Given today’s contentious, divisive and outright ugly political discourse, there are very few policies that unite the left and right. Now, of all people, Treasury Secretary Stephen Mnuchin may be on to one: Infrastructure.
Repairing the nation’s highways, electrical grid, water systems, and the like is one policy area where widespread agreement exists across nearly every political affiliation and persuasion. Sure, you can find a few extremists who insist that America’s roads, bridges, and tunnels are just fine, but no one takes those cranks seriously.
America long had the most advanced infrastructure systems in the world. Whether it was the interstate highway system, national phone system, rural electrification, mass transit, or early adoption of air travel, the U.S. infrastructure system was the envy of the postwar era.
Alas, no more. Not only has the rest of the developed world caught up with the U.S., many countries long ago passed it. One need only experience high-speed broadband in Asia, well-maintained roads and extensive rail network in Europe, airports and cellular connectivity, well, pretty much everywhere outside of the U.S. America now has an antiquated, underfunded patchwork of jury-rigged fixes that work, but in places just barely.
Consider the following:
Water systems: The rise of bottled water was an early hint the water supply system was failing under stress. Many areas still use lead pipes, which can leach toxins into drinking water with debilitating effects on human health. The crisis in Flint, Michigan, was not a one-off. According to Reuters, there are “3,810 neighborhood areas with recently recorded childhood lead poisoning rates at least double those found across Flint.”
Airports: Travel abroad, and a shocking realization hits you: Airports do not have to be poorly designed, dirty, or giant wastes of time. The U.S. does have some newer or recently upgraded airports — see Denver, Detroit, and Tampa — but they are the exceptions.
Highways and Roads: These continue to be underfunded, thanks to a freeze on the gasoline tax since 1993. The Highway Trust Fund gets more than 75 percent of its money from federal taxes on gasoline and diesel fuels. The fund was created in 1956, and the gas tax rose modestly for nearly four decades. If we want a well-maintained highway system, the tax not only needs to rise, but also be indexed to inflation.
Bridges and Tunnels: See gas tax above.
Rails: Commuters around the country complain that core transit commuter systems have become increasingly unreliable and, despite this, overcrowded. (Note: We are not discussing high-speed rails, but rather basic commuter train service.)
Here is a simple experiment
Track your own infrastructure experiences for a month, noting how much time and money is lost due to problems attributed to skipped maintenance and missing or misguided capital improvements. Multiply that by 12 to get your annual infrastructure cost. Imagine that number multiplied by 320 million people to see the costs a decrepit infrastructure inflicts on the nation.
There are many factors to blame, but two stand out: First, elected officials prefer spending money on shiny new projects while neglecting basic maintenance. Everybody loves a ribbon cutting ceremony, but few seem enthusiastic for essential maintenance like repainting bridges or repaving highways. Kurt Vonnegut saw this coming nearly 30 years ago, calling it a flaw in human character: “Everybody wants to build and nobody wants to do maintenance.”
Second, a rabid anti-tax ideology has made it increasingly difficult for the government to fund the sorts of things that governments are supposed to fund. If Washington can’t finance, build, and maintain the interstate highway system, the electrical grid and the nation’s ports, then who will? The private sector has neither the capital nor the patience to fund 50-year and 100-year projects; such companies can barely look beyond this quarter. You need only to see the lack of success of toll roads or prison privatization to understand they are terrible at this sort of thing. Zealots like Grover Norquist of Americans for Tax Reform are why the rest of America cannot have nice things.
An obvious solution beckons: Today’s low yields and shortage of high-quality sovereign issuance means there is huge demand for 50-year and 100-year bonds. Most of the infrastructure projects discussed above are long-term projects: The electrical grid is well over 100 years old — it needs to be hardened against cyberattacks and made more resilient for the next 100 years. The water supply system is fragile, and the replacement of lead pipes will cost billions and take decades. If self-driving cars are to become a reality, then a series of embedded radio frequency signals and detectors need to be installed — and not just on the national highway system, but also state and local roads. That’s another decade-long project, but the improvement should last for the next 30 years. Airport renovation and Federal Aviation Administration system upgrades will also take years, but should last a few decades.
Each of these systems requires a significant and long-lasting commitment from Uncle Sam. The most rational way to fund them is to match each project with an appropriate ultra-long term treasury bond. (Note I am not suggesting the use of Modern Monetary Theory (see discussion here), but rather, just straight-up debt issuance.
And this is where Mnuchin comes in: In an interview with Bloomberg News on Wednesday, he said issuing ultra-long term bonds is “under very serious consideration” in the Donald Trump administration. It’s not a new idea: Peter Fisher, who was the Treasury official in charge of bond issuance in the early 2000s, told Bloomberg in 2008, “If you issued a 100-year bond and had principal and interest pay down smoothly over the last 50 years, you create a great borrowing device for the Treasury.”
The question is, if these bonds are issued, where would the money go? Maybe the right place: In a March appearance before Congress, Mnuchin pledged to push for a $1.5 billion infrastructure plan “on a bipartisan basis.” Perhaps the 50- or even 100-year bond’s time has come.
Barry Ritholtz is a Bloomberg Opinion columnist. He is chairman and chief investment officer of Ritholtz Wealth Management, and was previously chief market strategist at Maxim Group. He is the author of “Bailout Nation.”
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