Tag Archives: US infrastructure

How Climate Change Might Hijack Trump’s Infrastructure Vision

By Henry Teitelbaum, Editor, P3-Planet

Any global warming-related catastrophe that hits US coastal areas over the next four years could quickly lead to an unraveling of key features of the Trump administration’s program for rebuilding America’s failing bridges, water systems, and other essential public infrastructure.

If the risks stemming from accelerating climate change do bring disaster to American shores, it will be a hard lesson learned by an administration that shows no signs of accepting the science behind global climate change. Rather than investing in the long-term potential economic benefits of a 21st century infrastructure, the administration could find itself spending all of its available resources fixing broken, inundated or degraded public assets.

Latest Hot Topic

The latest in a string of bad news for the planet’s ecosystem is that 2016 is officially the hottest year on record, marking the third consecutive year of record breaking global temperatures.
Recent evidence also shows that levels of floating sea ice around the world are in a state of collapse, threatening coastal areas with a potentially catastrophic rise in sea water levels. By the middle of this month, total sea ice, as measured by satellite was at its lowest level since records began in 1978, and is likely now at its lowest level in thousands of years.

national Snow and Ice Data Center

 

 

This pattern of melting has been most apparent in the Arctic, where in addition to the general rise in temperatures, “dark snow” or blackish deposits of man-made industrial particles on ice and snow formations are accelerating icemelt across the region by absorbing heat from sun where previously it was reflected by snow and ice. In the Southern hemisphere, a giant crack has appeared in the Larson C ice shelf in Antarctica, threatening to raise sea levels if it breaks off, not just by melting, but by allowing vast amounts of melting glacial water to run directly into the ocean.

Of course, no one can predict if, when or how future catastrophic weather events will bring destruction to US shores. Some scientists using climate change models for predicting weather patterns and changes in sea levels think climate change is already producing more intense cycles of droughts and floods, more powerful storms and more destructive hurricanes.

Rising Cost Of Disasters

Few outside the Trump administration would question that the risks are high, or that they are growing both in cost and in their potential for causing human suffering. Among notable weather related disasters, recovery from Hurricane Katrina in 2007 was the most expensive in US history, costing an estimated $108 billion of damage, while Hurricane Sandy in 2012 was the second most destructive. In both events, urban areas were hard hit by high winds, flooding and storm surges.

It bears noting that 40% of the US population, or 125 million people, now live in counties along the coastal shoreline. The population density in these regions, which include some of the largest metropolitan areas of the country, is six times that of inland counties, and they continue to grow at a much faster pace than inland regions.

This mostly urban population is particularly vulnerable to the kinds of disruptions to infrastructure services that occur as a result of extreme weather events associated with climate change, most notably rising sea levels, storm surges, and heat waves. This is because many urban infrastructure services are interdependent and locally based. So any electrical grid failure due to flooding is also likely to pollute clean water supplies, disrupt emergency services and shut down transportation systems.

Private Sector Infrastructure Push

Mr. Trump has made redeveloping public infrastructure, notably America’s aging roads, bridges, airports and public water systems, a top priority for his administration. Specifically, the “Trump Private Sector Financing Plan” is designed to be a revenue-neutral privately funded option for financing up to $1 trillion of the nation’s infrastructure needs over 10 years.

A key incentive for early stage private sector infrastructure construction would come from federal tax credits. These would be equal to 82% of the amount of the estimated equity required to absorb long-term revenue-related risks on projects. Because the equity component of the required investment is tax credit-supported, it reduces the revenue needed to service the financing, thereby improving the project’s feasibility.

It is entirely possible that the Trump Administration will be forced by a budget-minded Congress to curtail its ambitious infrastructure plans in the first place. But what if funding for the incentives that are needed to make these projects viable for private investors instead goes to covering the cost of restoring essential infrastructure services in cities hit by weather-related disasters? It’s hard to imagine private investors then being willing to take on the risk of long-term infrastructure investments on their own. So the whole program becomes non-viable.

What should worry Americans even more is that Mr. Trump and his choice of like-minded climate change deniers for key cabinet posts pretty much guarantees that the country will be blindsided by any real world climate change scenarios that play out over the next four years.

Featured image  courtesy of Timo Lieber from “Thaw”, an Exhibition of the Melting Polar Ice Cap, depicting photographic evidence of “dark snow” in the Arctic .

This blog post has also appeared in The Market Mogul and Ecosystem Marketplace

Is Trump’s US Infrastructure Vision For Real?

IImage by Henry TeitelbaumBy Henry Teitelbaum, Editor, P3-Planet.com

Right up to election day, President-elect Donald Trump was frustratingly short on the details of his post-election plans. In hindsight, it seems that lack of specificity didn’t hurt his chances, and may have even helped his campaign.

Now that he’s elected, Trump’s public remarks point to the possibility that he really is committed to investing in rebuilding America’s infrastructure. If confirmed, such a program would go a long way towards redeeming an otherwise deeply misguided political agenda.

As of this writing, it’s too early to expect a detailed plan from the new administration, particularly one that is led by such an easily distracted personality. However, most political observers seem to agree that this is one domestic program that passes the smell test. It is potentially  a rich harvest of low hanging political fruit because behind all the angry rhetoric of the campaign, both candidates put infrastructure near the top of their domestic agendas.

Serious Commitment

An analysis written in October by Commerce Secretary nominee Wilbur Ross and and business professor Peter Navarro — both senior policy advisers to Trump — points to a serious level of political commitment to infrastructure investment. It also indicates a willingness to consider innovative approaches to private sector financing for infrastructure  alongside public sector and public private partnership investments.

The “Trump Private Sector Financing Plan” described in their analysis is designed to be a revenue-neutral option for financing up to $1 trillion of the nation’s infrastructure needs over 10 years. A key incentive for early stage private sector infrastructure construction would come from federal tax credits. These would be  equal to 82% of the amount of the estimated equity required to absorb long-term revenue-related risks on projects. Because the equity component of the required investment is tax credit-supported, it reduces the revenue needed to service the financing, thereby improving the project’s feasibility.

Tax Neutrality

By their calculation, $167 billion of private sector equity investments in infrastructure could then be sufficient to secure leverage financing of $1 trillion. All of this assumes interest rates of 4.5% and 5%, an assumption that the post-election jump in yields call into question.

To achieve tax neutrality, the plan calls for the repayment of the tax credits from incremental revenue generated from project construction. That would be mainly from taxes on additional wage income and taxes on additional contractor profits.

Trump’s proposed corporate tax reform plan is designed to incentivize private capital flows into redeveloping America’s infrastructure. It achieves this by using the tax credit on infrastructure equity investment to offset corporate tax liabilities on the repatriation of  untaxed profits from foreign operations – effectively turning a tax liability into an equity investment.

Trump has proposed to tax US companies’ accumulated offshore profits at 10%, down from the current top corporate income tax rate of 35% on a one time basis if they repatriate those monies. US companies currently hold an estimated $2.5 trillion in earnings overseas because current federal law allows them to indefinitely defer paying taxes on these profits until they return them to the US.

Trump, who has specified that as a businessman he has “always loved leverage”, has also indicated a desire to take advantage of the current historically low interest rates to borrow long term, likely for a sum exceeding $500 billion.

Clean Sweep of Congress Helps

It’s worth remembering that Trump has been a real estate developer for his entire career. It is where his main business interests lie. But  it also seems that creating impressive, modern, even garish physical structures really excites him on a personal level. During the campaign, Trump emotionally recounted his experiences visiting modern airports in China and Dubai and wondered why the US has allowed its own public infrastructure to fall into its current state of disrepair.

Another factor that supports a potential increase in borrowing for infrastructure investment is the Republican sweep of both houses of Congress. Historically, most of the increase in federal spending in the US in recent decades has occurred under Republican administrations, most notably under George W. Bush when both Houses were under Republican control.

There is also considerable bi-partisan support for large scale infrastructure investment. President Barack Obama’s first term featured the American Recovery and Reinvestment Act, which was passed in 2009. It has been widely criticized for being too small in scope, and too focused on shovel-ready projects and other short-term fixes to address the enormous backlog of under-investment in infrastructure. But many still consider it an important Keynesian boost to the economy that contributed to the US outperforming other developed countries over the past eight years. A significant part of Hillary Clinton’s plan would have involved extending this investment program by creating a federally funded infrastructure bank that Obama was blocked from creating in the early part of his term by congressional Republicans.

Sorry State of US Infrastructure

There’s no question that the US would benefit enormously from new investment in these essential assets of future prosperity. The nation has been under-investing in its economic and social infrastructure for many years under both political parties, with overall spending dropping by half over the past three decades.

The extent of the neglect is evident across the board, with the American Society of Civil Engineers giving the country’s infrastructure a ‘D+’ GPA score on its 2013 report card. This includes a ‘D’ (poor) for drinking water and wastewater and a near failing grade of ‘D-‘ for levees and inland waterways. Aviation, roads and schools infrastructure are also rated ‘poor’ in terms of their fitness as measured by their capacity, condition, funding, future need operation, maintenance and public safety.

According to the ASCE, the US has infrastructure needs of about $3.6 trillion through 2020, including $1.7 trillion for roads, bridges and transit alone.

The Trump analysis points out that the future attractiveness of the US as an investment destination, its competitiveness, and its productivity are all at risk from the poor condition of the country’s infrastructure. It noted that the US now ranks 12th on the Global Competitiveness Index in infrastructure, with traffic delays due to inadequate transportation infrastructure costing the economy more than $50 billion annually.

Public Safety Issues Emerging

Beyond this, America’s quality of life and increasingly public safety are compromised, as recent episodes of lead poisoning and bridge collapses have demonstrated. The Trump campaign’s analysis cited an investigation by USA Today identifying nearly 2,000 additional water systems spanning all 50 states where testing has shown excessive levels of lead contamination of the past four years, including 350 systems supplying drinking water to schools or daycare facilities.

Since the Great Depression in the early part of the 20th century, infrastructure investment has been used as a fiscal tool for generating economic growth.

Citing the Federal Reserve, The Trump campaign paper says that in the US every $200 billion in additional infrastructure spending creates $88 billion in wages and increases real GDP growth by more than a percentage point, with each GDP point creating 1.2 million additional jobs. Other estimates, suggest that this multiplier effect could be even higher. According to the Federal Reserve of San Francisco, over a 10-year horizon, the average multiplier effect of government spending on highways is about two, which means that for every dollar spent, two dollars of GDP activity is generated.

There is also a potentially huge pool of domestic investment demand for infrastructure projects from pension funds, insurers and other institutions with long-term liabilities. The long-term nature of infrastructure programs means these investments are structurally well matched to the revenue flows from the debt that finances their construction, operation and maintenance.

Inflation Protection, Diversification Benefits

This revenue is highly reliable due to its link to dedicated tax revenue streams (availability payments) or revenue collected from tolls (concessions), it can provide inflation protection to the investor. Investors also look to infrastructure for its portfolio diversification benefits.

There are several challenges that could derail, or at least limit the success of Trump’s infrastructure plans. Among these is that the US unemployment rate has now fallen below 5% and continues to decline. That leaves very little slack in the labor market to prevent cost-push inflation from being generated. Regardless of the fundamental economic case for investing in infrastructure, shortages of labor are bound to appear, driving up the cost for delivery of these assets and making his goal less attainable.

It seems, in fact, that Trump’s plans for rebuilding America’s infrastructure will almost certainly be at cross-purposes with other key elements in his domestic agenda. Most notably, this includes his outspoken pledge to deport some 11 million illegal aliens.

Debt Spiral Risks

Another consideration is that the scale of Trump’s other policy initiatives, including higher defense spending and a range of tax cuts, could create a debt spiral that is potentially unsustainable. Already, the bond curve has steepened significantly amid concern that interest rates could start to rise quickly to prevent inflation from running out of control. If this happens, it could quickly and dramatically raise the cost of any large infrastructure investment program.

My own view is that Trump, or his Congressional allies will sooner rather than later have to decide which of his campaign promises needs to be curtailed so he can pursue the priorities that he believes will restore America to some semblance of his definition of its historic ‘greatness’.

Nearing A Watershed for Water Infrastructure?

By Henry Teitelbaum, Editor, P3 Planet

When public water infrastructure makes it into the presidential campaign debate, is it a sign that public discourse is at a tipping point?

Considering the scale of the looming national  water crisis, let’s hope it is. Public debate has been long overdue over how best to cover the giant backlog of under-investment in safeguarding sustainable drinking water supplies. We’re now at a point where doing something about it is as important as finding new sources of fresh water to supply the parched Southwest corner of the US.

Traditional Delivery

In most countries, the US included, the idea used to be that water is too precious a public resource to allow the private sector to have any control over managing its delivery, or even the operation and maintenance of its physical infrastructure.

But the  Flint, Michigan lead poisoning scandal changed all of that. For one thing,  the myth that dedicated public sector servants somehow can ensure better safety standards than if water supplies were privately run has been exposed. Not only did the government fail in its mission to protect and serve the people, it has claimed the right to hide from its responsibilities. 

Michigan’s Get-Out-Of-Jail-Free Card

Michigan’s ‘sovereign immunity’ doctrine is a piece of self-serving state legislation that now presents a significant legal obstacle to anyone seeking compensation, or even medical treatment for the long-term health damage caused by lead in the water supply. Under the law, Michigan and other states must grant permission to anyone making a legal claim against it.

In other words, officials elected by many of the same people who have been poisoned by their subsequent  negligence are in a position to deny legal responsibility for actions they take in an official capacity. So victims can give up on the idea that the government is better motivated than the private sector to pay for heath care,  worker’s compensation or damages, when things go badly wrong.

Blame it on the Budget

The lack of adequate public financial resources to pay for water infrastructure maintenance cuts to the heart of the issue, not just in bankrupt states like Michigan, but  across the country and, indeed, around the world.

It goes a long way towards explaining why water regularly ranks at the bottom of the American Society of Civil Engineers’ Report Card on the nation’s infrastructure. It’s current grade is a D-minus, placing it one notch above failing.

Private Money to the Rescue?

The free market approach, as often advocated by business-minded politicians, is that privatizing these assets will bring better cost control and more efficient service. This is predicated on the shaky assumption that any company that gets the contract will treat public health as a solemn trust, even as it strives to provide fat returns to its shareholders.

If you think calling in the private sector is always the best alternative model for managing water and other essential public resources, consider the largely preventable water crisis that recently brought the western hemisphere’s largest mega-city Sao Paulo, Brazil to the brink of disaster.

Sao Paulo’s Near Miss

SABESP is a mixed capital company that is both stock-exchange listed and publicly owned.  It has a 30-year concession for water and waste management in Sao Paulo, but has utterly failed to  manage the city’s available water supply in a country often referred to as the Saudi Arabia of fresh water. By neglecting to make critical investments in water infrastructure that might have prevented a severe water shortage in 2014,  it bears direct responsibility for bringing the city to the verge of catastrophe.

An equally damning  criticism  is that the profit-oriented structure of the company is fundamentally at odds with its ethical and public health duty to deliver an essential public service. The company’s long history of stock splits and  increasing dividends to stockholders does little to discourage this view.

Short-changing  Public Health

While the water crisis there has receded for the moment,  critics say SABESP’s failure to invest in critical water infrastructure gave short-shrift to the health of 30 million citizens of Sao Paulo.

Beyond the near criminal neglect of infrastructure are systemic legal issues, such as Brazil’s constitutional requirement for shared management of water resources by Federal, state and municipal authorities. A lack of communication or coordination among these levels of government resulted in watersheds being managed based on political rather than more logical geographical criteria.

Water Delivery in The Age of Shortages

So what is the right structure for water infrastructure delivery?

There is of course no single blueprint that applies to all situations. But considering how climate change is likely to bring a lot more spot shortages of water going forward, it’s fair to expect that water  infrastructure issues are going to come up again and again.

Given the gravity of water issues around the world a look at how Israel has overcome chronic water shortages by adopting holistic delivery and  management practices coupled with advanced desalination technology provides some scope for optimism.

Israel, like many countries, faces challenges related  to  a growing population, a thirsty agricultural sector and over-exploitation of natural water resources. It also exists  in a particularly hostile, crowded and arid region of the world.

As water shortages became critical earlier this century,  the Israeli government established an inter-ministerial agency in 2007 with the goal of coordinating policy at all levels and implementing the most comprehensive water management program ever undertaken.

Holistic Approach Needed

The program included a big push on water conservation, but also an ambitious wastewater recycling plan to ensure adequate water was available for agriculture use. For human consumption, the country planned. and has now mostly completed building five giant desalination plants using the latest reverse osmosis technology.

These convert sea water into potable water by forcing it through a membrane that filters out the salt and other impurities. The plants were delivered using the public private partnership (PPP) model, which enabled the government to tap the private sector know-how and financing to bring innovative approaches to reducing energy consumption and boosting efficiency.

In return, the company, IDE Technologies, got a concession to operate the plants for 25 years, after which time the assets will be transferred to state ownership. The state, for its part, retains final ownership of the assets, but buys the desalinated water from the company for 58 cents a cubic meter. That’s actually cheap by Middle Eastern standards. It then reinvests the money it collects from taxes into new water infrastructure, which is being developed by the national water company, Merokot.

Making Friends In the Middle East

The country now has a water surplus, which in a hostile neighborhood such as the Middle East, could go a long way towards building lasting friendships.

The risks are weighted toward further severe water crises, whether due to over-exploitation of existing natural supplies, or the effects of climate change. So at the very least, Israel’s successful use of PPP to manage its vital water requirements represents one highly effective model for water delivery in an increasingly thirsty world.

This article has also appeared on Medium and Business Daily

 

How Can We Tackle The Infrastructure Crisis?

By Henry Teitelbaum

(Originally Published in Aon One Brief, March 3, 2016)

We often don’t think about it until it breaks down, but the reality is that much of modern society in the developed world is dependent on public infrastructure investments in roads, airports, schools, water, sewage and electricity utilities that were made half a century or more ago. Without these, developed economies and societies simply wouldn’t be able to function.

But in recent years, a lack of public investment has forced many of these basic building blocks of prosperity to serve beyond their intended lifespans. In the U.K., the lack of upgrades or replacements for ageing power plants have begun to threaten electricity blackouts, while the recent toxic tap water in Flint, Michigan, has highlighted that ageing infrastructure may not just lead to an economic impact, but also create serious health issues. As many as half a million children may have been affected by lead poisoning from ageing pipes in the U.S. alone.

Why has the condition of our public physical infrastructure been allowed to deteriorate so sharply – and in our current age of over-stretched public purses, and with ageing populations putting increasing pressure on tax revenues, what are the options for addressing this worsening challenge?

In Depth

Globally, the World Economic Forum estimates that the planet is under-investing in infrastructure by as much as $1 trillion a year – since 1990, the global road network has expanded by 88 percent, but demand has increased by 218 percent in the same period.

With the global population continuing to grow – and urban populations in particular – the pressure on existing infrastructure is only set to worsen. And in the developed world that infrastructure is creaking: in the U.K., 11 coal-fired power stations are nearing 50, the end of their operational lives, and replacements have yet to be built; in the U.S., the average age of the country’s 84,000 dams is 52; in Germany, a third of all rail bridges are over 100 years old; parts of London’s Underground rail system, still in daily use by hundreds of thousands of commuters, run through tunnels that are over 150 years old.

According to the Report Card on America’s Infrastructure by the American Society of Civil Engineers (ASCE), the U.S. alone will need $3.6 trillion of infrastructure investment by 2020, assigning near-failing grades to inland waterways and levees, and poor marks for the state of drinking water, dams, schools, road and hazardous waste infrastructure.

Europe’s infrastructure is in worse shape – The Royal Institute of International Affairs has suggested that the continent needs $16 trillion of infrastructure investment by 2030, more than any other region in a world.

Taxing Issues, Tragic Consequences

While taxes once covered the cost of building and maintaining public infrastructure, entitlement programs such as social security and healthcare have started to claim a larger share of these funds as a percentage of government tax revenue, particularly as the number of people in retirement expanded.

In addition, as the cost of social programs grew, governments came under pressure to cut taxes, leaving even less money available to maintain existing infrastructure, let alone invest in the requirements of growing populations. “Too often infrastructure is seen only through the lens of cost, expenditure and not core to society prosperity”, says Geoffrey Heekin, Executive Vice President and Managing Director, Global Construction & Infrastructure, Aon Risk Solutions.

“Since the 1950s, investment in infrastructure in developed countries has been declining,” he says. “In the U.S., for example, investment as a percentage of GDP has fallen from around 5-6 percent in the 1950s to around 2 percent today.”

Tragically, train derailments, road closures, water mains breaks, and even bridge collapses to become commonplace. “Until situations like the water crisis in Flint or a bridge collapse happen, infrastructure does not hold proper weighting in the psyche of leaders in government,” says Heekin.

This lack of attention to infrastructure is costing developed economies billions of dollars in lost productivity, jobs, and declining competitiveness. Without addressing the infrastructure investment gap, the U.S. economy alone could lose $3.1 trillion in GDP by 2020, according to the ASCE, while one estimate attributes 14,000 U.S. highway deaths a year to poorly-maintained road infrastructure.

A Private Sector Solution To Public Sector Under-Investment?

To begin reversing the infrastructure gap, it is likely that governments will need to find ways to encourage private sector investment towards replacing, renewing and upgrading physical infrastructure.

Governments of all political stripes are increasingly supportive of private investment in infrastructure. One model that is now gaining attention is the Public Private Partnership (P3) model.

P3s in one form or another have been used successfully in developed countries for several decades. They are being used to procure everything from public health care facilities, schools and courthouses to highways, port facilities and energy infrastructure. While the volume and type of P3 deal can vary widely by country, there continues to be an upward trend for the model’s usage by the public sector.

In 2015, for example, Canada procured 36% of its infrastructure with the P3 model. Aon Infrastructure Solutions anticipates that 21 P3 projects will close in Canada in 2016, with a total capital value of USD$12.8 billon – the highest value of P3 projects in Canadian history. In the US, where adoption of the P3 model is less widespread, 11 projects are expected to close in 2016, with a capital value of USD $8.7 billion dollars.

Like traditional design-bid-build procurement, P3 projects involve public authorities putting out tenders for public projects or programs for competitive tender, and selecting a preferred bidder from multiple bidding consortia. The key difference is that the contractual structure in P3 allows the public authority to transfer a different set of risks to the private party – including (but not always) the financing for the project. The arrangement can allow the private partner that designs, builds, and finances construction of the asset to operate and maintain it in return for either, 1) a share of the revenue generated by the use of the asset, or 2) a stream of constant payments from the public authority (also called availability payments).

Keeping Focused on the Big Picture

“The public sector benefits from P3 delivery when the model is applied to a project that meets a community need and is procured through a transparent, accountable process,” says Gord Paul, Senior Vice President & National Director of Public Private Partnerships, Aon Risk Services, Canada.

“Public authorities seek ‘value for money’ in a P3 project by looking to the long-term value,” Paul says. This means identifying whether the private sector party is able to design, build, finance, operate and maintain an infrastructure project for a price lower than if the public authority did it on its own over the same period. It’s about the full lifecycle of the project – not just the build costs.

Taking a big picture view is equally important for the private sector party, says Alister Burley, Head of Construction for Aon Risk Services Australia. He points to the importance of taking a holistic view to P3 projects and investments to enable efficiencies to be built that will carry forward over time.

If done right, P3 arrangements can be a significant benefit to both the public and private sectors. Public bodies gain a much-needed boost to their infrastructure, often with long-term maintenance included in the deal, reducing the potential negative economic and health consequences of infrastructure failure. And private investors can secure a stable, long-term return through a stake in some of the underlying essentials of our economies.

Whatever route governments take to secure the integrity of our underlying infrastructure, one thing is clear – without a significant increase in infrastructure investment over the coming years, the world’s economy and health could well be put at further risk.

Our Fragile Markets, or Why China’s Your Daddy

By Henry Teitelbaum, Editor, P3 Planet

There seems to be very little western investors, governments or central banks can do to stem the tide of contagion from China’s collapsing stock markets.

While it’s tempting to dismiss this selloff as merely a correction in equity markets after they hit sky-high valuations, it’s troubling to see how quickly the wealth of millions of people has evaporated. Of greater fundamental concern for markets is that as China’s export-driven juggernaut slows, there are no real economic growth engines in the world to replace it. The fact is that our economies remain weak and vulnerable, and for that we have ourselves to blame.

During the past 20 years, when China’s booming economy was busy exporting goods and importing western technology and capital, governments in the US and Europe did very little to mobilize investment in the essentials of future growth at home. In Europe, the focus was on futile efforts to rein-in social spending, reform labor markets and keep jobs from disappearing, while in the US little attention was paid to economic fundamentals. Instead, successive governments, Democratic and Republican alike, threw everything behind politically popular efforts to expand home ownership to the millions.

Critically, nothing much happened at either the federal or state level to develop the public infrastructure that would be needed to support a thriving and productive 21st century economy. Whether it was upgrading roads and bridges, rail networks and airports, or building schools and public healthcare facilities, investment utterly failed to keep up with society’s needs. What we got instead was the biggest housing bubble in US history.

US Labor Productivity

Wrong-Headed Crisis Response

Even after that bubble burst, western leaders ignored or were thwarted from making these investments. Across the Euro-zone, governments focused on a self-defeating exercise in fiscal austerity, while in the US, an initial investment in fixing public roads was followed by political gridlock. Despite the opportunity to borrow long-term at historically low cost,  governments in both the US and Europe continually failed to make these urgently needed growth-generating investments.

The private sector has also failed us. Businesses across the US and Europe — rather than make bold investments in their flat-lining economies — have been sitting on their expanding piles of cash for years. Dividends to investors reached record levels while companies waited for that elusive economic turnaround that never seemed to take hold. Predictably, when the investment-starved turnaround finally did come, it was weak and woefully inadequate.

So here we are. The US, Europe and Japan are all still drowning in debt, either outright, or as a percentage of GDP. And investment spending, such as it is, isn’t anywhere near where it needs to be to allow economies to grow their way out of debt. So western economies, markets and indeed their financial systems are all looking very fragile indeed.

Investment Opportunities Ignored

It didn’t have to come to this. Investments in infrastructure create enormous value for economies that fully justify their cost. In the short-term, they generate jobs, which helps to put money into circulation in the economy through increased spending on goods and services. Whether it is public money, or private sector investment through Public Private Partnerships, the multiplier effect that follows quickly generates economic activity and tax revenue for the government.

Longer term, the completed asset supports better services for both the public and private sectors, leading to a more productive economy and a more attractive investment destination for both domestic and foreign businesses. The debt generated from building these public assets can also make for a safe, long-term  investment that can contribute to the stability of domestic markets in the face of turbulence elsewhere in the world.

Studies have repeatedly shown that infrastructure investments, particularly during times of economic bust, generate a much higher fiscal multiplier than other types of government investment, (http://www.frbsf.org/economic-research/publications/economic-letter/2012/november/highway-grants/).

In effect, they provide a Keynesian lift to aggregate demand at precisely the time when it is most needed. Further out in time, according to the Federal Reserve Bank of San Francisco, there’s a medium term boost to the economy when the asset, in their example a public road, increases the economy’s productive capacity.

The SF Fed concludes that combining these multiplier effects can mean that every $1 of government spending produces “at least” $2 of economic output.

China’s Treasury Bond Option

The colossal failure of western developed economies to adopt growth-oriented investment policies means their markets will remain extremely vulnerable to exogenous shocks such as the one China has generated. And it’s not just equities. Treasury yields could be in for a similar shock if China, now the biggest holder of US Treasurys ($1.27 trillion as of June 2015), decides to start selling off its holdings to support its markets.

In the absence of western leadership, what’s likely to happen in our fragile markets going forward will depend on how quickly and successfully China re-positions its economy towards domestic consumption. Let’s hope they decide they don’t need to sell their Treasury holdings to get there.

This blog has appeared in Medium and Business Daily.

Henry is available for freelance commissions and long-term assignments and is reachable at hthq@hotmail.com.

GOP Should Put Infrastructure Back On US Agenda

By Henry Teitelbaum, Editor, P3 Planet

Over the past six years, Republicans have become very adept at blocking US President Barack Obama from achieving anything in Washington, often through tactics that could have done lasting damage to the nation’s credit standing in the world.

Now that the Republicans have control over both houses of Congress, it’s time for them to grow up. The 114th Congress  brings with it just about enough time before the  2016 Presidential election campaign for the Republicans to craft a meaningful federal agenda that will prove it is more than just the party that says “no”.

While there is already talk of working together on a tax reform or immigration agenda over the next six months, it’s hard to imagine a breakthrough on issues of such long-standing disagreement between the two parties.

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