A confluence of events over the past four decades has created an opportunity to rethink how and where the government and private sector invest.
Long-neglected investment needs have resulted in an antiquated American infrastructure that is not aligned with the needs of private industry, the public sector or the direction of the digital economy.
With negative real interest rates, now is the time to address the long-term investment needs of an economy in rapid transformation.
As a result, the United States is on the verge of launching an ambitious effort to rebuild its infrastructure. But as with any large program, the question is how to pay for it.
In our estimation, the best way forward would be to create a national infrastructure bank. While that may not be possible in the near term because of political constraints, an infrastructure bank nevertheless is likely the optimal path to building the infrastructure for the economy to remain competitive.
Because of the recent shocks to the economy – resulting from ill-advised economic and trade policies from 2017-18 and then the pandemic starting in 2020 – the monetary authorities have instituted policies for extremely low interest rates to stimulate an economic recovery.
This presents the opportunity for long-term investment at negative inflation-adjusted interest rates. That is, the cost of newly issued debt will be paid in deflated dollars, resulting in investments that actually pay for themselves.
This is the time to act boldly, decisively and to address, once and for all, the long-term investment needs of an economy in rapid transformation.
In our estimation, this transformation, driven by digital technologies, demands new government institutions that can finance the next evolution of the U.S. economy.
It is impossible to identify the exact needs of the economy a decade from now. For example, who would have thought 10 years ago that educational broadband would be so important during a public health crisis? But an infrastructure bank would provide the flexibility to adapt to such changes, and offer a route for financing, in a way the private sector cannot match.
Rethinking infrastructure funding
We are proposing the development of an independent infrastructure bank (IB) that would operate as the fiscal equivalent of the Federal Reserve. The infrastructure bank would operate as a revenue-generating independent agency, subject to its mandate to develop the U.S. economy through public and private investment in infrastructure.
Grants and co-funded projects would promote economic growth, with a return on investment for the private investors in addition to the indirect returns for the public in the form of increased output and employment.
A workable model
Canada’s Infrastructure Bank can serve as a model. The CIB is a federally funded bank that seeks to act as a catalyst to fund investment projects that attract private capital to spur economic growth.
The CIB is investing $10 billion over the next three years in public transportation ($1.5 billion), building retrofits ($2 billion), broadband ($3 billion), agriculture ($1.5 billion) and clean power ($2.5 billion), all in Canadian dollars.
Domestically, the U.S. infrastructure bank’s closest relatives would be the National Institutes of Health and the National Science Foundation, whose grants have funded the research that underlies developments in health care and technology.
Just like the NIH and NSF, the mandate for the infrastructure bank would not end as soon as the business cycle turned upward. Instead, the infrastructure bank would continue to act as an idea generator and would continue to attract investment in projects that would benefit the public.
We can point to the public benefits of projects that sprang out of the New Deal or the Interstate Highway System, the advancements in immunology, and landing on the moon.
The need for research and innovation became especially obvious this year. The basis for the coronavirus vaccines came out of grants for research made 15 to 20 years ago, only to stay dormant because of the lack of funding. Nevertheless, the existence of that research allowed for the incredibly fast development of the mRNA vaccines from Pfizer/BioNTech and Moderna.
What would an infrastructure bank look like?
There have been a number of proposals for an infrastructure bank introduced in Congress over the years. One example was the National Infrastructure Development Bank Act of 2015, or H.R. 3337.
Such a bank would have established a wholly owned government corporation subject to Chapter 91 of Title 31 of the United States Code, referred to as the Government Corporation Control Act.
Like other government-owned, independent entities such as the Federal Reserve, Fannie Mae and Freddie Mac, an infrastructure bank would be subject to congressional oversight and maintain a board of directors subject to representative professional qualifications and regional representation.
While that oversight is critical to establishing the legitimacy of any independent, government-owned corporation, the direction of publicly financed investment projects would not be directed by the executive or legislative branches.
As outlined earlier, such a financial institution would be constructed to act as a catalyst to attract private capital supplemented by public financing to repair, construct and maintain infrastructure critical to the public good that the private sector on its own will not build.
Rethinking the response to the pandemic recession
The response to the 2008-09 financial crisis and Great Recession was to restore confidence in the financial sector, restore the finances of state and local governments, save the auto industry and its hundreds of thousands of jobs, and restore the income stream for the labor force through unemployment assistance and public-private projects.
The 2009 American Recovery and Reinvestment Act was well-meaning, but it was rooted in the past.
There was little funding for providing clean water, rebuilding the outdated electric grid, providing universal broadband coverage or building rural hospitals. The recent collapse of the Texas energy grid accentuates the need to invest in modern, resilient infrastructure that can withstand the type of extreme weather that has become more common.
A University of California study conducted before the recent emergency in Texas estimated that it would take $11 billion by 2035 to bring the already well-funded Texas energy infrastructure up to code. This is exactly the type of case that demands a solution with vision to address the quickly changing needs of the modern economy.
Investing in those projects would have gone a long way toward preparing for the competitive changes in the American economy.
The 2009 American Recovery and Reinvestment Act was well-meaning and immediate, but it was unimaginative and rooted in the past. It missed the challenges that automation presented to a large segment of the American labor force. The notion of shovel-ready projects was always going to be a misnomer, and they set back the prospects for infrastructure modernization by years.
We cannot afford to miss out on another opportunity to transform our economy.
Policy and investment considerations
With such a favorable interest rate environment and the needs so great, this is the time to act.
We came out of the Depression and the Second World War with public works projects that transformed the economy into an industrial powerhouse and provided a social safety net and education for almost all Americans.
We came out of the Great Recession with the same old electric grid, fewer manufacturing jobs and a missed opportunity to prepare our economy for its next phase. Now, more than a decade later, we have another chance.
We’ve already seen the attempts to prolong the postwar industrial age. Further efforts to ignore the global economy seem Pyrrhic at best. Instead, it makes economic sense to consider ways to solve our immediate problems and to invest in what’s coming next.
An infrastructure bank could do just that. As Winston Churchill once said, Americans will do the right thing — after they have tried everything else. It’s time to do the right thing.
