I received several questions concerning infrastructure spending and the potential for it to produce a positive fiscal multiplier, which I discussed in the columns, "We Can See the End of Growth From the View of 'Peak Debt'" and "Peak Debt and Fiscal Stimulus a Catch-22?"
Infrastructure spending at the federal level is not a panacea for producing net growth in an economy. It is, however, the only area of fiscal spending at the federal level where there is broad agreement within the economics community that it can produce a positive fiscal multiplier.
There is also broad agreement that every other form of fiscal stimulus cannot produce a positive fiscal multiplier and that deploying fiscal stimulus into other areas just causes debt levels and debt service to increase.
There are plenty of examples of infrastructure spending done poorly, where it is not a catalyst for net economic growth and actually causes the sovereign fiscal situation to deteriorate as a result.
The spending by Japan during the 1990s was focused on "river stabilization." That was the process of essentially cementing over the bottoms of all of the waterways and rivers throughout the country.
The city building in China over the past 20 years has been similar.
In both cases there has been no positive fiscal multiplier and each country's fiscal situation has worsened as a result.
Also in both cases, the drive to implement these programs was based on political expediency and the perceived need to do something quickly rather than properly.
The reason for that is that both were implemented or greatly increased in reaction to immediate economic contractions. In Japan, the crisis was the result of the bubble and crash in asset values of the early 1980s and 90s. In China, the building was greatly expanded in reaction to the 2008-2009 global financial crisis.
If the U.S. waits to begin an infrastructure investment program until after a slowdown or contraction in economic activity creates the political will for it to occur, it is probable that the same fate will befall this country. That's because members of Congress compete for how much "pork" they can siphon off for their states versus focusing on the need for the spending to be an investment that produces growth.
Of the political front-runners for presidential this year, only Donald Trump appears to exhibit an awareness of the need for a fiscal focus on the domestic economy.
In the aftermath of his comments concerning abortion yesterday, the stocks of the largest publicly traded infrastructure companies are down as speculators who have been moving into those stocks as Trump's popularity has risen are moving out of them again.
The three infrastructure companies I wrote about in the column "Implications of a Trump Presidency, Part 2: Trump vs. Military Industrial Complex" as possessing the best potential for appreciation if Trump is elected were down or flat on Friday. They are Chicago Bridge & Iron (CBI), Jacobs Engineering Group (JEC) and Fluor (FLR).
I believe it is probable that unless something happens to cause support for Trump to rebound substantially, this trend will continue.
That something would need to be a substantial decline in the equity markets or economic activity that causes voters' immediate concerns to shift back to the economy and away from social issues as a determinant in deciding on a preferred candidate.
If the economy continues to muddle through to the Republican convention in about three-and-a-half months, the prospects for Trump winning the nomination look less bright.
Nonetheless, it's still probable that the next president and Congress will be faced with an economic environment where a stimulative monetary policy response is limited and a fiscal response is required.
It is also probable that the political will to focus on a domestic infrastructure program to create jobs and stimulate economic activity will occur. The prime driver will be the recognition by the next president and Congress of the need to address the economic concerns expressed by the supporters of Trump and Bernie Sanders, who collectively represent a majority of voters, although they are backing different horses to address those concerns.
As that process continues to unfold, investors should be watchful for signs that the spending plans are driven by investments that not only can produce jobs immediately, but also become the catalyst for even greater private-sector economic activity that causes the necessary positive fiscal multiplier.
If the spending is as poorly allocated, as has been the case in Japan and China, the U.S. economy will suffer the same consequences after the immediate impact of the spending has waned.