How We Wasted A Chance To Upgrade Our Infrastructure For Free

Corpus Christi, Texas, a city of approximately 320,000 people, has now been under a boil water notice for nearly two weeks now, and it will probably be another day at least before that notice has a chance to be lifted.  This is the third boil water notice for the city in the last 10 months and it is just another example of the failing state of infrastructure all over the US these days. Interruptions in providing safe water is becoming a common occurrence these days. A Huffington Post analysis of Google alerts of boil water notices indicated 147 separate incidents in 27 states that lasted more than one day. And the lead contamination in Flint has prompted the discovery of similar levels of contamination in other water systems around the country.  All these problems can be traced back to underinvestment in monitoring and maintaining water systems around the country.  Incredibly, the federal level for the “safe” amount of lead in drinking water is not based on a scientific health threat – it is based on the calculation that 9 out of 10 homes will fall below the accepted level.

Naryana Kocherlakota was the President of the Federal Reserve Bank of Minneapolis from 2009 until the end of 2015. In 2008, Kocherlakota actually signed a letter opposing the stimulus plan that eventually passed Congress in 2009 and he was known as a monetary hawk who actually voted in 2011 against the Federal Reserve statement to keep interest rates near zero for an extended period of time. But his review of economic data convinced him that his view of monetary policy was in fact completely wrong and in 2012 he completely reversed his positions and now believes that rates should remain low until the economy has fully recovered.

So how does Mr. Kocherlakota fit into the discussion of infrastructure. He believes that households and businesses have been hoarding safe assets in the wake of the financial crisis.  Dodd-Frank is forcing banks to have lower leverage and hold even more safe assets. In sum, he believes that there is a world-wide shortage of safe assets available and that this shortage of safe assets is holding back the US and global economy.  I encourage you to read the whole article, but here is his summation:

“From a purely economic point of view, the government’s policy seems entirely artificial. No private entity would behave like this. Imagine a corporation with such a safe cash flow and such low borrowing costs. It would issue debt to fund expansions or payouts to its shareholders.

Analogously, the U.S. government should issue more debt, using the proceeds to invest in infrastructure, cut taxes or both. Instead, political forces have imposed artificial constraints on debt — constraints that punish savers, choke off economic growth and could sow the seeds of the next financial crisis.”

Since the 1980s, when the mantra of government being a problem rather than a solution took hold, underinvestment in the maintenance of the roads, bridges, water, and electric systems has been a standard. And the results of that neglect are being felt on a daily basis around the country. Interest rates have been at historic lows for the last few years and the real interest rate (current interest rate minus rate of inflation) has actually been negative at times.  Essentially, our government could have borrowed money for free and used that money to rebuild our infrastructure – repaving roads, fixing bridges, replacing aging and lead pipes, upgrading our rail system.  And this would have put millions of people back to work at the same time.  This is typical Keynesian economic theory at work and it was what FDR did to help pull us out of the Great Depression. But the political will was and still is not there.

In short, our reluctance to issue more safe assets in the form of US Government debt is keeping our economy from growing at its potential. And, what’s even more frustrating, is that we can see that this reluctance is keeping us from upgrading our infrastructure and investing in our futures.  The engine of the American growth in the 1950s, 60s, and even 70s was Eisenhower’s national highway system. It allowed commerce to move quickly and efficiently all around the country and allowed for the growth of our major cities. It is hard to understand the political myopia around this subject – upgrading infrastructure puts people back to work and builds the foundation for economic growth in the future.

Of course, the Federal Reserve looks intent on raising interest rates at least twice this year, so the time to take advantage of borrowing for free is quickly passing.  Eventually, we will have to fix our aging infrastructure and we will look back at this period and see what an opportunity we had to do those upgrades at little or no cost and think how much we wasted an enormous opportunity.