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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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Saving U.S. Infrastructure – Can Trump Do It?

Trump Election campaign

Politicians routinely denounce the deterioration of America's infrastructure while skimping on funding needed improvements. The American Society of Civil Engineers (ASCE) issues an infrastructure report card every four years and lays out projected costs of these potential infrastructure investments and, in effect, repairs. This election year President Trump in his campaign promised to do something about our infrastruc-ture.

His advisors and others have proposed ways to fund a new infrastructure program, possibly linking it to repatriation of corporate cash trapped overseas. More than half the infrastructure spending deficit identi-fied by the ASCE is accounted for by projects that affect major energy producers and users, including transportation and electricity production.

Infrastructure improvement may encourage greater electricity sales or make room for more motor vehi-cles on the road. It is also conceivable that some of these programs will make energy users more efficient and may further depress already weak kwh sales growth.

We do not know which it is. But the infrastructure investment potential associated with just the energy sector alone is substantial. As a result, we believe energy investors should consider scenarios that assume a meaningful federal presence with a focus on private sector capital participation.

Let’s leave aside the obvious question: why does a government that can borrow virtually unlimited amounts of money at very low rates of interest need to do anything other than borrow the money to fix infrastructure?

ASCE’s last report card projected that the USA needed to spend about $450 billion per year to maintain an “adequate” level of infrastructure through 2020. This compares with actual expenditures projected at about $250 billion per year--a large annual as well as cumulative shortfall. Adding that additional $200 bil-lion per year supposed "shortfall" to annual U.S. infrastructure spending would raise GDP by roughly 1 per-cent--a clear boost to a slow growing economy. Related: The Self-Driving Vehicle Revolution Has Begun

Would these funds go into energy investments as a means to kick start other programs favored by the new Trump administration like, for example, boiler modifications for aging coal plants or promoting nuclear power? No matter how generous the subsidy, we doubt that a resurgence of "king coal" is in the offing.

But as we've noted before, conservative governments on both sides of the Atlantic have long had a soft spot for commercial nuclear power regardless of its high relative cost. At a minimum we would expect re-newed interest in a Yucca Mountain type of permanent nuclear waste depository, streamlined reactor li-censing and funding for a next generation commercial nuclear reactor design. Nor would we be surprised to hear renewed proposals for the Clinch River "breeder" reactor or, possibly, molten sodium (thorium) technology. At this stage, though, it is difficult to know where the money will go.

The Trump-proposed infrastructure financing plan seems like an indirect and relatively expensive way to raise infrastructure funds, at least relative to ordinary tax-advantaged municipal debt. Their proposal, as briefly spelled out in an article by incoming Commerce Secretary Ross, would provide a tax credit to private investors to cover a large part of their infrastructure-related equity investment. This might also involve a government guarantee of associated project debt as well. In other words, the government would provide the bulk of investment funds, typically 80+ percent, while the private, equity investor injects a modest por-tion of capital. The resulting situation of public subsidy with private control is a neoliberal feature we may see more of, especially in areas like education.

Some politicians have suggested another tack. At present, U.S. non-financial corporations have over $1 trillion kept abroad, supposedly to avoid U.S. taxation. Given the need to fund their overseas investments and operations, not all this overseas cash is excess to corporate needs and available for repatriation. Related: How Vision 2030 Will Transform The Oil World

Politicians of every variety want to repatriate those funds. They have offered to levy a low tax rate on the money to induce corporations to repatriate the cash. One proposal uses the tax collected on repatriated funds to be invested in infrastructure spending. But a reduced 10 percent tax on repatriated funds would not go very far in providing the level of necessary funds.

What would corporations do with their newly repatriated cash? Many observers on Wall Street simply ex-pect more of the same--accelerated repurchases of common stock rather investing in productive assets that might actually create new jobs in the economy. But $1 trillion of incremental infrastructure capex could finance at least four years of our "deficit" in infrastructure spending.

The new President's reputation as a dealmaker precedes him. But can he induce U.S. domiciled multina-tional corporations to repatriate cash and help fix America's infrastructure with an offer they can’t refuse? No/low taxes and a decent rate of return on invested infrastructure-related cash seem like fairly attractive inducements.

But this type of policy solution presupposes that our nation's economic difficulties are on the asset side of the nation's balance sheet. As a result, more investment would be the logical answer. If our problem is in-stead excessive leverage, both individual and corporate, and too much income being required merely to service existing debt, then asset focused solutions will prove less than satisfactory. Shifting to the income statement, if our economic problem is one of inadequate demand or subpar top line or revenue growth, then we can only conclude with the question, if he builds it, will prosperity arrive?

By Leonard Hyman and William Tilles

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Leave a comment
  • Jim Decker on December 17 2016 said:
    How would you know whether nuclear is expensive? We haven’t built a new plant for almost a half a century. All estimates are inflated by exaggerated legal and regulatory costs. When the fools give up on solar and wind, they will take another look at nuclear and find that it is very reasonable in cost.
    I would not trust any number that the ASCE came up with. That is employment security for them. You can bet much of it is for a “smart grid” that is not just not needed, but essentially the start of Big Brother. The gub’mint is already trying to control thermostats with this con. It needs to be shut down.
    I live in a house where they were lowering the thermostat during the winter with an infant in a crib. They were doing it through Buffet’s NV Energy. He looks and talks like someone’s grandfather, but acts like a front man for a fascist government.
    If the energy industry needs it, they should be able to justify investing their own capital. No more Solydras!!! No more Cronyism!!!
  • Amvet on December 18 2016 said:
    Paying for infrastructure:
    (1) The Pentagon is eating our lunch. We have around 1,000 out of country military bases. The Pentagon cannot show paperwork for over $6 trillion of our dollars which is the corruption opportunity of all time.
    (2) If we get out of the war business we could finance our country.
  • Amvet on December 18 2016 said:
    Why no mention of thorium power?
    Thorium technology is well know and the advantages over Uranium are many.
    Our first reactor was thorium and we abandoned thorium because the waste could not be used to make atomic bombs.

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