President Trump’s $1.5 infrastructure plan calls for $200 billion in direct federal spending, with the remaining $1.3 trillion coming from state, local and private sources. But the unusual financing structure, along with the relatively small federal component, have led many critics to wonder if the plan could generate the desired levels of investment.
Economists at the Penn Wharton Budget Model reviewed the proposal to determine how much spending it could actually generate in real-world conditions. Using historical data on infrastructure spending, researchers built both static and dynamic models to predict the response to the proposal by various levels of government and private investors. The results were not encouraging:
"[B]ased on past evidence, much of the new federal aid would lead to state and local governments increasing total infrastructure investment by less than the value of the aid itself. We estimate that total new infrastructure investment would increase between $20 billion to $230 billion, including the $200 billion federal investment. There will be little to no impact on the economy."
A basic problem is that state and local governments don’t always boost infrastructure spending when federal spending increases. In fact, they may reduce their own spending on infrastructure, using some of the federal money for roads and bridges while shifting state and local resources to other budgetary priorities. In most cases, the authors write, “total infrastructure spending from local, state, and federal sources increases by less than $1 for each additional $1 in federal aid.”
Douglas Holtz-Eakin, a conservative economist who served as director of the Congressional Budget Office, told The Washington Post that although he thought the Penn Wharton projections were on the low side, the model was in the right ballpark. “I think they’re making a fair point: How the states respond matters, and there’s no guarantee that they’ll pony up an additional $1.3 trillion,” he said.