We desperately need to repair and replace a vast part of our national infrastructure but where do we get the money?…[Well,] the U.S. has spent hundreds of billions of dollars trying to fix Iraq and Afghanistan and God knows how many more hundreds of billions of dollars over the years on other projects around the world so what if we renewed the focus on our own needs?. [In this article I identify our infrastructure shortfalls and present a way to pay for the needed projects which, combined with my proposed specific] massive tax reforms, could reposition the country to be the most powerfully competitive nation in the world…
The comments above and below are excerpts from an article by John Mauldin (MauldinEconomics.com) which may have been enhanced – edited ([ ]) and abridged (…) – by munKNEE.com (Your Key to Making Money!) to provide you with a faster & easier read. Register to receive our bi-weekly Market Intelligence Report newsletter (see sample here , sign up in top right hand corner)
The odds that the next president will face a recession during his or her first four years in office are quite high. Maybe not in the first year, but it is highly unlikely he or she will get more than two to three years without one. Given the fiscal reality that our next president will confront and the dwindling number of arrows left in the Federal Reserve’s monetary policy quiver, the administration is going to have a hard time dealing with the fallout from a recession. In such an environment there will be very little room to do any sort of infrastructure or stimulus spending unless (read on).
…The economy is running at stall speed and any shock that comes from outside the U.S. – from Europe or Japan or China – or from an actual honest-to-God initiation of interest rate hikes by the Fed, which would force a re-pricing of bonds and equities, could set off a recession that would become self-reinforcing.
Pay attention to Deutsche Bank. The bank is deeply connected with the entire global banking market, and just as Lehman Brothers triggered a rolling wave of panic, Deutsche Bank has a similar potential. Even though Merkel swears she is not going to bail out Deutsche Bank, she will have no choice. They…cannot let the bank itself go under, because it is at the center of a massive financial spider web…[That] means the German central bank will have to be at the center of the rescue, and it gets its capital from the ECB so watch how quickly Italy, Spain, and the rest of Europe will demand that the ECB bail out their banks, too….
Now back to the U.S. and the coming recession…Let’s look at fiscal reality. Sometime in the first year of the next presidential term, the U.S. national debt will top $20 trillion…[and,] as you may imagine, the interest on that debt is beginning to add up, even at the extraordinarily low rates we have today…Sometime in 2019, entitlement spending, defense, and interest will consume all the tax revenue collected by the U.S. government. That means all spending for everything else will have to be borrowed. The CBO projects the deficit will rise to over $1 trillion by 2023. By that point entitlement spending, and net interest, will be consuming almost all tax revenue, and we will be borrowing to pay for our defense. Let’s look at the following chart, which comes from CBO data:
By 2019 the deficit is projected to be $738 billion and rapidly approaching $1 trillion. Almost every president wants to run for a second term. To forge any hope of being successful with that second run, a president needs to [be] able to say that he or she made a difference on the budget. There are only three ways to reduce the deficit:
- cut spending,
- raise taxes, or
- authorize the Federal Reserve to monetize the debt (or some combination of the three).
At the numbers we are now talking about, getting rid of fraud and wasted government expenditures is a rounding error…For the sake of the argument, let’s say you could find $100 billion here or there. You are still a long, long way from a balanced budget.
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…[What is] implicit (and this is critical!) in the CBO projections is the assumption that we will not have a recession in the next 10 years. Plus, the CBO assumes growth above what we’ve seen in the last year or so. Let’s contemplate what a budget might look like if we have a recession. I asked my associate Patrick Watson to look at past recessions and determine what level of revenue losses occurred because of them and then to assume the same average percentage revenue loss for the next recession. We more or less randomly decided that we would hypothesize our next recession to occur in 2018. If it happens in 2017 or 2019 instead, the relative numbers are the same, and so is the outcome: it would blow out the budget…Entitlement spending, defense, and interest would greatly exceed revenue [see chart below].
The deficit would balloon to a minimum of $1.3 trillion, and if the recovery occurs along the lines of our last (ongoing) recovery, then unless we reduce spending or raise revenues, we will not see deficits below $1 trillion over the ensuing 10 years. The deficit will climb to $1.5 trillion just as the president dives into the thick of a second campaign in 2020. Not exactly a great campaign platform and that is the known budget deficit. Off-budget additions to the national debt could be as much as one-half trillion dollars. Bluntly, in such an environment there will be very little room to do any sort of infrastructure or stimulus spending….[yet] we desperately need to repair and replace a vast part of our national infrastructure. We have legions of former manufacturing workers and young people whom we need to put to work and we need to remove as many impediments to economic growth as possible and we can do all three with an aggressive, Federal Reserve-funded infrastructure program.
You might respond that the roads and bridges are just fine and we don’t need more boondoggle spending. That may well be true wherever you live but is certainly not true for the nation as a whole. The needs vary, but they definitely exist.
The American Society of Civil Engineers has been preaching this message for a long time. They publish a national Infrastructure Report Card every four years. The last one was in 2013, so it’s a bit dated now, but I feel confident that few of the problems have disappeared and enough new ones have probably emerged to replace whatever we’ve taken care of since 2013. Below is your report card, America:
… “Fix the Levees!” isn’t exactly a vote-winning slogan unless the water is rising on election day. If you build something new, you get to cut the ribbon and look like you did something.
ASCE concludes we need to invest $3.6 trillion by 2020 in order to bring the national infrastructure up to par. Is that a lot of money? Yes, but we need to spend it, or our infrastructure will continue to crumble. Negligence will take us ever closer to a Blade Runner type of world.
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According to the Federal Highway Administration’s Bridge Inventory, 146,633 out of 604,474 bridges in the United States are structurally deficient or functionally obsolete – a whopping 24.3% of all bridges in the country. Bridges are typically built to last 50 years, and today’s average bridge is 45 years old. See the problem?
Ironically, the federal money for highways comes from the gas tax, which has not increased since 1993, which means it is not keeping up with inflation. Our gas taxes have lost at least a third of their purchasing power since then. Further more, our cars get more miles per gallon than they did, so we are using less gas to go farther. That’s a good thing except that it means we have less money to repair roads. Friday night I went to dinner with a friend who drove us in his new Tesla. He does not pay any gas taxes to help fund the roads that we were driving on. I know we think of the gas tax as a tax, but it is more of a user fee for people who use roads. If you do not use the roads, then fine. If you do, you should be willing to pay for them.
Most people think of roads and bridges when we use the term infrastructure. (Interestingly, the word infrastructure only came into common use in the 1980s. Prior to that it was called “public works.”) We really should think of infrastructure as the things that allow us to move food, energy, water, products, people, and information.
- It is our rail and trucking systems.
- It is our electric grid.
- It is our telephone system, internet, and other information systems.
- To some degree it is our school systems.
It is the things that make it possible for businesses and governments to provide the services and goods we all expect. We all assume that when we flip the switch, the light will go on; and when we set the thermostat, the heat or air-conditioning will turn on. We assume these things are automatic, but they have to be maintained, and we are not maintaining them well.
Let’s look at a few items that may not be on your radar screen.
- The average dam has a life of about 50 years, and many of the dams in the United States are much older than that. They need to be repaired before they become a disaster for those downstream.
- According to the Center for American Progress, there are 240,000 water main breaks every year, and as much as 25% of the treated water that enters the distribution system is lost through leakage.
- There are 75,000 overflows every year in the U.S. from our sewage system, and they dump something like 900 billion gallons of untreated sewage into our lakes, rivers, streams, and bays.
- The American Water Works Association estimates it will take $1 trillion to repair and replace the drinking water system over the next 25 years. It takes $3 billion a year just for emergency repairs.
- …Our antiquated our electrical grid was designed long ago…to meet needs that were much more simple and limited than those it must meet today, yet we are still stuck with it. One estimate is that we lose about $49 billion a year to power outages. The solution is something called a Smart Grid, but you are talking tens of billions of dollars, and nobody wants to put up the money to fix the whole system, so every jurisdiction functions more or less on its own without much coordination.
- …Our ports…need a massive upgrade rather than the piecemeal efforts that are underway now. Many of our ports can no longer handle the latest technologies and, while some airports are being upgraded, others are embarrassing.
- …Our information system is the very backbone of modern society; and with a little pressure from Congress the FCC could open up some more bandwidth and we could provide high-speed, nearly free internet services throughout most of the U.S.
If the ASCE estimated $3.6 trillion to repair our infrastructure in 2013 (it will likely top $4 trillion in their next estimate)…and that is just to repair and rework what we have, what will be needed to actually propel us into the 21st century? The total could be a multiple of that over the next 10 to 15 years. We are starting to talk serious money but, if we pay our dues and do that work, then the next generation will get something worthwhile for their tax money rather than the close to $20 trillion worth of debt that we have now, which has produced damn little.
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Where do we get the money?…[Well,] the U.S. has spent hundreds of billions of dollars trying to fix Iraq and Afghanistan and God knows how many more hundreds of billions of dollars over the years on other projects around the world. What if we renewed the focus on our own needs?
First, I would propose that Congress authorize something along the lines of a Ginnie Mae bond for infrastructure spending. Ginnie Mae bonds have the full faith and credit of the US government behind them but are paid for by the homeowners who pay their mortgages – but the bonds allow them to get cheaper mortgages. After that authorization, strongly suggest, or even require, that the Federal Reserve put those bonds on its balance sheet, selling Ginnie Mae bonds if the Fed wants to maintain its total asset base. The Ginnie Mae (and Fannie and Freddie) bonds would be readily bought back by the market if they were available..
The bonds would fund projects pursued by cities, counties, and states that have a tax base or other resource to pay for the bonds. (I do not want to go into this in detail here, but there are some legal prohibitions on certain types of government infrastructure spending.)
It is clear that you could put a small surcharge on a local water bill to pay for rebuilding and modernizing the local water system. Ditto for the electric grid. Roads are a little trickier as there has to be a tax base willing to carry the load.
If the U.S. government subsidized these infrastructure bonds by 2%, then local governments would be paying, at today’s rate, only something like 0.3% in total interest. Tack on an extra 10 or 20 basis points for servicing and the cost of the commission and losses, and a local government would be able to borrow at about 0.5%. If cost ends up being higher, then the servicing cost goes up by 10 basis points. The point is to make local governments pay for their projects, less the subsidy from the government for interest rates. Essentially, that subsidy is a rounding error in the total cost, and it would allow governments to start infrastructure projects today and have 30 years to pay them back.
I would provide the subsidy only for a limited period of time (say four years), in order to encourage infrastructure projects to get off the ground now and thus kick-start employment. This program would go a heck of a lot further to reduce income inequality than any ridiculous transfer system that takes money from the rich and tries to give it to the poor.
Let us say that by some miracle we could actually deploy $3-4 trillion in infrastructure spending over the next 10 years. We would be lucky to actually spend $2 trillion in the first 4 years, but let’s assume that we get all industrious and do it. If we assume a subsidy cost of 2% for the bonds, then 2% of $2 trillion is $40 billion a year. That is about 1% of our total federal expenditures. It is only about 7% of our defense budget.
Rebuilding our water systems – which, if estimates are correct, would save up to 20% of the water we are using as well as massive costs for emergency repairs – would actually pay for itself.
If you combine this type of program with massive tax reform, you could reposition the country to be the most powerfully competitive nation in the world…
I have written about my suggested tax reforms elsewhere, in a piece I co-authored with Steve Moore. Basically, we proposed:
- a maximum 15% corporate tax with absolutely no loopholes. Every penny above $100,000 would be taxed,
- income earned offshore would be taxed at 10%, period, so you might as well bring it back in and put it to work here. I believe it is possible to make the tax look like a VAT rather than an income tax or to structure it so that the purpose would be the same, so that companies exporting products would basically pay no taxes on their exports, which is what happens in Europe and the rest of the world. It puts our corporations on an even basis,
- income tax would be capped at 20% with no deductions for anything,
- institute a VAT tax, which would allow for us to eliminate Social Security taxes, which would be an immediate boost in income to the middle class. Adjust the VAT tax to allow for a reasonable safety net, and go back to Bill Clinton-style welfare reform. Remember when President Clinton proudly stood up and said, “We are ending big government as we know it”? Who knew Republicans would someday be nostalgic for Bill Clinton? (Although I would point out that my friend Newt Gingrich was a big reason that Clinton’s programs were so successful. Their partnership – the last truly successful example of bipartisanship – resulted in a completely balanced budget within a few years – and that was after Ross Perot ran on a platform warning that we were facing total disaster as a nation. That time – the early ’90s – was not unlike the situation we face today, but I am not so hopeful now of bipartisan working relationships.)
- Change the regulatory environment to one designed for the 21st century rather than the 19th century and set our companies free to compete and create jobs. Ah, but I dream!
What Happens If We Do Not?
If we do not do something like this when we go into recession, especially if Hillary Clinton wins, the same central bankers who are running the system today will give us the same tired monetary programs, which will have the same lack of results, except this time unemployment will be higher and the recovery will leave us looking more like Europe and Japan. Retirement plans and pension plans, which are based on long-term historical performance, will be devastated, and the Boomer generation will not be able to retire as they had hoped.
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