In Bastiat’s “parable of the broken window,” from his 1850 classic on
political economy, That Which Is Seen, and That Which Is Not Seen,
a man’s careless son breaks a window pane. A crowd gathers and begins to
contemplate the damage. They optimistically conclude that the boy has
actually performed a community service.
Their logic? His father will have to pay someone to replace the window.
That individual will spend the income on something else, multiply to
another, and so on. Voilà! The local economy is stimulated.
Bastiat, however, gently nudges us to consider “that which is seen and that
which is not seen.” What is less evident is that the father’s income is
reduced and used to fund a maintenance cost (simply replacing something
that has already been purchased). What’s more, the father could have spent
the money on other goods or services. Ultimately the crowd was wrong —
overall economic growth has actually been reduced.
Looking at the wider infrastructure thrust from U.S. President Donald
Trump’s administration, the fog is still thick. But some of it is lifting.
It is now clear that there will be significantly less than the $1 trillion
of new investment promised by the Trump campaign. Elaine Chow, Trump’s
Transport Secretary, has repeated several times that the federal government
accounts for only 16% of U.S. infrastructure spending — that means less
than US$200 billion of federal money.
The rest is up to state governments. Where they will raise the money seems
not to have been a consideration, except floating the idea of more
public-private partnerships. In any case, there is no urgency to any of
this. Even if the $1 trillion infrastructure promise could be financed, it
was meant to be spread over 10 years.
Overall, Trump’s infrastructure spending will have far less impact on the
economy than originally envisioned by markets. The most encouraging
development is the prospect for reduced regulation. Treasury Secretary
Steve Mnuchin and Commerce Secretary Wilbur Ross are clearly determined to
deregulate wherever they can.
Even if the Congressional Democrats block specific changes (like proposals
to alter the massive Dodd-Frank Wall Street Reform and Consumer Protection Act enacted
following the financial crisis of 2008), the Administration has room to
weaken regulations simply by reinterpreting existing laws. As such, Trump’s
sectoral impact will be substantial.
From that perspective, U.S. policy is likely to support financials and be
negative for infrastructure companies and energy (as prices should stay
soft while supply continues to ratchet up).
Tyler Mordy, CFA, is President and CIO for
Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities
selection. He specializes in global investment strategy and ETF trends.
This article first appeared in
Forstrong’s Gobal Thinking feature. Used with permission. You can reach Tyler by phone at Forstrong
Global, toll-free 1-888-419-6715, or by email at
firstname.lastname@example.org. Follow Tyler on Twitter at
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