Home Bull|Bear Intelligence How to Fix America’s Failing Infrastructure

How to Fix America’s Failing Infrastructure

The Failure to Act report by the American Society of Civil Engineers illustrates the fundamental impact of underinvesting in infrastructure. The findings indicate that the human consequences of inefficient infrastructure across the spectrum will lead to a more costly fix as politicians delay funding to rebuild. These mounting costs would be devastating to businesses and households as infrastructure continues to deteriorate, but there could be a way out. 

The Real Cost of Failing Infrastructure

The Failure to Act report describes how travel times will lengthen due to inefficient roadways and congested airports and airspace, affecting millions of travelers per day. Travel will also become more expensive and less reliable. Out-of-pocket expenditures to households and businesses will rise if the outdated electricity grids and power infrastructure fail. Water delivery systems likely won’t keep up with demand because of deteriorating drinking water pipes that are 100 years old on average.

Additionally, crumbling roadways will impede commerce with goods becoming more expensive to produce and more expensive to transport. As a consequence, U.S. businesses will be more inefficient as costs rise and productivity falls. This would cause GDP to drop, cutting employment with lost jobs estimated to exceed 2.5 million. The loss of personal income per household is estimated at $3,400 per year between 2016 and 2025, with cumulative lost income exceeding $33,000 per household.

U.S. Infrastructure Report Card
InfrastructureGrade
Energy and PowerD+
Hazardous WasteD+
Parks and RecreationD+
SchoolsD+
WastewaterD+
TransitD-
AviationD
DamsD
Drinking WaterD
Inland WaterwaysD
LeveesD
RoadsD
PortsC+
BridgesC+
Solid WasteC+
RailB
According to the American Society of Civil Engineers’ 2017 Infrastructure Report Card, which is published every four years, U.S. infrastructure gets a D+ grade.

Higher costs would also render U.S. goods and services less competitive internationally, reducing exports and decreasing dollars earned and brought into the U.S. from international sales. Cumulative loss of business revenue is expected to exceed $7 trillion by 2025 and lost GDP is likely to exceed $4 trillion. The impact will be felt throughout the economy, but will fall disproportionately on technology and knowledge-based industries that drive innovation and economic development.

The 2016 study underscores the findings of the preceding reports in the Failure to Act series, showing that the economic benefits of infrastructure investment reverberate through every sector of the economy, while economic losses that come from deferred investment also become worse over time. Delay is dangerous, and the real cost may not be measurable as the crumbling bridges, dams, and tunnels fail and cost an untold number of U.S. lives.  

Cogs in the Wheel

So far, Congress has turned a blind eye toward funding needed for fiscal stimulus. Lost income, jobs, and upward mobility will impact middle class Americans the most. The hypocrisy in Washington has reached alarming levels driven largely by populous rhetoric about protecting the majority of Americans. Yet by failing to enact a budget with significant fiscal stimulus to fix America’s infrastructure, Congress shows that they care very little about doing their jobs or about protecting middle income America. 

It seems that expanding power, holding power, and getting elected are all that matter to today’s politicians. They spend most of their time focused on party politics and how to shift voting power from one party to the other. The Democrats have long held that they are the party of middle class Americans. Yet they are more focused on putting a Democrat in the White House than doing their day job in the Congress or Senate. Unfortunately, Republican politicians are not much better. 

However, it was startling to compare the Democratic blue states on the 2016 Presidential Election Map with CNBC’s state infrastructure map showing how each of the 50 states ranked based on the quality of their hard infrastructure. It’s plain to see the Democratic states are almost all ranked towards the worst end of the scale in dark green.

Source: 270towin.com
A 2016 study by CNBC ranked all states, 1 to 50, based on the quality of hard infrastructure in each.

Another stumbling block to funding infrastructure projects is expanding the already bloated U.S. deficit that has been rising at an alarming rate post-Financial Crisis. Americans are acutely concerned about the size of the deficit and handing future generations an unsolvable problem that could end up compromising their prosperity. Much has been said and written about the anemic ~2% GDP growth rate that has persisted since the U.S. emerged from the Great Recession in 2009. Some economists think 2% growth is the “new normal” and likely the economic potential of the U.S. moving forward. Let’s hope they are wrong! 

The recent fiscal stimulus provided by the late 2017 Tax Cuts and Jobs Act demonstrated the boost fiscal stimulus can have on GDP by lifting growth from below 2% in 2017 to 3% in 2018. We can still hear Fed Chairman Ben Bernanke telling Congress over and over that monetary policy by itself would not provide enough stimulus to lift the economy to a normal rate of growth. His words still ring true today, and infrastructure spending would be the key to lifting the economy to 3% growth or higher on a sustained path for the next 10 years.

We have to give the Fed credit: their monetary policy provided an immediate boost to GDP and initiated a recovery from the Financial Crisis that might not have happened if they ceased to act. Nevertheless, it was a Band-Aid on a bullet wound because what’s been missing is fiscal stimulus, which could create continuous, long-term GDP growth. Considering the dysfunction in Washington, it isn’t surprising that Congress has failed to enact fiscal stimulus because it’s a key component of the budgetary process. No budget, no fiscal stimulus.

Meanwhile, U.S. infrastructure – once a shining example to the world – is crumbling and in desperate need of a $3.6 trillion investment by 2020 to prevent near-term disaster. The proposed infrastructure spending plans, amounting to approximately $200 billion, are a drop in the bucket compared to the amount of funding required to alleviate a crisis. The Fed’s recent interest rate hikes and unwind of their balance sheet to normalize policy has put the brakes on the boost provided by the Tax Act. With the economy’s fall back toward its anemic growth rate, the only way the Fed can get interest rates back to normal levels or to unwind its bloated balance sheet would be to find an economic growth driver that would offset the drag this policy tightening would cause. 

Think Outside the Box

Without fiscal stimulus, the current monetary policy used to promote zero interest rates and quantitative easing could end up toppling the fragile economic balance established after the Financial Crisis. This may seem unrelated to the fact that America’s infrastructure is in a dangerous state of disrepair, but the case is quite the contrary. Prior to the Financial Crisis, the Fed’s balance sheet was $900 billion; today, it’s $3.9 trillion. Using some of that cash to fund infrastructure, while unconventional, could be a home run. 

Since Congress cannot set aside its toxic political backdrop to approve additional fiscal stimulus, the Trump administration should create an “infrastructure bank” that includes a reasonable methodology to allocate capital and partner with industry. A rational and fair approach might be to allocate infrastructure funding to each state based on their pro rata contribution to GDP – the largest contributors to the economy would likely need larger capital infusion to address infrastructure needs than smaller state economies.

Here’s a clear example to illustrate how far behind the U.S. is in addressing its infrastructure and spending issues. Let’s compare us to China for a moment. China spends 8.6% of its GDP on building up roads and railways to support economic growth – that’s more than triple the 2.5% the U.S. spends. In the past 30 years, China has grown from an emerging economy to the second largest in the world, and for the last 10 years, that growth has been primarily driven by infrastructure spending. Central planners in China are likely betting that their world-leading infrastructure foundation will easily allow them to become the largest economy in the world.

The U.S. needs to step up to the plate on infrastructure spending or get left behind as a second-class economy. The money on the Fed’s balance sheet is not the Fed’s – it’s the property of the American people. The Treasury expanded the Fed’s balance sheet at the expense of the U.S. taxpayer in the Financial Crisis to prevent a second depression. This was part of the $13 billion U.S. deficits ballooning since 2007. The good news is, the money on the Fed’s balance sheet is already included in the deficit and can be recycled to support infrastructure funding without driving deficits higher.

An American Duty

The cost of failing to address America’s infrastructure issues is high. To reach a resolution may call for unconventional ideas as outlined here. Hopefully our president and his cabinet will embrace a path toward better infrastructure before our economy slides further toward recession, but voters can make a difference too. Votes will never count more than in upcoming elections. All voters, regardless of party affiliation, need to hold their representatives accountable to do their day job by working diligently to solve the U.S. infrastructure problem.

Important Information

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