State of the Union: Growth, Trade, and Infrastructure
Volume VII, Issue 1, January 2018
January 26, 2018Life in the Trump era offers a constant refresher course in the Constitution. This month’s lesson centers on Article II, Section 3, which requires that the president “shall from time to time give to the Congress Information of the State of the Union, and recommend to their Consideration such measures as he shall judge necessary and expedient.” On the first half of that mandate, there is little doubt what President Trump will say in his televised address on January 30: the union is stronger than ever, thanks in large part to an accelerating economy. Less clear is what “measures” he will choose to highlight in his speech, but two in the economic arena seem likely to be deemed “necessary and expedient.”
It is understandable why President Trump would feel the urge to crow about the U.S. economy. Earlier this month, the International Monetary Fund (IMF) revised its global forecasts, including upward revisions to estimated U.S. growth in 2017 (to 2.3 percent) and forecasted growth for 2018 (2.7 percent). The unemployment rate, at 4.1 percent, is at its lowest point since 2000, and median wages continue to grow at their highest rate since the global financial crisis. The president will no doubt credit his forceful efforts to slash regulations and corporate taxes during his first year in office. While the long-term costs and benefits of these policies are open to debate, it is hard to argue that they have not supported business and consumer confidence and boosted the prospects for economic growth in the near term.
The forward-looking economic policy content of the speech is likely to revolve around two issues. First, expect tough language on trade and investment from China. After a year of forbearance from acting on his fire-and-brimstone talk as a candidate, President Trump is clearly itching to act on his longstanding belief that China is taking advantage of the United States economically. A first salvo was fired on January 22 when the administration announced tariffs and quotas on imports of washing machines and solar panels (albeit not just ones coming directly from China). The president is widely expected to use his January 30 address to preview a barrage of additional trade remedy actions and possibly investment restrictions to be launched in the days and weeks following the speech.
What specific measures will be taken is the topic of much speculation in Washington. Most watched will be the choice of remedies under Section 301 of the Trade Act of 1974. These could include a mix of tariffs, investment restrictions, tightened export controls, and limits on visas for Chinese visitors. How China will respond is equally important. When the president was asked earlier in the month about the potential for a U.S.-China trade war, he said he hoped one would not ensue, “But if there is, there is.” Commerce Secretary Wilbur Ross, speaking in Davos, Switzerland added, “There have always been trade wars. The difference now is U.S. troops are now coming to the ramparts.” While there is broad agreement in U.S. business and policymaking circles that China’s mercantilist economic behavior should be checked, it is important to remember that trillions of dollars of trade and financial flows between the two countries, not to mention the health of the global economy, are at stake. (We will comment separately on any China trade actions as they are rolled out.)
The other much-anticipated policy highlight of the State of the Union speech is expected to be a preview of the Trump administration’s plan to boost domestic infrastructure investment. That American infrastructure is in dire need of an upgrade is not news, nor is it contested. Poor infrastructure quality in the United States stems from decades of underinvestment, weighing on economic growth and job creation. The American Society of Civil Engineers gave the United States an overall grade of “D+” in its 2017 Infrastructure Report Card, estimating infrastructure investment needs at more than $4.5 trillion over the next 10 years. In fact, the United States is in such dire straits when it comes to the quality of our infrastructure that the U.S. Chamber of Commerce has long supported an increase in the gas tax to help finance needed investment.
Details of the administration’s infrastructure plan, to the extent they are known, emphasize mobilizing private investment to finance infrastructure projects, particularly through grant incentives. The administration’s FY2018 budget proposed $200 billion in federal funding over 10 years, structured to mobilize more than $800 billion in state, local, and private funding through public-private partnerships, reducing the net reliance on federal funding for infrastructure. One reason for the emphasis on local and private funding is the fact that post tax cut, the federal deficit is forecast to add nearly $12 trillion to the federal debt over the next 10 years. A logical question might be why deficit-creating tax cuts were acceptable in the name of boosting economic growth, but deficit-creating investment spending is not? In fact, econometric research suggests that multipliers (i.e., economic growth) associated with government spending generally exceeds multipliers associated with tax cuts for advanced economies like the United States.
While private-sector investment will be an essential component to upgrading and modernizing America’s infrastructure, it is questionable whether private money can fill the gap. Even if limited public funding successfully mobilizes private financing, the amounts currently under discussion are a fraction of the estimated need. The Simon Chair and our Reconnecting Asia project have tracked infrastructure developments globally and find that many of the constraints that prevent private capital from financing infrastructure projects abroad are also binding in the United States. As noted in the July 2015 GEM, a major impediment to boosting infrastructure investment is the lack of “bankable” infrastructure projects that clear a multitude of hurdles, including land rights, red tape, bureaucratic capacity, corruption issues, and environmental challenges, among others. In addition, the more ambitious the project, the more likely it will be over budget and over time, something Professor Bent Flyvbjerg of Oxford University calls the “iron law of megaprojects: over-budget, over-time, over and over again.” These are not the best conditions for attracting private capital, and it remains to be seen whether the administration’s plans will include policies to address the nonfinancial impediments to investment.
Beyond touting the economy’s upsurge, growling about China, and promising more “beautiful” infrastructure, it is unclear whether the president will tackle the other pressing economic issues facing the country. If he plans to advance proposals to tackle rising income equality, reduce the deficit, or prepare the U.S. workforce for an increasingly automated and technology-driven economy, the administration appears to be counting on the element of surprise to keep us tuned in.
President Trump’s unexpected comment at Davos that he might consider rejoining the Trans-Pacific Partnership (TPP) certainly raised eyebrows. Coming exactly one year after he announced U.S. withdrawal from the trade agreement, and a few days after the remaining 11 members of the pact agreed to move forward with a tweaked deal on their own, Trump’s remark seemed calculated more to appeal to the gathering of largely pro-TPP “globalists” at Davos than to signal serious intent to shift policy.
As Simon has argued in the past, withdrawal from TPP was an ill-advised move that did significant damage to U.S. economic and strategic interests in the Asia Pacific. If the president was truly moving his foot from brake to accelerator on TPP, that will be welcomed by most U.S. allies and partners in the region—once they recover from a severe case of whiplash.