With progress on deregulation and passage of the tax bill, the Trump administration’s pro-growth economic agenda is shifting. During a meeting at Camp David with Republican congressional leaders, President Donald Trump outlined his legislative agenda for 2018. Along with immigration, the military and national security, infrastructure was singled out as a key objective.
Judging by remarks made by a broad range of politicians and economists in recent years, this policy initiative commands widespread support — and with good reason: It promises beneficial effects for both the supply and demand sides of the economy. And it can be funded in a cost-effective manner.
Indeed, the question is not the economic or financial desirability of such a programme, but its political feasibility. Here are three elements that show the need for a well-designed infrastructure programme:
* On the supply side, better infrastructure. Addressing decaying parts such as roads, bridges, airports and ports, as well as expanding in new areas associated with the wider use of technological innovations, including artificial intelligence and mobility, enhances both private- and public-sector productivity. By also reducing the historically-unusual gap that has emerged over the last few years between the US and some of its international competitors, particularly in Asia, this spending helps lift both the country’s actual and potential growth capabilities.
* A well-designed infrastructure programme can also help on the demand side.
Supported by a pickup in growth, the US economy is transitioning away from an unbalanced demand management policy stance that has required prolonged and excessive reliance on unconventional monetary measures. Although these steps have provided an important growth bridge, their protracted use carries a mounting risk of collateral damage and unintended consequences.
With the implementation of a well-structured infrastructure programme, the Federal Reserve would find it easier to progress further on its “beautiful normalisation”.
* Then there is the funding side.
Long-term interest rates, including the 2.80 per cent on the 30-year Treasury, remain unusually low in the context of ample appetite for government bonds. As such, infrastructure projects can be financed effectively. Their expected social returns would exceed the cost of financing, and the benefit on economic growth would compensate for, if not more than offset, the longer-term debt burden.
Given these three considerations, it should come as no surprise that improved infrastructure has, for a number of years, been on the wishlist of many politicians and economists who care about economic well-being and financial sustainability. Yet, until now, turning the desirable into the feasible has proven politically challenging as several years of polarised politics have undermined one attempt after another.
With their control of both houses of Congress, Republicans have a window to move ahead on an infrastructure programme as part of a broad pro-growth policy agenda. With Democrats also involved in what is an inherently complex design process, such an undertaking could even provide a signal here and abroad that America’s politicians are still able and willing to come together on a beneficial, sensible and needed economic initiative.
Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. He was chairman of the president’s Global Development Council, CEO and president of Harvard Management Company, managing director at Salomon Smith Barney and deputy director of the IMF. His books include “The Only Game in Town” and “When Markets Collide.”
