rely on federal income-tax expenditures—accelerated depreciation and tax credits, respectively. This may render them uncompetitive because the Internal Revenue Code already makes state, municipal, and authority debt triple-tax exempt, enabling governments to borrow an almost unlimited amount of money at ultra-low rates to pay for public infrastructure. Furthermore, the tax reform advocated by Congressional Republicans and Steven Mnuchin, Trump’s pick for Treasury secretary, will lower marginal rates, reducing the value of any investment expensing. If a tax-credit plan is overly generous, it could incentivize aggressive tax shelters for uneconomic projects.
Neither plan addresses the problems of open-access infrastructure, such as highways, where it is easy for users to detour around toll roads. As Jakab reports, of eight completed highway projects that relied on private financing and have been open for more than five years, half have declared bankruptcy or been bought out by public partners. And significantly, neither tax-incentive plan offers solutions for financially distressed infrastructure in declining areas, such as the Flint, Michigan, water system. Some Rust Belt cities, such as Detroit, are less than half the size they were in 1960, yet have aging infrastructure built for their peak populations. For these areas, bankruptcy Chapter 9 or a financial-control board like the Puerto Rico Oversight Panel may be better models for reducing infrastructure to a manageable footprint.
Outgoing president Barack Obama’s vaunted “shovel-ready” stimulus failed because his primary goal was to pay off favored interest groups rather than to complete projects. Even something as straightforward as installing insulation in homes got tangled up in expensive, time-consuming efforts to comply with prevailing-wage, historic-preservation, and other mandates. The new Congress and administration should exempt their infrastructure plans from many requirements and use the opportunity to simplify the process and reduce infrastructure costs. The House of Representatives already has a bill before it to repeal the Davis-Bacon Law, which effectively requires above-market union wages for federally funded projects, and by some estimates raises construction costs by at least 10 percent. The procurement process is infested with set-asides for minority contractors, women, and small business, leading to corruption and higher prices. “Buy American” rules have a similar effect, but while Congressional Republicans have opposed such rules, the Trump administration is likely to support them.
The infrastructure-permitting process is also broken, but the last year has seen progress. Between elaborate displays of pipeline caprice, Obama signed the Fixing America’s Surface Transportation Act (FAST Act), which provides for an expedited interagency-review process for federal infrastructure projects. Only about 30 projects have been listed to date. The FAST Act deals with federal projects, but many projects face additional layers of regulatory review at the state level. Where state-infrastructure projects are funded by federal grants, the federal government should require comparable expedited review by state regulators.
The incoming Trump administration and Republican Congress have been given a mandate to “drain the swamp” and sideline environmental and identity-politics activists. A new infrastructure-spending program—no matter the price tag—must add value instead of vanity.
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