Interest rate hikes leave little room for infrastructure spending
Earlier this month during a victory rally through Des Moines, president-elect Donald Trump laid out the economic plan for his administration: buy American and hire American.
Throughout a campaign fraught with promises of infrastructure spending and tax breaks, Donald Trump planned to invest in domestic jobs and products that have been taken away from the United States over the years. In September, Trump criticized the Federal Reserve for propping up a “false economy” and told Reuters that interest rates were going to have to change at some point.
Well, that time is now.
The Federal Reserve decided to raise interest rates on Dec. 14, which effectively raised the cost of borrowing money for corporations and consumers alike. In the months leading up to that decision, the Federal Reserve balked at raising interest rates. Many believed the impending election caused this delay.
Unemployment is relatively low and growth in the economy, while slow, is dangerously close to its maximum sustainability without giving rise to inflation.
According to an article published by the Committee for a Responsible Federal Budget, our national debt nearly doubled during the Obama administration. Two major factors can be attributed to the rising debt: extension of Bush-era tax cuts and Obama-era federal deficit spending.
Both practices are likely to continue under the Trump administration, but unlike how Obama’s administration could do business, increases to the interest rate means borrowing money isn’t “free.”
We are desperately in need of infrastructure spending, and if you don’t believe that to be true, try getting a glass of tap water in Flint, Michigan.
Trump’s infrastructure plan relies heavily on tax breaks for private investors, which doesn’t necessarily equate to a subsidization of infrastructure projects. And that doesn’t even equate to higher employment because of such projects. If the projects were already set in motion, Trump’s plan has even more fallacies, and the private investors are simply going to benefit from ex post facto tax breaks.
A recent analysis of the infrastructure plan by two senior policy advisers to Trump, though supportive of his proposals, leaves no room for direct investments in specific infrastructure projects. It merely provides private sector financing, which can go to any number of projects of a company’s choosing.
An increase in federal spending will increase the national debt, and any growth attributed to the spending will likely face more rounds of interest rate hikes from the Federal Reserve. Trump wants to attain a four percent growth in the economy, which is more than double what the Federal Reserve wants.
If the increased government spending does drive the economy toward unprecedented growth through the proposed corporate welfare, the Federal Reserve will raise interest rates again to mitigate inflation. That will make the investments in the private sector costlier, and taxpayers will inevitably foot the bill and face an economy of rising prices and costlier loans.
The government-sponsored enterprise Freddie Mac has already shown signs of an increasing average mortgage rate on a 30-year loan, which would increase under higher borrowing costs from the Federal Reserve. Yet Trump promised to cut taxes for the average U.S. consumer.
Income tax cuts are generally well-received, but in the face of rising inflation and rising interest rates, these tax breaks can often be offset. The economist Milton Friedman, a member of Reagan’s Economic Policy Advisor Board, once wrote, “the only effective way to restrain government spending is by limiting government’s explicit tax revenue.”
Trump plans on increasing spending while limiting tax revenue, which eerily lends to the idea that corporations are getting a break while subversively limiting tax revenue that funds social and regulatory programs passed under the Obama administration. Friedman famously referred to this practice as “starving the beast,” but in reality it’s beginning to look like the future administration is picking and choosing which beast it really wants to feed: the private sector.
If the most recent hike in interest rates signals the first of many, it would be a miracle for Trump to make good on his promise for more American jobs and an economic boom.
Opinion columnist Nicholas Bell is an MBA graduate student and can be reached at [email protected]