Infrastructure

The Roadblock to Obama's Infrastructure Dreams

Mark Paul — Tue, 09 Dec 2008 19:36:00 -0500

President-elect Obama's call for enormous new investment in national instructure has the potential, as Steve Coll recently noted, to both stimulate the economy in the short run and strengthen it for the long haul. But as the situation in California illustrates, the economy cannot get the full benefit of that infrastructure package unless the stimulus package also includes a large dose of direct aid to state budgets.

In every respect but one, California is ideally positioned to take advantage of Obama's infrastructure plans. With its congested freeways, crumbling levees, and burgeoning population, it has boundless infrastructure needs. It has existing voter authorization to issue tens of billions worth of state bonds to cover the state's share of cost for projects. It has a bountiful supply of workers, now idled by the collapse of housing construction, to retrofit buildings for energy efficiency or to repair schools and public buildings. It has a vigorous corps of entrepreneurs and venture capitalists to spur a wave of green infrastructure investments, contributing new ideas and technologies to the effort.

It has everything to carry out an infrastructure stimulus program except cash.

Speaking December 8 to an unusual joint session of the California Legislature, Treasurer Bill Lockyer announced that, as of December 17, the state of California, its till increasingly bare, will have to stop providing the short-term cash financing needed by most state infrastructure projects. Billions of dollars worth of planned and approved projects –– school builidings, road and transit projects, levee improvements –– will come to a stop, resulting in the loss of $12.5 billion worth of private sector activity and 200,000 jobs, according to Lockyer's estimate.

When the media and politicians talk about infrastructure and bonds, the discussion usually involves a simple shorthand: Voters approve bonds; state sells bonds; state uses bond proceeds to build projects. In actual fact, the financial plumbing is more tangled. Because of federal tax laws, most infrastructure financing must follow a two-step process. When a state agency is ready to begin an infrastructure project with authorized bond funding, it first applies for a loan from the state's Pooled Money Investment Account, the cash reserve where state and local revenues and special fund cash balances are temporarily parked until they are needed. This bridge financing is used to build the project. Once the project is ready, the state sells authorized bonds and uses the proceeds to pay the short-term loan with interest.

In normal times, this process works seamlessly and without any public attention. (In the 18 months I served as executive secretary of the Pooled Money Investment Board, I never saw a reporter at a board meeting.) But today it is ready to break down.

The state's cash reserves, already depleted by years of internal borrowing and budget gimmickry, are fast draining as the recession drives down revenue collections. To make matters worse, the meltdown of the financial markets prevented the state earlier this autumn from being able to sell the full amount of revenue anticipation notes it normally issues to keep its cash drawer full until most of its tax revenues arrive in the spring. Because the pool in the state's cash reserve is already so low, all of the remaining dollars will have to be loaned to the general fund over the next several months to pay day-to-day bills, leaving none available for infrastructure financing. And without drastic and immediate action by the Legislature to raise taxes or cut state programs, the state will run out of cash, in February or March, for any purpose. In Governor Schwarzenegger's words, California is "headed toward a financial Armageddon."

Yet even drastic action won't be enough to make infrastructure financing available in California for more than a few months. At the same joint session, Controller John Chiang told lawmakers that the state's revenue loss is so great that the cash crisis will return next summer, at the beginning of the next fiscal year, in which the state faces a projected deficit of $19 billion, roughly equal to 20 percent of its general fund. To close that deficit by spending cuts alone would require closing the University of California and the California State University system, ending welfare payments, and eliminating all state funding for the developmentally disabled, for mental health, and for In-Home Supportive Services.

Given that the California Legislature has been unable, to date, to take budget actions, either tax increases or spending cuts, far less painful than these, it seems unlikely that California finances will permit the normal funding of infrastructure at any time in the next several years.

Obama has said he will provide infrastructure funding for the states, which must use it quickly or lose it. But without federal assistance to cope with its budget calamity, California, and likely other states as well, will be in no financial shape to take full advantage of this infrastructure moment. As I have written before, using the coming stimulus bill to bolster state finances is essential to prevent state budget actions from deepening the recession. But as California's plight illustrates, generous assistance to the states, on the order of $100 billion to $150 billion, is also vital to making Obama's infrastructure hopes come alive.

Transportation for America

Patrick Doherty — Mon, 04 Aug 2008 22:04:00 -0400

I just came across the Transportation for America campaign. It's a coalition of some great organizations who recognize the strategic importance of building out a 21st century transportation network for the United States.

In a nutshell, T4A is advocating the following:

Build a world-class rail and transit network that puts us ahead of the rest of the developed world, not behind.
Help communities meet the soaring demand for homes in neighborhoods that require less driving and have access to high-quality transportation options;
Restore, and then keep our existing highways and public transportation networks in tip-top shape.

This is important.

My colleagues in the Smart Globalization program here at New America recently hosted former Senator Majority Leader Tom Daschle and CEO Leo Hindery to talk about how our health care crisis is creating a massive competitive disadvantage. Our transportation infrastructure is doing the same thing.

Our current system, especially in terms of passenger travel, is dependent on the automobile. Beyond the pain at the pump this causes, for the daily routine of going to work and school, this is like giving everyone in a hi-rise building their own personal elevator car. I love that analogy because it is so true. The amount of land, energy, and income we waste on personal transportation is incredible. Especially when that system so often results in traffic jams and so much wasted time. No wonder our suburban families are stressed to the breaking point.

I digress. My favorite recent study, the McKinsey Global Institute's report, China's Urban Billion, details how the rural-urban migration of 700 million Chinese from the countryside and into the cities will challenge the world. Energy, transportation and land-use are three of the four dimensions of that challenge and this initiative is the first serious coalition I've seen that is capable of even starting the conversation here in the States.

But it is also popular. As T4A points out, "90% of Americans believe that new communities should be designed so we can walk more and drive less."

Folks, it's time to recycle suburbia.

T. Boone Pickens: Right Track, Wrong Package

Patrick Doherty — Wed, 09 Jul 2008 15:41:00 -0400

There is an old truism that goes, "where you stand depends on where you sit." This was the case for former Treasury Secretary and former Goldman Sachs chief Robert Rubin and his policy of "Rubinomics" that elevated a few short- and medium-term macro indicators (e.g. annual budget deficit, Fed Funds Rate, S&P 500, etc.) above long-term economic health.

Similarly, his successor, current Treasury Secretary and also former Goldman Sachs chief, Hank Paulson. In Paulson's case, stability of the macroeconomic status quo is the highest priority and thoughts of longer-term, broad-based domestic prosperity are given short shrift.

If you're a banker in Wall Street these policies make complete sense. If you're the next President of the United States, however, that kind of narrow thinking is insufficient.

That is a long introduction to my critique of T. Boone Pickens' new energy plan. In today's Wall Street Journal, the renowned oil executive offered up his plan to, as he puts it, "escape the grip of foreign oil." While Pickens' proposals rightly establish the scale of the problem -- "Now our country faces what I believe is the most serious situation since World War II" -- the package of solutions is clearly designed by an Energy executive, and is not ready for consideration by the next president.

I believe the next president needs to build a new grand strategy for the country rooted in, among other things, a shift towards a sustainable energy sector. Yet T. Boone Pickens' proposal looks more like another federal spending program that on its own will cost the taxpayer too much money and deliver inadequate results.

Rather, a new grand strategy has to be powered by a new economic engine. The last one was conceived after World War II and designed to deal with a vastly different set of grand strategic circumstances (Communist expansion, two superpowers, pent-up demand for housing, pent-up demand for everything from war-torn Europe and Japan, cheap energy, the baby boom, plenty of environmental cushion etc.). Attempting to prop up the energy sector of our obsolete, uncompetitive economy is just too little, too late. Today we face a vastly different set of grand strategic challenges (multi-polar international order, insecure and expensive energy, trade imbalances, fiscal dysfunction, climate change and other forms of ecosystem depletion, increasing inequality, demographic aging, breakdown of community, etc.)--and we need a new solution.

In other words, our economic engine needs to be replaced and its replacement needs to do our strategic heavy lifting. Contrast that with a new federal program spending money on a transitional energy infrastructure. A new economic engine would use legislation and executive orders to align prices in the marketplace to our strategic requirements. Some essential infrastructure would be funded, but it would be more on the order of the high-efficiency electrical transmission lines, metropolitan and intercity transportation infrastructure, and grid infrastructure than on wind turbines and nuclear plants. Spending relative to economic impact would be minimal.

But Picken's proposal picks a very particular energy mix, as he states here:

My plan calls for taking the energy generated by wind and using it to replace a significant percentage of the natural gas that is now being used to fuel our power plants. ... We can use new wind capacity to free up the natural gas for use as a transportation fuel.

To force this solution on the market would require a huge amount of additional market distortion in the form of subsidies and outright expenditures from a Treasury that already is far too in the red. The wind-gas-cars shift might be a good idea in some scenarios, but picking it as a winner for all 300 million U.S. consumers is better left to the markets.

I want an economic engine in which choosing renewable energy, smart growth, and sustainable consumer products means choosing the least expensive, most convenient options. Those three objectives will simultaneously secure our prosperty, our shores, and our environment. That's what the post-war economic engine did: the public investment in the national highway system, in combination with the GI Bill and private sector exploitation of Federal energy reserves, generated an incredible return on investment for the nation.

In other words, with signficant market-shaping and minimal direct expenditures we made suburbs cheaper than cities, let cars increase personal mobility, and gave centralized coal, oil, and natural gas-fired electricity a near monopoly on electricity generation. In fact, it created a massive new market called suburbia.

Large federal spending programs, like Pickens' and many other energy-only proposals circulating today, would put a straightjacket on the markets we need to be agile and innovative. They do not create markets but try to salvage an economy that is on its last legs and dangerously insecure.

That, in fact, is my test for economic policy going forward, during the Presidential campaign and after: does a particular package of policies, in the aggregate, generate a new, prosperous, secure, and sustainable economic engine, or does it attempt patch and repair the 60 year old rusting, greasy hulk we're operating today?

Thanks, Mr. Pickens, for elevating the issue. But please don't be upset if we choose a different path to American sustainability and security.

Summers Embraces Infrastructure Investment

Sam Sherraden — Tue, 01 Jul 2008 15:24:00 -0400

During the design of the fiscal stimulus plan in early 2008, the mantra was that it must be "timely, targeted, and temporary." Larry Summers, in his recent piece in the Financial Times, acknowledged that these principles may have been flawed and that a longer term stimulus plan that includes infrastructure investment will be necessary.

At the time, people feared that the economy would recover quickly and any stimulus that went beyond the summer would add to inflationary pressure. Many now fear that the economy will be stagnant for much longer and that the stimulus checks will only provide a temporary boost to consumption, after which, the economy will enter a longer period of stagnation or even recession.

During the formulation of the stimulus plan, the New America Foundation Economic Growth Program and Bernard Schwartz advocated investing in infrastructure to give Americans jobs with high incomes and make businesses more competitive. Now, Summers agrees that infrastructure investment should be a component of further fiscal stimulus.

Larry Summers - What we can do in this dangerous moment (June 30, 2008)

Larry Summers - Why America must have a fiscal stimulus (January 6, 2008)

Arnold Digs at Jerry Brown

Joe Mathews — Tue, 10 Jun 2008 15:55:00 -0400

The current governor and the once (and future?) governor have had a warm relationship, campaigning together for municipal finance protections and against changes in the state's three strikes law. But Monday, during a long Schwarzeneggerian soliloquy at a Riverside event to promote his rainy day fund proposal, the governor took a shot at Brown in response to a question from a Southern California Gas official about the state's infrastructure problems. Here's the direct Arnold quote in the transcript, in full context:

"Well, California for 40 years has not really rebuilt our infrastructure in water, so we have now the stuff that was done under Governor Brown from the '60s. Not Jerry Brown, but Pat Brown, because Jerry Brown did not build infrastructure. They stopped building infrastructure when Reagan came in and so Pat Brown was the last one that built infrastructure. And so, since then our population has gone from 18 million to 38 million but we haven't built any new infrastructure. So, you still have the same water delivery system, we still have the same amount of reservoirs that are now between 50 and 75 percent down. We're running out of water, so there's a major problem."

More Republican Proposals in California

Joe Mathews — Sun, 11 May 2008 13:06:00 -0400

This blog took a shot last week at senate Republican leader Dave Cogdill yesterday for the hypocrisy of going after ballot initiatives as part of reform proposals. But Cogdill and his Assembly counterpart Mike Villines at least are offering a number of reform ideas. It's a long, piecemeal rollout, as they tackle contracting, education, and budget reform. Given the power of labor and the fact they're the minority party, few of these ideas have much chance of passing. But it's good that they're raising issues--California desperately needs a serious, wide-ranging debate about the structure of its government, its budget system, and its tax system. Here's the latest set of proposals. Of these ideas, the ones that have the best chance of making it are the ones calling for more government transparency (requiring public agencies to publish their expenditures on the Internet in a searchable form), the elimination of some state mandates to local school districts in bad budget times, and the speeding up of voter-approved infrastructure projects.

American Strategy In the News | April 10-11

Ian McAllister — Fri, 11 Apr 2008 19:52:00 -0400

US News & World Report (04/11) asks Sherle Schwenninger about economic policy and the U.S. government.
The National Interest (04/10) quotes Steve Clemons on the subtlety of realist politics.
Bloomberg (03/24) quotes William Hartung on the benefits to contractors in Iraq.

Democratizing Capital

Patrick Doherty — Wed, 26 Mar 2008 15:57:00 -0400

In each formulation of American grand strategy since World War II -- until we inexplicably stopped such planning in 1992 -- the President and Congress relied on the power of the American economy to do the strategic heavy lifting. Sixteen years, however, is far too long for even the American economic engine to coast without a strategic re-alignment, and the stimulus, bailouts, subsidies and even military operations that naturally ensued have forced even Martin Wolf of the FT to declare the "dream of global free market capitalism" dead. Writing in the upcoming issue of The Nation, Sherle Schwenninger, looks to the architects of the New Deal and finds three lessons essential for re-tooling the American economic engine and bring market capitalism back home to America's shores.

Democratizing Capital

by Sherle R. Schwenninger | The Nation | April 7, 2008

Historical analogies are never exact. Yet many of the choices we have before us today are similar to ones that an earlier generation of progressives faced as the 1932 election approached. As we do today, progressives then confronted a society beset by a huge gap between classes and an economy laid flat by the bursting of the speculative excesses of the previous decade. To be sure, our economy is nowhere near Depression levels of collapse. But the choices New Deal progressives made are worth revisiting because they provide sound first principles for dealing with the economy and government today. Indeed, many of those principles are even more appropriate for today's world.

The first lesson to be learned from this earlier era is that a large middle class requires an economy that generates a broad base of jobs paying middle-class wages. The New Dealers were not opposed to "rigging" the labor and financial markets to achieve this result. New Deal progressives believed the economy should exist to serve society, not the other way around, and that the government has a duty to shape the economy to meet middle-class aspirations. A high-wage, middle-class society would, in turn, be good for the economy: living wages would not only ensure adequate demand for the economy but in so doing would spur new investment and productivity growth, creating a virtuous circle of rising living standards.

The belief of New Deal progressives in an economy that could create good middle-class jobs stemmed in part from their resistance to large social welfare subsidies to individuals, on the grounds that this would encourage an unhealthy dependence on the state. Moreover, even though they favored progressive taxation, New Dealers were skeptical of a society dependent upon the permanent redistribution of income. The principal goal of many New Deal programs was not to relieve the conditions of poverty--although they often did so--but to build physical and human capital that would allow people to escape permanently from poverty. Thus New Dealers emphasized government programs that expanded education, spread property ownership, invested in America's common physical and knowledge capital, and seeded the industries of the future. It was not perfect, in large part because it preceded the civil rights revolution and thus left out millions of African-Americans. But it did build the largest and most secure middle class America has ever known.

Today we see the consequences of a much different way of thinking about the economy and society. Over the past two decades we have been told that globalization is an immutable force and that we must bend to its demands, embracing the agenda of free trade, financial deregulation and less progressive taxation. The best we can do, we're told, is to let globalization run its course and compensate the losers, even though no amount of new social welfare measures could compensate for the loss of millions of good-paying manufacturing jobs. Thus, without any real debate, America's political elites have chosen for us a highly stratified, low-wage society with great costs to our middle-class way of life and to our productive economy.

The second New Deal principle is about achieving a high-wage economy and at the same time more widely distributing the capital and skills for wealth creation. The principal policy tool the earlier generation used was massive public investment and public building. The public investment programs they pursued not only created many new middle-class jobs but also laid the foundation for a more productive economy, which led to even more middle-class jobs. Agencies like the Tennessee Valley Authority in the 1930s and '40s were followed by even more extensive public investment initiatives in the postwar years. From 1950 to 1970, the government spent more than 3 percent of GDP on public infrastructure alone. It built everything from highways to schools, power systems to parks.

Throughout the New Deal era, public investment was America's way of enacting industrial policy. It was understood that public investment paid for itself many times over. The GI Bill alone generated returns of up to $7 for every dollar invested. And because it generated returns to the economy and society, New Dealers in the postwar period were not afraid to raise taxes or to borrow in order to ensure adequate levels of public investment. And borrow they did, even though the national debt was a much larger percentage of GDP than it is now.

For the past few decades, however, we have made a very different choice. As concerns over the budget deficit have grown, and as tax-cutting mania has taken hold, we have cut back on public investment. Since 1980 we have devoted less than 2 percent of GDP to public infrastructure and have allowed federal spending on basic research and development to decline as a percentage of GDP as well. As a result, a backlog of public investment needs--clogged roads and ports, collapsing bridges and levees, uneven broadband access, an antiquated air traffic system, an undersized energy infrastructure--has begun to cut into our economic growth and undermine our efficiency.

A third principle of middle-class America that the New Deal offers us relates to the concentration of power and capital. Earlier progressive reformers distrusted such concentrations. Not only did they threaten democracy; they also warped the economy and distorted consumption and investment. Government therefore must be a strong countervailing force to big business and oligarchic power, and must be organized so that it cannot be captured by one economic group at the expense of another or the general public.

The New Dealers were particularly concerned about the power of Wall Street and the financial community. They feared a national credit system that was dependent on Wall Street bankers, whose interests were not always aligned with the needs of homeowners, farmers and small and medium-sized producers. They therefore sought to democratize capital by creating myriad credit institutions that would ensure that all regions and sectors of the economy had access to capital. They created a variety of federally subsidized credit programs to enable people to construct homes and start businesses and to allow states and municipalities to build schools and modernize infrastructure. It was here that the New Deal was most creative--combining a strong federal state with the local and regional decentralization of capital and the local and regional control of these programs and institutions.

As with other first principles of a middle-class America, we have seen a reversal of priorities over the past few decades, as big financial institutions have again asserted their influence over the economy and economic policy. The new power of Wall Street has been evident in its successful push for financial liberalization and deregulation, in the emphasis accorded the deficit and concerns about inflation as opposed to full employment, and until recently in Washington's preference for a strong dollar, which favors financiers over real producers. This triumph of Wall Street over Main Street has been responsible in part for the hollowing out of the tradable-goods sector and for the asset bubbles and predatory lending that have wreaked havoc on the economy. Indeed, one of the first things the New Deal would have us do is reregulate the financial system and put the interests of the productive economy over those of Wall Street.

In all these respects, whether it be high wages, public investment or the decentralization of financial power, the New Deal succeeded because it changed the way the economy worked. And it did so by marrying progressive reforms with Americans' preference for independence, whether from government subsidy or big-business paternalism. This is the enduring lesson of the New Deal.

Candidates Support Infrastructure Investment

Sam Sherraden — Wed, 13 Feb 2008 00:00:00 -0500

America needs $1.6 trillion in public investments to get our infrastructure up to date, according to the American Society of Civil Engineers. New America's Economic Growth program, led by Sherle Schwenninger, argues that not only is it necessary, but in a time of recession, infrastructure-based stimulus is the best way to revive the economy.

So it's heartening to see that with rust-belt states coming up on the primary horizon, more presidential candidates are supporting public investment.

Barack Obama finally gave teeth to his economic revitalization strategy during a speech at a General Motors plant in Janesville, Wisconsin Wednesday morning in which he proposed $60 billion for a “National Infrastructure Reinvestment Bank” that would fund an array of projects to rebuild America’s crumbling infrastructure, create millions of jobs, and be essential to reorient our debt-driven growth.Hillary Clinton, soon after the collapse of the I-35 bridge in Minnesota, launched the Rebuild America Plan and co-sponsored the National Infrastructure Bank Act by Senators Chris Dodd and Chuck Hagel.Mike Huckabee advocates bringing spending in other countries down and proposes investing heavily in U.S. infrastructure.

Barack Obama – Speech in Janesville, WI VIDEO
USAToday – Obama to call for $60B 'Infrastructure Reinvestment Bank'
Hillaryclinton.com – Rebuild America Plan
ABC Debate – Mike Huckabee on Infrastructure VIDEO
mikehuckabee.com – Plan to Strengthen America’s Infrastructure