Pence Promises HUGE Spending Bill on Infrastructure. What Will Be In It?

Vice-President-elect Mike Pence made it clear on Tuesday that a massive infrastructure bill is high on President-elect Donald Trump’s priority list.

Pence relayed a message to the U.S. Conference of Mayors from the president-elect: “Tell ’em we’re going to do an infrastructure bill, and it’s going to be big.”

He did not elaborate on the specifics of the plan, outside of promising that the bill would be able to cover all the state and local problems with infrastructure. Pence stressed that Trump understands the challenges that cities face.

“Remember, after all, he’s a New Yorker, through and through,” Pence said.

The specifics of Trump’s infrastructure bill have not been released yet, but what is known is that Trump has promised to funnel $1 trillion towards roads, bridges, hospitals, schools and airports. A campaign position paper claims that $137 billion in tax credits will entice private investment into infrastructure, and it won’t hit taxpayers at all because of the resulting “economic stimulus.”

It will also allow private companies to own roads and collect money through tolls.

Trump’s plan then may not be the pure Keynesian economic stimulus model that makes Paul Krugman drool, but it appears that it will follow the same concept that the federal government can rejuvenate the economy with an injection of taxpayer dollars. Ramesh Ponnuru argues at National Review that Trump’s plan wouldn’t actually be beneficial to the economy:

The first argument is that with interest rates low, there has never been a better time to borrow money to invest in infrastructure. This view rests on a fallacy. It assumes that low interest rates reduce the costs of an infrastructure project while its benefits remain constant. But if interest rates have fallen in part because the country’s potential for economic growth has also fallen — which is the view of many economists — then the assumption is wrong. In that case, the likely economic benefits of a project are also lower.

The second argument is that a deficit-financed infrastructure boom will stimulate the economy. This argument is based on the familiar Keynesian view that increased deficit spending can get an economy out of a slump. It puts money in people’s pockets, they go spend it, which puts money in other people’s pockets, etc. This was the argument that the Obama administration employed to justify its stimulus bill in 2009, which included a heavy infrastructure component. Trump’s advisers take this argument far. They say that his tax credits will pay for themselves: More people will be working, and they’ll pay taxes, so the federal government will come out even. But the argument is a poor fit for our circumstances, since we are not in a recession. We are in an economic expansion, and at such times Keynesianism calls for reducing deficits. And with unemployment already low, infrastructure spending is likely to move already-employed workers from one activity to another, so there will be no revenue windfall.

Anyway, deficit spending is not expansionary if it causes monetary policy to tighten. Since the economic crisis of 2008–09, the Federal Reserve has tried to keep its preferred measure of inflation running between 1.5 and 2 percent per year. If it sticks to that target, a building boom cannot do much to stimulate the economy: As soon as inflation threatens to rise above 2, the Fed will raise interest rates to bring it back down. The Fed could instead determine that a little extra inflation is worth tolerating for a little extra growth. In that case, however, the infrastructure spending would not be necessary: The Fed could raise its inflation target without that spending.

Ponnuru also pointed out that economist Andrew Warner noted in an International Monetary Fund paper that there is “very little” evidence that this kind of Keynesian spending results in economic growth.

“He pointed to some chronic problems with such investment, including poor selection of investments (since policymakers and construction firms have more incentive to see that money is spent than to see that it is spent wisely) and poor information (key actors having no incentive to produce realistic forecasts or economic analyses, they are not produced),” writes Ponnuru.

Conservatives in Congress who may be skeptical of voting for the bill may be persuaded to do so by the fact that Trump’s plan slashes regulations on construction initiatives, although Speaker of the House Paul Ryan reportedly burst into laughter when asked if he would support Trump’s infrastructure bill.

“That’s not in the ‘Better Way’ agenda,” Ryan said.

Senate Minority Leader Charles Schumer (D-NY) has said that he would support Trump’s bill, although he prefers that it “have real expenditures. You can’t do it with just…tax credits.”

In other words, Schumer and the Democrats will likely try to turn Trump’s plan into a bigger boondoggle than the president-elect’s proposal intends. If that happens, will Trump and the Republicans stop the Democrats or will they roll over? And even if Trump’s proposal stands as the outline states, will conservatives in Congress have enough spine to block it?

Follow Aaron Bandler on Twitter @bandlersbanter.