A real estate reporter asked me (last week) to comment on the "infrastructre plan" put forward by President Trump on February 12th. Prior to the phone interview we scheduled, I send the following comments to her via email. Since my remarks were too detailed to be used in full (and her publication was targeted to a non-professional audience), let me share my thoughts via this blog post
- It turns out that Trump's campaign promises about infrastructure are no more reliable than his marketing promises about Trump University, only the fraud here is more massive.
- The scale of the program will likely never hit the size Trump claims. Leveraging $200 billion in federal "seed money" into a $1.5 trillion infrastructure program, with already strained state and local budgets bearing the majority of the burden, is unrealistic.
- Remember that the 2017 Tax Act has already hammered the taxing capacity of state and local governments by capping the SALT (state and local tax) deduction. In effect, it is classic Trump financing - push the burden on someone else, preferably someone smaller and weaker.
- The context is the infrastructure deficiency level analyzed by the American Society of Civil Engineers, a ten-year shortfall estimated at $4.6 trillion. Against this, $200 billion is chump change. (Only an economist can say that!). The ASCE grades America's infrastructure "D+". That's a grade that would put my students on academic probation.
- Simply on a cost basis, Trump's approach is fiscally foolhardy. Long-term infrastructure improvements need to be bond-financed, and the Treasury can borrow (today) at 3.02% for 20 years. States and municipalities must pay higher rates, depending upon their bond ratings, and many have very restrictive limits on the amount of allowable indebtedness as well as requirements for voter approval of public bonds. In real estate, the normal procedure is to leverage a small ratio of high yield equity to acquire a larger amount of lower-cost debt. Trump's proposed structure is an example of "negative leverage."
- Wall Street is a major winner under this plan, since driving down financing from the Federal to state and local agencies multiplies the number of debt issues which need to be devised and marketed - huge fees for investment banks. And, of course, every dollar that goes to an i-bank is a dollar that does not go to roads, bridges, rail facilities, and airports.
More Specific Comments:
- The real cost of infrastructure deficiencies is in lost productivity. This directly affects real estate (especially commercial real estate) because lost productivity negatively affects profits, and it is profits that pay the rent for tenants. There is great irony in what Trump prioritized in his economic agenda. The Tax Act, for example, is an example of government subsidizing profit gain without stimulating increased productivity. Infrastructure improvement, on the other hand, means improved logistics, less lost time to employee commutation, and greater efficiency in the delivery of energy, to name just a few economic benefits. And then there is The Wall, which has no productivity benefit for its $25 billion (proposed) cost, and will likely be inflationary by exacerbating an already stressed labor market.
- Well-designed infrastructure can more than pay for itself by increasing the value of the real estate around it. That's what TIF (Tax Increment Financing) and TOD (Transit Oriented Development) do so well. The tax cuts, by contrast, are generally recognized to be a net economic loss insofar as they don't pay for themselves, even under so-called "dynamic scoring." By prioritizing a net-negative intervention (the Tax Act) over a net-positive intervention (infrastructure), Trump and his team display considerable economic illiteracy. In a way, it is a bait-and-switch economic shell game similar to alleging that casinos will jump-start the economy of troubled cities. (see the results in Atlantic City.)
- The Tax Act is probably more harmful to residential real estate than this infrastructure proposal. Moody's Analytics calculates that most cities (including Austin, Atlanta, and New Orleans,not just "blue state" cities like New York, Boston, and San Francisco) face home price declines of 2% to 6% in home values due to the Tax Act.
- Your (the reporter's) worry about labor costs [affecting housing affordability] is better directed to the deleterious impacts of the Cotton/Perdue "RAISE" immigration bill, supported by Trump and his team (Mulvaney and Miller). So-called "merit-based" immigration skews new arrivals toward white-collar workers, discouraging construction workers, agricultural workers, and lower-skilled service workers such as landscapers. The RAISE bill would cut legal immigration in half at a time when we have a 4.1% unemployment rate. It's a disastrous idea.
- I think you (the reporter) are on the wrong path in looking for rural areas with low cost housing as being any significant part of America's future. Rural areas have been depopulating since the 1930s (and probably before) because there is little economic opportunity "out in the country". We are sometimes nostalgic for Mayberry, but you'll find few romantics among those who actually live in Appalachia, rural Mississippi, West Texas, or southern Illinois. Have you ever been to the Ozarks? or eastern Washington State?
- It is particularly frustrating to think of the many lost opportunities that will be missed under the combination of Trump Administration policies, not just for business but for the ordinary worker that Trump called "the forgotten man." Large-scale infrastructure projects provide jobs at many levels of skill, especially for under-employed blue collar workers. Moreover, they provide entry-level jobs that are not dead-end jobs but gateways to an upwardly mobile career. It gets back to productivity again: as skills grow, so does productivity (output per worker; output per hour). That is the way to grow GDP in a sustainable way. No one on the White House economic team seems to understand this basic economic concept.
This may be a bit of a rant, but I actually would argue that these points are important and based on very sound economics, the kind of economics that Eisenhower understood in laying out the Interstate Highway System and Kennedy understood in proposing the Apollo space program. Such infrastructure efforts spurred a half-century of growth. Trump's plan doesn't even merit being called an "idea."