Rebuilding Americas Inner Cities

While America is the largest economy in the nation, there is a considerable push towards rebuilding America’s infrastructure. Many Americans believe that they are losing out globally to firms that have better infrastructure in place.

Companies in China have been beating America at low-cost manufacturing for decades now. However, even if higher labor costs are set aside, American manufacturers still face very high costs related to infrastructure. This is what Donald Trump emphasized in his pre-electoral speeches. He used the phrase “rebuilding America’s inner cities”. He also stated that even though Chicago was home to the United States president, it was still in a mess. He advocated radical reforms and said that he would earmark over a trillion dollars to rebuild these cities if he was voted to power. Now, he is in power, and an overhaul of the American infrastructure is almost a certainty. However, what needs to be decided is the manner in which the $1 trillion dollars is likely to be spent. In this article, we will have a closer look at this issue.

All American Consensus

There are very few issues on which the Republicans and the Democrats agree. One such issue where all Americans seem to agree is that of infrastructure. During the Presidential debates, Hillary did not disagree with the fact that the entire system needs an overhaul.

Also, Americans have already been spending large amounts on infrastructure. The GDP to spending ratio has not declined at all during the many decades that have followed World War-2. Over the past year, the government has already earmarked $350 billion to be spent towards infrastructure as a part of the routine budgetary exercise. However, Americans also seem to unanimously feel that regular spending will not cut the deal here. What is actually required is high powered financing that will radically transform the economy within a short period. Hence, the trillion dollar budget!

Funding the Trillion Dollar Binge

Spending trillion dollars is not an easy task in itself. However, it is easier than financing the trillion dollars! America is ready to rebuild. However, who is going to pay for this? There have been several proposals raised regarding the probable financing routes that can be used. However, the one most likely to be selected is based on tax credits.

The government plans to use tax credits to give an impetus to projects that would not have panned out otherwise. The idea is to use less equity and high leverage. The investments made towards these projects can be offset against tax credits up to 80% of the value. Hence, corporations that were going to pay 100% of an amount of tax can instead invest it here and gain control of an asset for a mere 20% price!

There was significant debate about the viability of this plan. The credibility of this plan was also challenged since it was laid down by Wilbur Ross who is a well-known investor, but some people sought to view him as a Wall Street stooge. The main criticism was that this plan is not raising any new funding. Instead, it is just redirecting the existing funding from Treasury towards this infrastructure fund. Hence, any gains made by the infrastructure fund will be exactly offset by the losses to Treasury.

The winners in this entire exercise will be corporations that will save tax dollars and end up controlling assets by paying a fraction of the price! However, Trump administration has vehemently argued that this will not be the case. They have stated that the profits that they are targeting to make tax exempt will be incremental. By providing this scheme, the Trump administration will raise a huge volume of money by enticing corporations to repatriate money that they have held offshore.

Democrats also seem to be on board with this plan as long as two conditions are met. The infrastructure plans being covered under this scheme must not be bankable i.e. able to fund themselves. Secondly, the Treasury revenue targets must not be missed since America is already heavily in debt and cannot afford more fiscal deficits.

Which Projects to Undertake ?

The government of the United States has a massive capital rationing exercise that they need to undertake. They have to choose where to spend their money and where to get corporations to spend the money. The simple logic that can be used is that the government must fund the most bankable projects. These are the ones that will repay their costs i.e. debt plus equity almost certainly. The problem is that most of the projects are centered on urban areas. Hence it might appear that the government is biased towards urban areas making it a bad political move. Similarly, the government can ask corporations to spend money on rural projects that have a longer gestation time and will make money only in the distant future. The promise of saving money via tax credits is likely to entice corporations to jump head over heels into Trump’s new scheme.

To sum it up, the fact that American infrastructure will be rebuilt is a foregone conclusion. Both parties agree to the proposal and support it. What needs to be seen now is how the massive spending is financed and what projects are chosen.