The Infrastructure Bank

On Labor Day, president Barack Obama announced a plan to spend $50 billion on infrastructure projects, part of an overall stimulus package designed to alleviate employment problems and jump start the economy. It is also a bow to political reality in that anything the president was to propose in a heated election season, especially where the other side of the aisle smells blood in the water, would be opposed, but infrastructure spending - the perennial favorite pork-laden entree for representatives of each party - would be opposed less vehemently. This is smart politics in a period of time when all politics is seemingly rotten.

The president's plan does include one fascinating proposal that is warming the cockles of wonkish hearts everywhere: the establishment of an infrastructure bank.

Obama also called for a permanent funding mechanism, an infrastructure bank, to focus on paying for national and regional infrastructure projects. Officials provided few details of how the bank would work.

For non-wonks, an infrastructure bank is not a bank the way it is commonly thought of (except it will get its money from the government, so in that sense I guess it is like many modern banks). An infrastructure bank is -- as designed -- an independent entity that would receive federal dollars for infrastructure and then distribute them using a non-political evaluation. In theory, the money would go to the projects with the greatest return on investment, be they local, regional or national in nature. Projects would compete and our limited dollars would go to those most worthy.

In another wrinkle, the bank would be free to tap into private capital. The infrastructure bank would then function as an investor, seeking a return on infrastructure investments through the use of tolls, fees or other direct mechanisms. In this way, limited federal dollars could be combined with capital from the private sector to the benefit of all.

While the Obama proposal lacks specifics (it is just a proposal, so that is not a criticism), William Galston of the Brookings Institution explains some of the likely details:

There is widespread agreement that it should focus on large regional initiatives that cut across jurisdictional lines and that its decisions should be made by a board of governors insulated from traditional political pressures. To reach the scale at which it could make a real economic difference, it must be able to leverage a modest amount of publicly provided capital to attract much larger amounts of private capital, which would demand a reasonable rate of return. To provide it, most projects the bank funds would have to generate revenue streams from user fees and other sources. The bank could supplement these fees with subsidies that reflect the gap between the private goods projects generate and the public goods whose value cannot be recaptured from individual beneficiaries.

Reaction from the geek-o-sphere has been rather positive. The Christian Science Monitor had an overwhelming supportive piece, pointing out the populist appeal of taking the pork-barrel out of the hands of politicians.

Oddly, despite the political timing of Obama’s proposal just weeks before the election, such a bank would help remove some pork-barrel politics that now influence the construction of highways and mass transit. Projects would be decided on their merits by an independent board within an infrastructure bank – and for one simple reason. The bank would need to pay back its investors. 

Robert Puentes of Brookings, oft-quoted here and a long-time proponent of an infrastructure bank, actually suggested that the Obama proposal may not go far enough, although he too lauded the innovation of the bank:

First the good: there are several key reforms that promise to change the way transportation infrastructure projects are funded and chosen on the federal, state, and metropolitan levels. A merit-driven national infrastructure bank could be the vehicle for green-lighting projects that have the highest return on investment rather than the greatest political reward.

We have not discussed the concept of an infrastructure bank here on this blog, even though it would seemingly align with our emphasis on return-on-investment when it comes to infrastructure spending. The reason is simple: I have thought about it a lot, but I don't have a strong opinion on it. I suspect Jon and Ben are likewise disposed.

My initial reaction to the approach is skepticism. The first thought that crosses my mind is Fannie Mae and Freddie Mac, the quasi-free-market behemoths that have not only enabled destructive development on a massive scale, but have done it all the while privatizing the gains and socializing the losses to the tune of literally a quarter of a trillion dollars (and counting). The best laid plans....

My next hesitation comes from turning decisions on national priorities over to what essentially would be quasi-bureaucrats. The only thing scarier (and more dangerous) than a corrupt political class is a corrupt bureaucracy. At least the former has some accountability, if only nominal. The latter has none. This is one of the arguments made in The Economist:

If we generalise Mr [Steven] Pearlstein's [proponent of an infrastructure bank] reasoning, we end up with, at best, a ruthlessly rational and efficient Singapore-style technocracy, which wouldn't be so bad, but isn't anybody's idea of liberal democracy. More likely, we would end up with a system even more corrupt, corporatist, and inefficient than the one we've got, but with fewer of the protections afforded by democracy.    

These arguments being said, if I were stood up against the wall and asked to stick with the present politically-driven, pork barrel spendfest of projects that not only squander what wealth we have left but do it in a way that actually makes us financially weaker when the long-term commitments are calculated, OR support an infrastructure bank, give me the bank. At least with the bank we have a chance to have some return on the public investment, at least in the near term.

To strengthen the infrastructure bank proposal, we also need a plan to address the trillions of dollars of infrastructure already in the ground that has a negative ROI. How do we increase the return on these investments or, alternatively, wind down our long-term commitments in these places? Proponents of an infrastructure bank look at it as a way to get more money, but it really just redirects capital (perhaps efficiently) and in that sense does not address the long term gaps in funding that exist (in Minnesota the gap is $50 billion over the next 20 years).

An infrastructure bank may be a good first step, but we have to admit that it is an easy one. Figuring out what to do with the long tail of public commitments that have little or no actual value is even more perplexing. The reality is that these commitments will likely be "devolved" to the lowest level of government, with only token financial support to accompany the "gift". An infrastructure bank may hasten this process, which only makes the need for towns and neighborhoods to start working towards a Strong Towns strategy all the more critical.

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