Investing in infrastructure: Economic stimulus with a purpose
Rebuilding the nation's roads and bridges boosts companies and the economy
Beyond chatter of the ongoing presidential campaign, there is a large elephant in the room. Many of our airports, waterways, rail lines, highways, tunnels and bridges are not up to the task of supporting the growth that our politicians are selling.
The American Society of Civil Engineers (ASCE) has given U.S. infrastructure an overall grade of D+ due to delayed maintenance and underinvestment, estimating that $3.3 trillion needs to be spent over the next 10 years.
What does this gap mean for America's economy? If unaddressed, the ASCE estimates that each household will lose $3,400 in disposable income to infrastructure deficiencies each year over the next decade while the U.S. economy will lose almost $4 trillion in GDP, resulting in a loss of 2.5 million jobs.
Those are compelling numbers, but we've been warned about this for years and not much, or at least not enough, has happened. Many of the most enduring and successful American companies got their start providing material and know-how to early infrastructure projects. Several of those companies are part of Northstar's Income First strategy.
We may be approaching an inflection point where needs lead to actions. It appears that both of the candidates for president agree on at least one thing: the need to increase federal spending on infrastructure. Hopefully, they recognize the economic and practical necessities and not just the opportunity to score political points in stump speeches. Even if our hopes for action are not met, collapsing bridges and water supplies compromised by lead-leaching pipes may force the next president's hand.
There are also indications that incremental monetary stimulus is losing traction with the global economy. Those who were motivated to borrow to invest or spend have largely done so. Historically low interest rates alone may no longer be enough. Should we hit a bump in the economic road or try to push the economy beyond its sub-2 percent annual GDP growth, accelerated government spending on infrastructure is a possible next step. Opponents of fiscal stimulus argue that government spending often crowds out the private sector, imposes undue interference in the free market, and too often leads to "bridges to nowhere."
How well it ultimately works is usually a function of where and how it's done. For example, the $180 billion Build America Bonds that were offered up in 2009 were a mixed blessing – many state and local infrastructure projects were funded through sales of federally subsidized taxable municipal bonds. Unfortunately, the federal budget sequestration debacle in 2013 cut federal subsidies to municipalities, resulting in much higher repayment costs for the long-term bonds.
There is hope that the next iteration of infrastructure finance can be better. An increasingly common financing structure, known as public-private partnerships, or PPPs, are showing promise as a way to pay for the revitalization of America's infrastructure while boosting the economy.
A PPP involves a contract between a public sector authority and a private partner, in which the private partner builds a public service or project and assumes substantial financial, technical and operational risk in the project. Using long-term contracts, the private partner eventually hands off ownership to a public entity such as a housing authority. In many cases, the cost of using the service is borne primarily by the users of the project and not by all taxpayers – think of a toll bridge, hospital or commuter rail line.
The infrastructure growth concept is attractive because it promises various new channels for investment returns that utilize established manufacturing and service companies – such as those found in Northstar portfolios. The attendant surge in spending will directly benefit those companies and the workers that they employ.
The long-term benefit of infrastructure investment to society cannot be overestimated. For example, massive private and public investment in technology infrastructure such as fiber-optic cable and cell phone towers over the last 25 years have resulted in ubiquitous and fast internet and coast-to-coast cell phone coverage.
Bob Van Wetter is a co-founder and chief operating officer of Northstar Investment Advisors. A graduate of Dartmouth College, Bob is in charge of day-to-day operations and compliance for the firm. Bob also divides his time at Northstar between portfolio management, equity research and spending time with clients.