21st-century Keynesianism? Get real

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By:
Dominic O’Neill
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UK and US economic policy has changed tone since last year’s electoral rebellions. Markets should jump at the chance to buy into higher-yielding real assets, but politicians will struggle to make reality match their rhetoric on infrastructure investment

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In his victory speech at 3am on November 9, Donald Trump said he will rebuild the battered highways, bridges, tunnels, airports, schools and hospitals of the world’s biggest economy.

In the UK, since she became prime minister after the Brexit vote, Theresa May has complained about the effects of an interest-rate fuelled recovery – just as America’s president-elect has attacked Janet Yellen. Post-Brexit chancellor Philip Hammond put infrastructure at the heart of his autumn statement. In addition to earlier talk of new government-backed infrastructure bonds, Hammond said a new National Productivity Investment Fund would provide £23 billion ($29 billion) of additional spending in transport, digital communications, research and development and housing.

Are the two countries that did most to promote monetarist economics now leading a shift to a kind of 21st-century Keynesianism? 

Trump said his infrastructure programme “will put millions of our people to work”. Given this is 2017, will we see a new dawn for government-incentivized private-sector infrastructure financing, too? High public debt means governments must incentivize private investors to take much of the risk, and there is no shortage of yield-starved money to invest in real assets like infrastructure. 

Infrastructure has been high on the global political agenda since 2008. But that was a false dawn for infrastructure investment. Much UK infrastructure activity has involved shuffling completed assets, like 2016’s sale of London’s City Airport to Canadian pension funds. M&A on its own does little to improve productivity. 

One problem in the UK has been a focus on megaprojects, such as new rail links across London and to the north of England and an £18 billion nuclear power station, at the expense of less headline-grabbing but in aggregate more useful projects. Under the Conservative-Liberal Democrat coalition between 2010 and 2015, the old private finance initiative, which is relevant to smaller projects, was politically tarnished by its widespread use by the Labour government between 1997 and 2010. The UK may have invented these public-private partnerships under the Conservatives in the early 1990s, but like football, it is a game played more skilfully elsewhere now.

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Yet as the political winds have changed, PFI’s reincarnated but little-used 2012 version, PF2, seems more politically palatable. The UK is targeting £300 billion of infrastructure investment between now and 2021. According to Hammond, the government’s infrastructure plans will be more than 50% privately financed. In November, the government hired Matthew Vickerstaff, formerly head of structured finance at Société Générale, to head its project finance team. That might be another sign of an end to austerity-era culls of officials with experience of infrastructure investment. 

It might not be a new dawn, but certainly a break in the clouds, assuming PF2 really does become a more common and stable framework to which investors can get accustomed. In the US, however, while Trump’s rhetoric may be more extreme he will find it even harder to realize. 

There has never been a widely used model for public-private partnerships in the US of the kind that countries like the Netherlands and Canada enjoy. The burden tends to fall on the tax-exempt municipal bond market, but this has never been allowed to fund public-private partnerships. Despite its reputation for statist economics, France has more private-sector ownership of infrastructure assets today – tolls are normal on French, but not American, highways.

Perhaps John Maynard Keynes and Milton Friedman’s famously different views on government spending may have been partly a reflection of their own countries’ inherently different ability to do it well. Britain’s national character may be muddled, but it has had a little more national unity. In the US, differences between states and between the states and the federal government make for a mind-bogglingly complex environment for infrastructure markets.

In the UK, a fiscal boost is needed to compensate for the likely hit to growth from Brexit and the loss of European Investment Bank funding.

Whatever the practical difficulties of meeting Trump’s headline figure of a $1 trillion infrastructure investment plan, there are also more contradictions in his wider vision for economic stimulus. Constructing a broader-based recovery is needed to quell the anger of voters outside the metropolitan areas. 

The US is in dire need of infrastructure upgrades, as anyone who has spent time in its decrepit airports or bounced along its pot-hole-strewn roads will know. Whether or not Trump can fix that is another question; and, as the US economy is already reaching full employment, his other and easier-to-implement fiscal boost – tax cuts – will do even less to even out the bumps.