Will infrastructure derail the GOP and Trump?

With the Republican Party’s convention next week, Republicans are about to publish their 2016 platform. Unfortunately, a major new infrastructure plank calling for maintaining and upgrading our infrastructure will be missing.

This despite the American Society of Civil Engineers (ASCE) giving American infrastructure a grade of D+, and despite U.S. families losing in aggregate about $428 billion in disposable income this year (based on ASCE estimate), or about $3,400 per American family, because of lost productivity and higher costs due to our crumbling and outdated infrastructure.

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This $3,400 in estimated lower annual disposable income per American family is expected for each of the next ten years.

Without aggressive and prompt infrastructure investments—to prevent bridges from becoming unstable or collapsing, highways from buckling, and outdated highways and airports from causing further congestion, delays, lost productivity and extra costs for everyday goods—Congress and, by extension, the GOP with majorities in both chambers risk voters’ physical safety, their incomes, and their anger.

Voter anger will only increase if delays to repairs continue, because replacing infrastructure is much more costly than simply repairing it. In addition, costs may grow even larger if interest rates rise from current levels. Interest rates on 10- and 30-year U.S. Treasury bonds reached all-time lows last week, 1.32% and 2.10%, respectively. These levels are much lower than even those under Eisenhower. By comparison, April 1954 yields on 10-year notes reached as low as 2.29%.

What mystifies this registered independent, and proud American, about GOP intransigence is that such infrastructure investment yields large returns and that such investment is part of the GOP’s historical DNA.

The ASCE estimates a $1.4 trillion investment gap will need filling over the next decade. Were the federal government to borrow the required $1.4 trillion by issuing 10-year bonds at today’s extraordinarily low interest rates, the U.S. government might pay only about $21 billion each year in interest.

For purposes of illustration, aggregate family disposable income would increase by about $428 billion. If families were to spend this additional income each year, federal tax receipts could increase by up to about $107 billion each year (assuming a 25% tax rate). These tax revenues over ten years could cover all related interest and repay just over 60% ($860 billion) of the debt incurred. But that’s not all.

These increased tax revenues can be expected to continue for longer than ten years because infrastructure improvements generally last decades.

And that is not all. The federal government would also receive tax revenues from the $1.4 trillion of spending injected into the economy. Because one person’s spending is another person’s income, that injection could translate into an additional estimated $350 billion in federal tax receipts over the investment period. These additional federal tax revenues could pay back another 25% of the initial debt incurred. But that is still not all.

The federal government could also expect to receive large, additional, and increasing tax revenue streams over that period and far beyond. These would be able to pay off any remaining government bonds issued to finance these infrastructure investments and also pay back other unrelated U.S. debt. The reason? Private credit creation.

As incomes rose, consumers and businesses could become more confident in their prospects and increase their demand for credit. Banks and other financial institutions, for their part, would observe the creditworthiness of borrowers increasing and would be willing to lend them more. When these additional funds were then spent or invested, economic activity would increase further and continue to add to incomes, net worth, further credit creation, and federal tax receipts.

Results over time would decrease our federal debt/GDP ratio from current levels, all else being equal, and GDP would increase while federal debt would decrease from current levels.

Wrong-headed thinking about such infrastructure investment—draped in the respectable-sounding phrases of “fiscal conservatism,” “deficit-reduction,” and “lower taxes”—displays, at the very least, a fundamental misunderstanding of some bases of a vibrant national economy.

As strange as this seeming lack of understanding is, equally baffling is the apparent lack of historical knowledge about the Republican Party’s support of infrastructure investment, even when federal debt/GDP ratios were relatively high.

President Eisenhower often preached against deficits, calling the national debt “our children’s inherited mortgage.” Nonetheless, in his 1955 State of the Union Address, with the federal debt/GDP ratio still high due to World War II, Eisenhower set out a bold vision, stating that “a modern, efficient highway system is essential to meet the needs of our growing population, our expanding economy, and our national security.” Under the leadership of Congress and Eisenhower, the U.S. government invested to build the interstate highway system.

Almost a century earlier, Congress and Abraham Lincoln had supported the building of the transcontinental railroad.

History has judged these policies of Congress, Lincoln, and Eisenhower positively for creating jobs, economic growth, confidence, national pride, and for improving national security.

Republicans can launch a major, bold initiative, in conjunction with their presumptive nominee, and safeguard as well as broaden their electoral appeal. They need only choose to look economic reality in the eye, live up to their Party’s proud heritage, and in so doing create their own legacy. Will they muster the courage to do so?


Clarence Schwab is founder and managing partner of Schwab Capital Management, an investment and advisory firm focused on publicly traded and smaller privately held companies. Follow him on Twitter @SchwabClarence.