President Donald Trump has hinted that the administration plans to release a detailed set of principles this month for “a trillion-dollar infrastructure bill” to upgrade roads, bridges, airports and other public works. Too bad the recently enacted tax cut legislation will increase the large projected fiscal deficits over the next decade and severely limit the federal government’s ability to fund a large and multiyear infrastructure plan.
In the parlance of financial markets, this is what’s known as a missed opportunity, and the current euphoria among investors over lower corporate taxes could soon fade. The economic lift from the tax plan will be positive, especially in the early part of 2018 as the cuts take effect. However, sustained growth in gross domestic product of greater than 3% needs all sectors of the economy to be growing, and that includes public investment.
The current economic expansion has been characterized as the weakest on record, and it is. Yet, even though overall GDP growth has averaged a little more than 2% a year, it’s not because of weakness in the private sector or even business investment, the main beneficiaries of the tax cuts.
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During the current eight-year-long expansion the private sector has grown almost 3% a year. And, in comparison to the 2000s growth cycle, the private economy growth rate has been slightly faster by about 20 basis points per year. What may be more surprising is that real business fixed investment has averaged 4.25% in the current economic growth cycle, double the growth rate of real GDP and almost double the rate of growth in business investment during the last decade.
The weak link in the current cycle is in the public sector. Over the past eight years, real public sector spending and investment has declined about 1% a year. That is in sharp contrast to the historic average of roughly a 2% increase a year during previous economic expansions. No other period of growth in the postwar era has experienced such a large and sustained drag from the public sector, especially public investment.