In one way, the idea would be a good one if the US economy was riding somewhere mid-point along the business cycle. But the economy is nowhere near such a point. Rather, with real long-term interest rates (i.e. interest rates on inflation-protected bonds) as low as they are today, the US should simply be borrowing massively and investing the amounts on growth-inducing projects, such as building or improving infrastructure, as well as in areas such as education and energy-efficient technologies.Since Obama gave his jobs speech last Thursday, I've read several commentaries expressing doubt about the necessity and merits of the proposed infrastructure bank. But none are as forceful as this excellent article from the author of the Reuters MuniLand column. Here are some excerpts from the article describing the problems associated with the proposal to establish the AIFA and the role it might play in accelerating the pace of privatization of US public assets:
Also, I want to add a word on this notion that the funds be limited to "commercially viable" projects. Let's not forget that the private sector is rarely compelled to invest in projects resulting in positive externalities (i.e. benefits that everyone can enjoy). Governments, however, are much better positioned to do so given that governments can count as profits these types of widely-shared, collective benefits associated with large, public infrastructure projects.
Currently almost all American infrastructure is funded either through municipal bonds or federal funding. Even as federal funding has been constrained, municipal bond issuance has been very low this year, running at about half of last year’s rate. There is plenty of capacity to fund infrastructure with municipal bonds. From a funding standpoint it’s not clear why we need an infrastructure bank, especially a paygo infrastructure bank. [...]I agree that it's a shame. Actually, if the public interest is truly the goal driving such an initiative, US policymakers should stick with a plan that involves borrowing massively and investing into employment-enhancing and growth-inducing public infrastructure projects. Now is exactly the right time to be undertaking such initiatives. As you can see from the chart below, the cost of borrowing for the US government is currently at record lows.*
There is no question that private money is interested in being used for loans to infrastructure projects and guaranteed by the federal government and taxpayers. It’s almost identical to senior bondholders who loaned money to too-big-to-fail banks. It’s the best setup for private money because there is no loss. [...]
[I]t’s a pity that a project dressed as job creator will really be a vehicle to create privatized public assets. Our nation was founded and grew strong on the basis of our shared public infrastructure. It’s a shame that the American Infrastructure Financing Authority will be the agency in which ownership of public assets becomes private. (emphasis added)
|10-year Treasury Inflation-Indexed Security, Constant Maturity (Source: Federal Reserve)|
* Rates on inflation-protected bonds rates are a good measure of the private cost of borrowing to start new businesses or expand existing ones