Infrastructure still needs help, but can the US afford it?
Friday, October 27, 2017
Cities are not defined by a collection of buildings but rather by a deep web of movements, people, products or ideas. And it is infrastructure that knits together the different components of a city — where we live, work and play. It is also what links cities to each other globally.
The term "infrastructure" means what lies underneath other things, holding them up and allowing them to function. That also means it is something that is often hidden until something goes wrong.
Following revelations that infrastructure is regularly "going wrong," President Donald Trump's promise of a $1 trillion investment in the country's infrastructure has been well received by Republicans and Democrats alike. However, how can he make it work alongside his other high-profile agenda — the ambitious tax cuts plan?
Strengthening the 'backbone of the economy'
The "hidden" nature of infrastructure networks has led to its undervaluing, and subsequent underinvestment, across many parts of the developed world in recent decades. While places like Singapore and Hong Kong have shot up the infrastructure leaderboards, the U.S. has been spending only 1.4 percent of GDP on infrastructure, a historic low.
However, the recognition of the crumbling state of the nation's roads and bridges, and the ensuing obstacles to economic growth, has brought the attention of policymakers back to the importance of infrastructure as the "backbone of the economy." This includes roads, bridges, ports, tunnels, dams and sewer systems, but also digital infrastructure that underpins the knowledge economy.
Most recently, Trump promised in June to dedicate $1 trillion to rebuilding America's infrastructure during what became known as "infrastructure week." In fact, turning our attention to infrastructure is one of the few things agreed upon across the political spectrum in the U.S. today. Even if people disagree on where the money will come from.
America's report card: D-plus
America has a good track record on ambitious infrastructural projects — from the Golden Gate Bridge to the Hoover Dam (even if they did take somewhat longer to build than Trump suggested). Even today, the U.S. is still pushing the limits of technology, recently building the world's longest floating bridge in Seattle.
However, we are seeing serious problems with the less spectacular side of infrastructure. In Iowa, Pennsylvania, Oklahoma and Nebraska, over 15 percent of bridges are structurally deficient, and 50 percent of California's public roads are in poor condition. A number of U.S. dams are in such bad shape that residents have been evacuated from surrounding areas due to the risk of failure. It may not be surprising that The American Society of Civil Engineers gave the U.S. a D-plus on its infrastructure "report card" this year.
Another problem is that in a society that celebrates entrepreneurship and is deeply cynical about government intervention, infrastructure is a "public good" — that is, it provides significant benefits beyond their private return, making it difficult to fund through private finance alone.
Finding the money
In the WEF's Global Competitiveness index for 2017, an "inadequate supply of infrastructure" was cited by executives as eighth-most significant factor for doing business in the country. However, the top two "problematic factors" were given as tax rates and tax regulations. This brings us neatly to the central piece of the puzzle when planning infrastructure: how to fund it.
Infrastructure is inevitably expensive. While in the past, the government dug deep to fund projects like the Hoover Dam, more recently governments around the world have sought to partner with private investors, through public-private partnerships and other hybrid structures. These, too, lie at the core of Trump's plan.
Trump's 6-pager: What does it mean?
To look behind the headline of Trump's $1 trillion promise, all we have to go on is the six-page skeletal document released with the budget in May. We find that Trump has pledged just over $200 billion of federal funds, to be spread over the next 10 years. The rest would have to have to be brought to the table by private investors, likely to require generous tax breaks.
To help get the private sector on board, Australia has been trying to sell Trump its own controversial model of "asset recycling" — where public assets like airports and roads are sold off to raise money for infrastructure projects, a route said to be favored by Vice President Mike Pence. To the surprise of many, another option that is rumored to be being considered is the establishment of an "infrastructure bank," on the model of China and Canada, and a policy promoted by both Hillary Clinton and former President Barack Obama.
Trump has also promised significant deregulation and permit streamlining to encourage private investment — an overdue move, but one that must be pursued with care if what he has in mind is gutting environmental protections. The irony was not missed when the president ditched flood regulations in Houston just weeks before this summer's flooding hit.
However, this is no more than loosely-guided speculation. Given the lack of detail provided so far on what this all means, and what the funding mechanism will be, investors will have to keep waiting.
A missed political opportunity?
The lack of investment by the new administration in infrastructure is surprising. As a businessman, Trump played on his ability to get the economy going again, which he will need to maintain legitimacy among those who voted for him. Infrastructure investment is seen as a key lever to boost GDP — the Brookings Institute estimates that increasing infrastructure investment by 1 percent can raise GDP by between 0.4 and 1.5 percent over four years.
But that will take time. Despite ambitious promises about overhauling the sector, there may be no such thing as a shovel-ready project.
The difficult trade-off between taxes and infrastructure
America can be as susceptible as everyone else to the glamour of infrastructural megaprojects. But often it is the more mundane elements of infrastructure that require attention.
The U.S. does not need flights of fancy like building a wall with Mexico. What it does need is more pragmatic routine maintenance and upgrading of existing infrastructure networks to help boost the economy and provide the jobs that were promised on the election trail.
Trump is not known for his engagement with the subtle trade-offs demanded by policymaking, but his team will need to manage them in order to flesh out the funding plan to reach the $1 trillion mark.
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