I-35W Mississippi River bridge collapses, Aug. 1, 2007 (Scott Cohen/Reuters)
Earlier this year, Sen. John Kerry introduced the
BUILD Act as new legislation to tackle the problems of jobs, economic growth and our declining infrastructure simultaneously. The centerpiece of the legislation calls for the creation of an American Infrastructure Financing Authority, or what is coming to be known as an "infrastructure bank." This essay will touch on the fundamentals of the bill and the problem it attempts to solve, explain ways it could be improved, argue that it is a good idea, and advocate political support for it.
The BUILD Act creates a financial institution modeled after the Export-Import Bank, which was created by FDR during the Great Depression. The bill would require a small amount of start-up capital financed by the federal government, but it would conduct its business as an independent agency. A CEO and a seven-member board of directors would be appointed by the president and confirmed by the Senate. Although the initial start-up capital ($10B) would be provided by the federal government, the bank would be required to become self-sufficient in five years.
The infrastructure bank under this legislation is most fundamentally a supporting lender. The bank would not be permitted to lend more than 50 percent of the cost of any project. The bank would rely on private industry to secure contracts for infrastructure development projects. Projects would have to cost a minimum of $100 million, although the size restriction is only $25 million in rural areas. All types of projects would be eligible including water, transportation and energy. The bank would provide investment in the form of loans and loan guarantees over a 35-year period. All projects would have to clear technical and environmental regulations, have a dedicated revenue stream and provide a clear public benefit. The legislation relies on private financing as its capital base. Sovereign wealth funds, mutual funds, pension funds and the wealthy would be able to partner with the bank to finance projects all over the United States.
Source: American Society of Civil Engineers
The BUILD Act aims to solve the problems of our declining infrastructure, weak economic growth and a lack of jobs. The American Society of Civil Engineers estimates that
over $2 trillion is needed to simply bring our infrastructure back up to a passing grade. They rated the national infrastructure an abysmal "D." They noted our failure to act will cost an estimated 877,000 jobs and almost $900 billion in lost GDP. With this in mind, the BUILD Act as it stands today is woefully inadequate. It is limited in scope, its financing mechanisms are insufficient to attract a large amount of capital, and it will have limited near-term impact on jobs and growth. It is a start, however, of the conversation about how to fix the terrible state of our infrastructure. (This
nifty tool at Transportation for America is useful. Enter a zip code and see how many bridges in any area are structurally deficient.) The BUILD Act is insufficient to even address the bridge problem, not to mention our water, sewer, transit, road, airport, communications and energy grid problems. We must have a larger scope and more creative ideas at financing to effectively tackle this problem. Even if every dollar of the BUILD Act's infrastructure bank were matched 10-to-one, that would still provide only a $100 billion bullet at a $2 trillion problem.
Here are some suggestions the author sent to Sen. Kerry to improve the act:
- Larger scope:
The infrastructure bank should not just see to invest in private sector projects with dedicated revenue streams, but also in public projects by lending directly to state and local governments and agencies. Furthermore, it should be sufficiently capitalized to cover the entire cost of certain projects and have, as a policy goal, a mission of breaking even overall. On some projects, the bank should be allowed to lose money, such as on the rebuilding of a sewer system. On others it should make money.
- Bigger capital reserve:
The bank should seek a large, one-time massive infusion of cash. My suggestion would be to allow multinational corporations a one-year window to move the $1 trillion in corporate profits they have parked overseas back to the United States tax deferred as long as they put those profits into the infrastructure bank. My idea would be that they are allowed to defer taxes on these profits until they take the money out of the bank, but they would be required to keep them there for a minimum of five or 10 years without penalty. The bank would pay an interest rate on those profits. We could also make sure accounting rules allow them to "book" those profits over time for the purposes of satisfying quarterly and annual earnings reports. By the time the 10 years is up, the bank should have developed a revenue stream and other forms of financing.
This would fill the bank's coffers quickly so that it could rapidly begin financing projects all over the United States right away. Furthermore, corporations are already lobbying for a tax holiday on these profits, which is problematic in the current fiscal environment. We know the tax holiday does not work because corporations simply dish those profits out to their investors and executives. Why not, instead, put it to work for the American people? A trillion dollars will have an impact on our infrastructure that ten billion almost certainly would not. Just ask India. They recently put in place a five year plan to raise $1 trillion to invest in their infrastructure. Our economy is 14 times the size of India's. We have to do better than 1% of their infrastructure investments.
- Issue Bonds
The bank could issue bonds. This is how how the European Investment Bank works. Issuing bonds for federal, state and local projects allows the bank to have an even larger capital base from which to draw. The bonds could be guaranteed by the income stream of the bank, and as a backstop, the federal government to make them investment grade. The EIB has been very successful in financing innovative transportation projects all over Europe and has made small and medium sized business supporting the projects a centerpiece of its agenda. It can also finance projects over a longer term, say 50-75 years, so as to minimize the interest payment impact on state and local budgets. Financier Felix Rohatyn recently suggested this idea. The money raised from the bond sales could be dedicated and granted to new projects like sustainable development initiatives.
- Union labor and American suppliers
Projects financed by the bank should require union labor from contractors and subcontractors whenever possible. Furthermore, American suppliers should get preferred treatment providing materials and services like architecture and engineering. The BUILD Act does not address this matter.
- Fifty state ownership
Instead of the bank being owned by the federal government, I submit that it should simply be chartered by the federal government but owned by the states. Each state would receive shares of the bank according to population and would use it to elect a much larger board with regional committees. State regional planning and transportation officials could be appointed to the committees to make decisions on which projects are approved. The chairman and CEO, however, could still be appointed by the president in consultation with the Senate. This is to prevent the board from being overcome by political paralysis in Washington. The European Investment Bank is constructed this way and it appears to work very well.
Suggestions for improvement aside, the infrastructure bank is a good idea. With both parties in Washington now totally consumed by deficit fever, something must be done to inject capital into the demand side of the marketplace. Fiscal stimulus is now out of the question, and the ability of the Federal Reserve to stimulate demand via monetary policy is weak. This seems to me a clever workaround to that problem. President Obama supports it and offered legislation that was a bit broader than Sen. Kerry's legislation. The U.S. Chamber of Commerce has endorsed the idea and so has the AFL-CIO. It is very rare to get Tom Donohue and Richard Trumka to agree, but on this matter they do.
What would an upgraded BUILD Act mean for the average American? At least 2.6 million new jobs per year based on an analysis from the Alliance for American Manufacturing. That is based on allocating 20% of the bank's capital per year. It would mean a huge, huge boost to job creation, economic growth, and aggregate demand. Additionally, it could provide a spark to get the country out of a spirit of national pessimism and sense of decline. Every time something old and dilapidated turns shiny and new, the country will begin to feel that it is headed in the right direction. That is important to lift consumer spending, the fundamental driver of economic growth.
Contacting Federal, state, and local elected officials to urge support for improvement and passage of the BUILD Act is vital. Even in its weakest form, it will do some good. Writing a letter to the editor of the local newspaper is a good start. Mention it in a town hall. If you know a Republican or tea party member, mention the idea to them and note that if it were improved, it could be done with no government spending and no tax increases whatsoever. All private sector money. In fact, one could even sell it is a major tax shelter for big corporations. They'd love that. The quicker the American people can build support for the BUILD Act and the infrastructure bank, the sooner it can be put to good use rebuilding America.