Could Mrs Thatcher help Trump with his stimulus?

Published May 4th, 2017

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Insight from Christopher Gasson, GWI publisher

How can President Trump deliver his trillion-dollar infrastructure spending plan? It is a difficult question to answer, both because of the lack of forward visibility in Washington politics at the moment, and because of the strong partisan feelings gathered within the Beltway.

The central problem of delivering the stimulus package is how to do it while reducing taxes, holding down the deficit, and keeping Congress happy. Ideally, then, the stimulus has to be delivered without costing the US Treasury a dime. There are three ways of achieving this. The first is to do nothing but talk a lot, then claim credit for projects which would have gone ahead anyway. This is a feasible strategy, but it might add to the alienation of Trump’s electoral base. The second is to attempt a “regulatory stimulus”, cutting back the red tape that is holding back major projects across the US. The problem is that many of these projects are locally controversial, and the result might be a load of lawsuits rather than shovels getting to work. The third solution is to take a leaf out of Margaret Thatcher’s playbook and use public asset sales to release capital.

Of course the federal government does not own many assets that could be privatised. The states and municipalities do, however, and probably the most valuable assets on the public balance sheet that could be sold are the water systems. Based on an analysis of the balance sheets of US water utilities that we did a few years ago, my best estimate of the total book value of America’s water and wastewater utility assets is in the region of $1,040 billion (or $3,250 per person). If Trump were Mrs Thatcher, he would have no qualms about telling municipalities to sell their water utilities and use the proceeds to fund a trillion dollars of spending on other public infrastructure such as roads and bridges. If they were reluctant to sell their water systems, he could withdraw the tax exemption on interest from municipal bonds. This would cut the municipalities’ access to cheap debt, forcing them to raise money through asset sales. Closing this loophole would incidentally increase federal tax revenues, facilitating other tax cuts.

Of course this kind of thinking has always been an anathema in the United States. People are generally proud of their cities and the services they provide. Unlike the UK during the 1980s, nobody questions the efficiency of public service provision. In Mrs Thatcher’s world, it was assumed that anything done by the public sector was bound to be inefficient because public employees lack the profit motive. She would argue that the savings that private companies could squeeze out of public sector organisations would more than cover the cost of the capital that the private sector would have to raise in order to buy the assets off the public sector.

She would also ridicule America’s fear that big corporations cannot be trusted with something as important as water systems. She would point out that there is an inherent conflict of interest in the public sector both providing services and regulating them. She would remind people that it was the public sector which killed more than 100 people in the 1993 Milwaukee cryptosporidium outbreak, and that the crisis in Flint was also the responsibility of the public sector. America’s investor-owned water utilities have never acted with such disregard to public health because they are properly regulated, and unlike the public sector, they are incentivised to invest.

The real problem of America’s infrastructure is that the economic model that supports it is no longer valid. In the days when Eisenhower was building the interstate highway system, it was possible for the government to issue debt to finance roads because more roads would lead to more trade, which would lead to a growing economy, and with the top rate of income tax fixed at 90%, any public spending would quickly come back to the government to pay off the debt. Today, improved roads would have a more marginal impact on economic growth, and with the top tax rate set at 39.6%, it is not so easy for governments to get their money back from infrastructure projects which don’t have associated direct revenue streams. While privatisation at the municipal level is a cultural anathema in the US, it does seem difficult to see another way of stimulating spending without returning to Eisenhower’s approach to tax and spend.

The people who would benefit most from privatisation-driven stimulus spending would be the infrastructure fund managers. They currently find it very easy to raise funds, because investors want low-volatility assets which offer yields better than those available in the bond markets, but it is very difficult to find suitable investment targets. According to a 2017 Preqin report, global infrastructure funds currently have around $137 billion of dry powder. Leveraged up, that could fund $550 billion of asset purchases from the public sector, the proceeds of which could then be recycled into new infrastructure investment. Once the opportunity was established, it would quickly be possible to create a $1 trillion stimulus.

Normally I would not give so much space to this line of thinking, but the fact that there are now so many Goldman Sachs alumni around the President makes me feel differently. Goldman has more than $10 billion in its infra funds. Creative finance could provide the stimulus Trump needs without adding to the deficit or the tax bill.