Is Quantitative Easing an Option for Infrastructure Financing?
BY ERIC PETERSON
Transportation Policy Consultant, Former Deputy Administrator of the Research and Innovative Technology Administration at the U.S. Department of Transportation
The on-going discussions over the “fiscal cliff,” tax reform, entitlement reform, deficit reduction, etc., leave one to wonder whether and if another penny will be spent to address the public facilities and services most central to the mission of government, i.e. infrastructure and, most especially, the nation’s transportation infrastructure. Despite the efforts of numerous think tanks, national commissions, and other stakeholders over the past decade, the challenge of motivating policy makers to address the staggering backlog of maintenance, repairs and improvements to the nation’s transportation infrastructure seems truly formidable.
And while many pragmatic observers conclude that for the time being there is little hope, there are also those who view the situation through what might be regarded as rose-colored glasses. These individuals believe that great progress has been made over the past twenty years and that, in and of itself, this progress is worthy of celebration. Others take the position that the situation should be accepted for what it is and we should just get used to it. Then there is the contingent that believes things can and should get better and are willing to campaign to fulfill their mission.
Each of these perspectives has its arguable evidence, but the purpose of this article is not to demonstrate the validity of each perspective. Rather, the purpose of this article is to focus on one particular perspective – that things can and should get better and here is a strategy to make it so.
Over the past four years, in an effort to stimulate employment and stabilize the national economy, the Federal Reserve has carried out three exercises it referred to as “Quantitative Easing.” Through these exercises the Fed bought Treasury notes and poured hundreds of billions of dollars into the market. In mid-December, the Fed announced a fourth round of Quantitative Easing that will continue until either the unemployment rate reaches 6.5 percent, or inflation rises to 2.5 percent. Under this new round the Fed will buy $45 billion in Treasury notes monthly and will direct $40 billion monthly to the mortgage market in order to encourage bankers to help improve conditions in the housing sector.
Also occurring over the past several years has been considerable discussion over the notion of the United States establishing an infrastructure investment bank similar to the one established by the European Union. Through this facility, it is suggested, infrastructure projects like roads, airports, public transit and railroads could receive low-cost, long-term financing that could give confidence to investors, contractors, and suppliers in their decisions on both bidding for and providing materials to these vital initiatives.
The challenge in the U.S. is that the Executive and Legislative branches insist on treating infrastructure in the budgetary and appropriations process of the federal government the same way they treat the purchase of office supplies and equipment or government workers’ salaries. The commitment is mostly annual in nature with little guarantee that the next Congress, or the next administration, will honor the commitment of the current Congress or administration. There is little long-range planning or contracting. As a result, the cost of materials, human resources and financing these projects are highly distorted… much more expensive and less effective than they should or could be.
If the U.S. had an infrastructure bank, or better yet, if the Federal Reserve were to direct its quantitative easing resources toward infrastructure projects, the massive inventory of needed and planned transportation infrastructure projects could be addressed quickly, securing both a brighter future for America’s workforce, a better future for America’s competitive position in the world, and brighter prospects for improving the mobility of the nation while redressing the environmental impacts that the nation’s current transportation produces.
This may sound like a revolutionary strategy for the United States, but both Britain and Japan are currently using a similar approach to address their transportation infrastructure needs. If the Fed were to make a portion, say one-third of the monthly amount of easing that it announced in early December, available to transportation infrastructure – approximately $28 billion per month – it is conceivable that within a year millions of jobs could be created, and major progress could be made in fixing roads, building new rail and aviation capacity, and addressing other transportation infrastructure-related needs without stressing the Congressional imposed debt limit, or otherwise affecting the government’s budgetary balance.
In fact such a move would have a beneficial impact on government budgets at all levels.
New and/or improved transportation would improve the mobility of workers and travelers, improve the efficiency by which goods flow to the domestic and international markets, help generate new economic activity that would ultimately generate new revenue with which to pay for other government services, as well as service the long-term debt of infrastructure construction, operation and maintenance.
Over the past two years, the House Transportation and Infrastructure Committee held a series of hearings, all aimed at making the case for private investment in the nation’s re-emerging intercity passenger rail service. The majority party on the committee is most interested in having the Northeast corridor taken over by a private-sector organization that would not require any form of subsidy from the Federal government.
At the final hearing in the committee’s series, Perry Offutt, Managing Director, Morgan Stanley, informed Committee Chair John Mica (R-Fla.), that: A) the private-sector has never attempted to undertake such a massive project on its own, and thus has no experience; B) while he could imagine the possibility of the private-sector becoming involved, it would only come about if the Federal government were also involved and willing to guarantee protection for the private-sector’s investment; C) the amount of investment the private-sector might be willing to make would probably be no more than 15 percent of the total project; and D) the private-sector would expect a rate of return on their investment of between 11 percent and 15 percent.
If nothing else, Mr. Offutt sent a clear message that from the private sector’s perspective there is an expectation and an obligation for the Federal government to accept and fulfill its role in insuring the vitality of the nation’s transportation infrastructure. Further, if there is no money at the present time that would allow the Federal government to address this responsibility, the private sector will continue to sit on the sidelines or invest its funds in more attractive opportunities. Without some sense of long-term commitment from the Federal government, there will be no long-term commitment from the private-sector investment community.
So what are the alternatives? It would appear there are three.
The first alternative is for Congress and the Administration to muster the courage to raise and provide adequate levels of funding that will allow for both the backlog of projects and the development of new projects to be addressed.
The second alternative is for Congress and the Administration to continue doing little or nothing, thus allowing the nation’s competitiveness to continue to deteriorate, extending the possibility of high unemployment and slow economic growth.
The third, and perhaps most pragmatic and efficient alternative, would be for the Federal Reserve to redirect a portion of its fourth round of Quantitative Easing to rehabilitate and further develop that nation’s infrastructure.
Working with the U.S. Department of Transportation and other Federal agencies with oversight for the nation’s transportation system and other infrastructure systems, the Federal Reserve could provide long-term low-cost/no-cost financing that could help hold down the cost of fixing the nation’s infrastructure, bring down unemployment, stimulate economic growth, and provide private investors the confidence to be constructive partners in the rebuilding of America.
In the 1860s, the Federal government put the United States on track to be a world leader by committing to the long-term development of the transcontinental railroad. Nearly 100 years later, the Federal government renewed that commitment to world leadership by building the interstate highway system. Now, fully a half-century later, that infrastructure, as well as other elements of the nation’s transportation system is in grave need of renovation and improvement.
While the call for austerity in government seems to be the political currency of the day, it cannot and must not be the obstacle to infrastructure repair, improvement and maintenance. To end this situation, the Federal Reserve should pursue its twin missions of fighting unemployment and stabilizing the economy by dedicating a portion of the fourth round of Quantitative Easing to the nation’s transportation infrastructure. In both the long-term and the short-term such a move could be highly beneficial and transformative.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of The Eno Center for Transportation.