On the sidelines of the Democratic Convention, a group of mayors and governors met to plan a big infrastructure investment push. Bloomberg reports:
“We need to sell the American people on the value of investing in infrastructure,” Terry O’Sullivan, general president of the Laborers’ International Union of North America, said. He spoke at a meeting sponsored by Bloomberg Politics and Building America’s Future, a coalition of elected officials that’s co-chaired by Michael Bloomberg, founder and majority owner of Bloomberg LP, the parent company of Bloomberg News.
U.S. spending is projected to fall about $1.4 trillion short of the $3.3 trillion needed through 2025 for airports, highways and other infrastructure, according to the American Society of Civil Engineers. While President Barack Obama spurred spending on public works by helping cover the interest on about $188 billion of state and local debt, the program lapsed in 2010. Democrats have been unable to revive it because of Republican opposition in Congress.
Elsewhere, the Financial Times reports that it’s not just a former billionaire mayor and his acolytes who want to re-pave roads and fix bridges:
The Democratic party platform promises “the most ambitious investment in American infrastructure since President Eisenhower created the interstate highway system”. Mr Trump promised to “build the greatest infrastructure on the planet earth”, including the roads, railways and airports of tomorrow. “Construction is what I know,” Mr Trump said. “Nobody knows it better.”
Infrastructure might be the buzziest buzzword on Wall Street right now.
The argument for increasing infrastructure spending right now is straightforward. With real interest rates flirting with negative territory, the federal government can borrow money for free to finance ambitious new projects and renovations. Looking at the dramatic reports from the American Society of Civil Engineers and a continuing dearth of well-paying jobs, infrastructure spending looks to many people like a no-brainer.
The problem is that all of those justifications could as easily have been made—and indeed were made—five years ago or six years ago or three years ago or last year; there was no infrastructure spending bill in those years, so why would there be one now? Republicans in Congress have refused to spend the money so far; why would that change?
It’s possible that the GOP might get behind a big infrastructure bill if they held the presidency. After all, building new roads is a time-tested way to accumulate political capital (this is also why government construction so often stinks of corruption). But even if Republicans do an about-face on debt-financed spending, America’s infrastructure won’t improve quickly.
Republican opposition to infrastructure is short-righted in some ways, but it’s based on some good instincts. Infrastructure in the United States is saddled by union mandates, consulting fees, and other regulations that make building here far more expensive than in other developed countries. Spain is famously beset by bureaucratic inefficiencies, but it gets ten to twenty times more value for its spending as we do. The UK, which is generally considered a more apt comparison, isn’t as efficient as Spain, but it also does more with less. As with our convoluted health care system, the American mix of private and public financing and contracting drives perverse incentives and poor outcomes. (In fact, one of the big cost differentiators for America’s infrastructure is expensive health care for construction workers and transit employees.)
It isn’t just all the added cost, either. Building takes much longer than it used to, as President Obama learned when he promised lots of “shovel-ready” stimulus projects and then found out that very few things in the U.S. are “shovel-ready.” Procurement and contract negotiation can themselves take years. Meanwhile, private contractors are rarely incentivized to keep costs down or to worry about future maintenance—common practice in the U.S. is simply to go with whatever bid is initially cheapest and then deal with overruns later.
True, low interest rates mean the federal government can just pony up extra cash to cover the costs. But that won’t ensure things get built faster or address the reality that, under the current system, true maintenance costs on new projects won’t be factored into projections. Local and state governments will be left footing future bills and they, unlike the federal government, can’t borrow money cheaply and reliably.
Any effort to finance infrastructure investments should consider these challenges. America’s infrastructure does need attention (although we’re skeptical of assessments from trade groups like the American Society of Civil Engineers). But to really fix it, Congress will have to do more than just authorize the spending. It will have to overhaul procurement policies, union regulations, and environmental restrictions. This isn’t just a left-wing or a right-wing concern: both unions and construction firm owners are benefiting from the current system at the public’s expense.
Writing a blank check now will only further entrench the current interests (there’s a reason Wall Street smells opportunity) and make reform even harder to pursue in the future. Free cash is tempting, but to take it without pursuing any reform would be a costly mistake.