Tag: infrastructure

A Message for Trump: Basel IV Will Kill Dreams of an Infrastructure Boom

Ever since the Financial Crisis, regulators have tightened their grip on banking activities (read: beaten up on banks) without taking note of unintended consequences. Prominent amongst these misguided regulatory interventions have been the Bank for International Settlements (BIS) mandates, which are touted as promoting global financial safety and economic stability. John Dizard of the Financial Times has seen through the Basel Committee on Banking Supervision’s smoke and mirrors display and correctly concludes that the proposals provide background noise for the next crisis.

First, the new “Basel IV” reforms will dampen economic growth globally. The European Banking Federation claims that increased capital requirements will cause European Banks to raise an additional €850bn of capital. This will exacerbate the credit crunch because banks can increase capital-asset ratios by either shrinking assets or raising capital. In both scenarios, deposit liabilities are reduced and money is destroyed. Slower growth in the money supply, broadly measured, slows the expansion of nominal GDP. The implications are dire because Basel IV seeks specifically to increase capital requirements on project lending and banks account for 80 percent of lending to the real economy in Europe.

Second, Basel IV’s push to standardize risk weighted asset calculations will actually increase risky activities. Unbelievably, Dizard reports, “under the current version of the Basel ‘standardized approach’, unsecured lending to a non-public, below investment-grade corporate borrower requires the same bank capital commitment as project financing secured by assets, liens on equity and cash lockbox arrangements.” With all corporate risk considered the same, incentives will exist for bankers to lend for a risky, high-yield project instead of a safer, more productive one. The result will be a push away from revenue-producing infrastructure projects. 

The secretive Basel Committee on Banking Supervision continues to create systemic risks, which threaten to plunge the world into a slump. Thanks to the BIS mandates, we might experience the horrors of Quantitative Tightening (QT).

Infrastructure Investment: A Look at the Data

Hillary Clinton says that “we are dramatically underinvesting” in infrastructure and she promises a large increase in federal spending. Donald Trump is promising to spend twice as much as Clinton. Prominent wonks such as Larry Summers are promoting higher spending as well. But more federal spending is the wrong way to go.

To shed light on the issue, let’s look at some data. There is no hard definition of “infrastructure,” but one broad measure is gross fixed investment in the BEA national accounts. 

The figure below shows data from BEA tables 1.5.5 and 5.9.5 on gross investment in 2015. The first thing to note is that private investment at about $3 trillion was six times larger than combined federal, state, and local government nondefense investment of $472 billion. Private investment in pipelines, broadband, refineries, factories, cell towers, and other items greatly exceeds government investment in schools, highways, prisons, and the like.

One implication is that if policymakers want to boost infrastructure spending, they should reduce barriers to private investment. Cutting the corporate income tax rate, for example, would increase net returns to private infrastructure and spur greater investment across many industries.

Infrastructure Spending and the Charleston Seaport

George Will’s oped the other day argued that Congress should hurry up and fund an expansion in the Charleston, South Carolina, seaport. But his piece revealed why the federal government should reduce its intervention in the nation’s infrastructure, not increase it, as Clinton and Trump are proposing.

The Charleston seaport has become crucial to South Carolina’s economy. Will notes that “1 of every 11 South Carolina jobs — and $53 billion in economic output are directly or indirectly related to Charleston’s port.”

There is a problem, however. The Charleston seaport:

needs further dredging in order to handle more of the biggest ships, which is where Congress enters the picture: Unless it authorizes the project and appropriates the federal portion of the $509 million cost to augment South Carolina’s already committed $300 million, the project will be delayed a year. The deepening project is only 14 percent of the $2.2 billion South Carolina is investing in its port facilities and related access.

The biggest ships pay more than $1 million to transit the [Panama] canal; if they miss their transit time, their fee is doubled. Until the port is deepened, too few can be handled here simultaneously, and they can enter and leave the port only at high tide.

Protectionism Is Crippling Atlantic and Gulf Coast Ports

George Will writes in his column today about the importance of the Port of Charleston – and by extension, trade – to the economy of South Carolina. Recent completion of the 10-year project to widen the Panama Canal to accommodate more traffic and passage of a new class of container ships with nearly triple the capacity of their immediate predecessors has exposed a logistics snafu that could cost South Carolina’s economy billions of dollars: Charleston Harbor is too shallow to accommodate these much larger, “Post-Panamax” ships efficiently (only limited sections of the harbor are deep enough and only during high tide).

According to the American Society of Civil Engineers, these vessels can lower shipping costs from 15-20 percent, but harbors need to be at least 47 feet deep to accommodate them. The U.S. Army Corps of Engineers reports that only seven of the 44 major U.S. Gulf Coast and Atlantic ports are “Post-Panamax ready.” American ports must be modernized if the United States is going to continue to succeed at attracting investment in manufacturing and if U.S. companies are going to compete successfully in the global economy.

As I wrote in the Wall Street Journal last year:

The absence of suitable harbors, especially in the fast-growing Southeast, means fewer infrastructure- and business-development projects to undergird regional growth. It also means that Post-Panamax ships will have to continue calling on West Coast ports, where their containers will be put on trucks and railcars to get products from Asia to the U.S. East and Midwest—a slower and more expensive process.

The problem can be traced to one major issue: funding.  And that issue is made more complicated by another problem: protectionism.  Most funding of infrastructure inevitably come from federal and state budgets – taxpayers, who should have a voice in the debate about whether these infrastructure projects constitute wise public investments.  But a couple of long-standing, though obscure, protectionist laws have conspired to reduce capacity in dredging services, ensuring that projects take twice as long and cost twice as much as they should.

Topics:

The Who-Gets-to-Decide Crisis

“There is now a consensus that the United States should substantially raise its level of infrastructure investment,” writes former treasury secretary Lawrence Summers in the Washington Post. Correction: There is now a consensus among two presidential candidates that the United States should increase infrastructure spending. That’s far from a broad consensus.

“America’s infrastructure crisis is really a maintenance crisis,” says the left-leaning CityLab. The “infrastructure crisis is about socialism,” says the conservative Heritage Foundation. My colleague Chris Edwards says, “There is no widespread crisis of crumbling infrastructure.” “The infrastructure crisis … isn’t,” the Reason Foundation agrees.

As left-leaning Charles Marohn points out, the idea that there is an infrastructure crisis is promoted by an “infrastructure cult” led by the American Society of Civil Engineers. As John Oliver noted, relying on them to decide whether there is enough infrastructure spending is like asking a golden retriever if enough tennis balls are being thrown.

In general, most infrastructure funded out of user fees is in good shape. Highways and bridges, for example, are largely funded out of user fees, and the number of bridges that are structurally deficient has declined by more than 52 percent since 1992. The average roughness of highway pavements has also declined for every class of road.

Some infrastructure, such as rail transit, is crumbling. The infrastructure in the worst condition is infrastructure that is heavily subsidized, because politicians would rather build new projects than maintain old ones. That suggests the U.S. government should spend less, not more, on new infrastructure. It also suggests that we should stop building rail transit lines we can’t afford to maintain and maybe start thinking about scrapping some of the rail systems we have.

In Africa, Institutions Matter More than Infrastructure

Washington Post article recently highlighted the impressive but uneven progress that Africa has made in its struggle against poverty. The article looked at questions pertaining to material wellbeing, including “the number of times that an average family had to go without basic necessities.” On that measure, Cape Verde saw the most rapid improvement. And so the article asks, “What did Cape Verde do right?” 

Cape Verde’s superior infrastructure, the Washington Post explains, is partly responsible for that country’s economic progress. Surely that cannot be the full answer. The United States did not have an interstate road network till the Eisenhower Administration – decades after the United States became the richest and most powerful country in the world. Similarly, Germany was the most powerful and richest country in Europe a long time before constructing its famous autobahns. 
  
In fact, it is Cape Verde’s policies and institutions that we should look to as reasons for that country’s superior performance relative to, say, Liberia, where poverty increased the most – according to the Washington Post. According to the Center for Systemic Peace, Cape Verde is a democracy. Liberia, in contrast, is far behind.

Highway Bill Extends Big Spending

Here is the first paragraph of an Associated Press story about the new House highway bill:

Despite years of warnings that the nation’s roads, bridges and transit systems are falling apart and will bring nightmarish congestion, the House on Thursday passed a six-year transportation bill that maintains the spending status quo.

Yet some of the government’s own data—as I cite here—shows that, rather than “falling apart,” the nation’s bridges and Interstate highways have steadily improved in quality over the past two decades.

I wish reporters would explore the data themselves, rather than just parroting what the transportation lobby groups say. I also wish they would use their imaginations a bit and realize that if bridges and highways were actually nightmarish and falling apart, then state and local governments—who own the bridges and highways—have the responsibility and full capability of fixing them themselves.