Private Infrastructure Investment
Larry Summers didn’t get nominated to run the Fed, but he certainly still has the President’s ear. A piece of analysis we read recently pointed us towards an op ed article he wrote for the Financial Times in mid-October. That piece suggested two lines of thought which we follow below.
Summers comments: “Growth-enhancing policies have more widely felt benefits than measures that raise taxes or cut spending. Spurring growth is also an area where neither side of the political spectrum has a monopoly on good ideas. We need more public infrastructure investment but we also need to reduce regulatory barriers that hold back private infrastructure.” This statement was made in the context of a kitchen-sink list of policies that he believes could be enacted to spur growth, while trying to show how policy priorities of both left and right are available as pro-growth options. (And maintaining, sensibly, that spurring growth is the real key to resolving our fiscal troubles.)
The emphasis on infrastructure caught our eye. By some measures, things are not as bad as they were in the 90s, with fewer structurally unsound bridges and a less ragged interstate highway system. But it is true that U.S. infrastructure stock is aging and needs further investment — especially in technological growth areas, such as information and energy.
For decades, the trend has been for this investment to become more and more public, with direct funding and direct and indirect subsidies from Federal, state and local governments.(Even so, excluding defense spending, gross fixed investment by the private sector is still some five times as big as that of government.)
Infrastructure expansion can come from both the private or public sector, and if the government gets behind slashing red tape and bureaucratic overreach, we could see a big infrastructure boom in the U.S.
The Age of U.S. Capital Stock at a Record Level
Source: Financial Times
Tax and Regulatory Barriers to Private Infrastructure Investment
What barriers could be brought down?
• Municipal-bond interest is exempt from Federal income tax. This means that financing is cheaper for governments than for private enterprises. And this is just one of the tax advantages public infrastructure has over potential private providers.
• Government-owned facilities are exempt from state and Federal taxes on earnings, as well as property taxes — another burden private enterprise faces that government doesn’t (think of a state-owned vs a private airport, for example).
• Labor unions are powerfully present in state and local government, and use their clout to resist any encroachment of the private sector on public infrastructure. Does this support the revitalization of U.S. infrastructure?
Not all of these barriers present options for the Obama administration — but some do. If the administration wants to engage in a push to expand and replace ageing infrastructure in order to boost national productivity, Larry Summers may convince it to look here.
QE Muni
We like this possibility, given the need for infrastructure and the historically wasteful way in which infrastructure spending by government has played out. What’s another possibility with a dovish Fed and a President eager to spend on infrastructure? Several pundits have suggested that the Fed could end up buying state and municipal bonds, if appropriate amendments could be made to the Federal Reserve Act. Given the perilous nature of a lot of state and local finances, this is not an option we would endorse.
Beneficiaries
In any event, the need for renewal of U.S. capital stock is likely to be positive for industrials — perhaps one more piece of good news for them as the cycle strengthens and capital expenditure increases across the board.
