Create an Infrastructure Bank and Transition from a Wartime to a Peacetime Economy
The deal that Congress and the President made that created the so-called fiscal cliff may not be so bad after all. In fact it has many good elements: raising taxes on the rich which will reduce burgeoning inequality in the US, deficit reduction and reduction of the bloated military-industrial complex budget.
The one thing that many experts are worried about is that taking this much money out of the economy will create a recession. However, increased economic activity that would offset the fiscal cliff provisions can come about with increased leveraged spending on infrastructure development. A relatively small amount of government money when combined with money from private investors can goose the economy while preserving the good elements of the fiscal cliff deal.
This can lead to a conversion of what today is essentially a wartime economy to a peacetime economy and change the US from a national security state – one dependent on military related spending to create jobs – to a world leader in peacetime economic development.
It is important to realize that development of infrastructure in the US will set the stage for the revival of the economy. First class infrastructure will open up possibilities for the creation of 21st century businesses and enable them to thrive. It will also reduce carbon dioxide emissions and thus global warming.
President Obama backed the proposed legislation in February 2008 for the creation of an infrastructure bank. The bank would use the same methods as a commercial bank – that is fractional reserve banking. Fractional reserve banking allows banks to leverage depositor funds so that they can loan out ten times what their deposits are on the theory that not all depositors will want their money back at the same time.
In this way banks can make many more loans than they would be able to do otherwise. Obama suggested that the Bank would borrow $60 billion of federal funding to invest in infrastructure over 10 years, while leveraging “up to $500 billion” of private investment. So a relatively small amount of Federal funding could be leveraged up to provide a substantial amount of spending on infrastructure.
The logic behind the bank isn’t hard to grasp. In recent years, reams of white papers have come out describing how much of the nation’s transportation, water and energy infrastructure is in shambles. A 2010 Government Accountability Office report, for one, found that a quarter of the country’s 600,000 bridges are either “structurally deficient” or inadequate to today’s traffic needs.
The American Society of Civil Engineers (ASCE) estimates that an investment of $2.2 trillion is needed to bring America’s infrastructure up to snuff. The US lacks a central source of low-cost financing for big construction projects akin to the European Investment Bank.
The deal that created the fiscal cliff has many good aspects including the following:
- Taxes are raised on everyone but disproportionably on the rich reducing inequality.
- A lot of revenue is generated to pay down the deficit.
- The military-industrial complex takes a big hit.
- Social Security, Medicare, Medicaid and Veterans’ benefits are not affected.
- There is a 5 to 1 ratio between revenues from taxes and savings from cuts.
The only downside to the deal crafted by politicians as a means of kicking the can down the road is that taking that much money out of the economy might cause a recession. But here’s a way to avoid that: create an infrastructure bank. My premise is that money needs to be taken away from the military-industrial complex establishment and spent on rebuilding infrastructure in the US.
In addition new infrastructure such as a smart electric and electronic grid, high speed rail and undergrounding and hardening of all utilities as a way to avoid widespread devastation from superstorms such as the recent Sandy is of paramount importance. Whether or not we go over the fiscal cliff, creation of an infrastructure bank should be part of any deal before or after January 1.
Here’s another way to do it: take some of the money from revenues generated by the fiscal cliff, about one tenth will do, and then, through the magic of fractional reserve banking, that money can be multiplied ten times. The government would make a deposit with savings generated by the fiscal cliff, and then investors would also be invited to make deposits. They would draw interest on those deposits. The bank’s sole dedicated purpose would be to loan out or grant money for infrastucture projects.
Those loans or grants would be made after due diligence on the requesting company’s business model for the infrastructure project it has in mind. These projects could be created by entrepreneurs or by the government itself. Some of these projects could be revenue producing such as toll roads; some could be public investments with interest paid to investors over a period of time.
Obama’s proposed Secretary of Business could oversee the infrastructure projects funded by the infrastructure bank to make sure that there is a cohesive vision for a national infrastructure model that made sense as a whole and not a collective hodge podge of unrelated projects that didn’t fit together or work together. The Secretary of Business could also oversee industrial policy in the US similar to Japan’s Ministry of Industrial Trade and Industry (MITI). MITI ran much of Japanese industrial policy, funding research and directing investment.
In 2001, its role was taken over by the newly created Ministry of Economy, Trade and Industry (METI). An industrial policy coupled with an infrastructure development policy could make the US better fit for not only nation building at home but place it on a better footing for international competition. At the same time infrastructure redevelopment would create hundreds of thousands of jobs thereby avoiding a recession and placing the economy on a sounder footing.
The US is lagging behind other countries in infrastructure development. While other countries have been pouring money into infrastructure, the US has been pouring money into its military-industrial complex. More money is spent on defense than is spent by the next ten highest defense spending nations combined.
For example the US ranks 29th among the world’s nations in internet speed behind such countries as Romania, Bulgaria and Latvia. We rank first only in price. We pay six to ten times as much as the French, for instance, for a triple play package (phone, cable TV and internet). The French internet is ten times faster downloading and twenty times faster uploading than what most Americans can buy.
Undergrounding of utilities is one much needed infrastructure project. According to a Morgan Stanley analysis, power outages, caused by trees falling on electric power lines cost the U.S. economy between $25 billion and $180 billion every year. In Germany there are hardly any power outages from storms because their lines are all underground. Other infrastructure projects that can be encouraged by intelligent government policies is the creation of and retrofitting of smart buildings.
In Germany architects have created buildings that have a net zero consumption of energy. This translates to fewer carbon emissions into the atmosphere – a good thing. There are over 50 passive houses and at least 100 units with ‘plus energy’ standard (houses which produce more energy than they need) in Vauban, a neighborhood of Freiburg, one of the largest ‘solar districts’ in Europe.
“Within Vauban, a new ecologically designed settlement of 2000 houses that is being built on the site of an abandoned French military base, a Solar Village – Europe’s most modern solar housing project – is being built at Schlierberg, with 50 solar houses that will produce more energy than they consume, designed by Rolf Disch, one of the most renowned solar architects in Europe. The brightly coloured terraced homes use only 15% of the energy that is needed by Freiburg’s low-energy homes, and need additional heat for only a few weeks a year, from a wood chips biomass combined heat and power (CHP) plant.”
“A district centre has been created at Vauban with shops, a primary school, kindergartens and public green spaces. Vauban has been designed to create a ‘district of short distances’ where the schools, farmer’s market, businesses, shopping centre, food coop, recreation areas and approximately 600 jobs will be within walking and cycling distance of residents.”
The US electric grid is also not performing at the same level it was decades ago. Energy losses in the transmission and distribution system nearly doubled from 5 percent in 1970 to 9.5 percent in 2001. There is also a considerable security risk in the design of the grid with centralized generation plants serving distant loads over long transmission lines.
A smart grid would consist of a network with distributed sources of electricity generation from many different types of sources. It would optimize asset utilization and operating efficiency. It would anticipate and respond to system disturbances in a self-healing manner. It would be resilient against physical and cyber attacks and natural disasters.
In summary, the importance of infrastructure development for the long term healing and soundness of the economy cannot be underestimated. The creation of an infrastructure bank as Obama has suggested would be a cost effective way to ward off a recession, leverage government money with private investment and put the US on a sound competitive footing vis a vis other countries of the world.
The provisions of the fiscal cliff provide for many good things, among them deficit reduction, raising taxes disproportionally on the rich and reduction of the Defense budget. It might also reduce economic activity leading to a recession unless another way can be found to stoke the economy and employ laid off defense workers. Many of them would welcome the opportunity of switching over to a job in the infrastructure-industrial complex.
Any deal Obama makes, whether before or after the fiscal cliff dive, should provide for infrastructure development, something that is sorely needed in the US both in terms of security from physical and cyber attack and from attacks from Mother Nature which are gearing up in ferocity. Obama may have only one chance to make any kind of grand bargain since the Republicans in Congress will probably be as intransigent and obstructive as they have shown themselves to be for the last four years. He better get it all done in one fell swoop.