Commentary / Infrastructure Bank

A Response to Rep. DeFazio on Infrastructure Banks

By Alphecca Muttardy, macro-economist

March 31, 2019–In his written and spoken testimony before the House Ways and Means Committee on March 6, Rep. Peter DeFazio, Chairman of the House Transportation Committee, correctly described what would happen to our economy if our nation’s critical infrastructure needs are not addressed. Citing the American Society of Civil Engineers, the economy would lose almost $4 trillion in GDP between 2016 and 2025, resulting in a loss of 2.5 million jobs, and American families would lose an average of $3,400 in disposable income each year.

A Response to Rep. DeFazio on Infrastructure Banks

Congressman Peter DeFazio (D-OR) addresses Congress.

However, Rep. DeFazio is wrong in stating that infrastructure banks cannot satisfactorily finance all of our infrastructure needs. His views, along with our rebuttal answers, are as follows:

  • While government borrowing may lower financing costs, Federal, State, or local revenue is still needed to repay the loans. But, an adequately sized infrastructure bank does bring in new government revenues, while infrastructure loans are repaid back 99% of the time. The U.S. rural electrification program demonstrates that loans can be repaid even in low-income areas.
  • Most infrastructure projects (roads, bridges, etc.) do not generate user fees, so banks will not invest. But this applies only to the DeLauro bank proposal (HR547), which requires user fees to guarantee its loans.
  • Asking state and local governments to borrow, and repay loans, only further magnifies the long-term trend of declining Federal spending. But, as four major infrastructure banks in the past have shown, it does not matter which government agency funds infrastructure, only that it successfully gets funded and built. And finally,
  • Only government budgets are positioned to fund infrastructure: Federally through grants and loans, and the remainder through local budgets. But, our Federal budget is in disarray, state budgets are strapped, the Highway Trust Fund is bankrupt, and the mass transit Capital Investment Grant program needs restructuring. All of these budget areas need correcting before any critical projects like Gateway, the Hudson River Tunnel, or the Portal North Bridge can be funded by budgetary means.

Meanwhile, no proposal was put forth by the Transportation Committee to describe how all infrastructure needs might successfully be funded. Rather, too much attention was given to rehabilitating the Highway Trust Fund for transportation only.

A Response to Rep. DeFazio on Infrastructure Banks

Rural Electrification under the FDR Administration

How FDR Addressed the Problem

By comparison, the example of FDR’s Reconstruction Finance Corporation (RFC, 1933-1957) shows how a well-structured infrastructure bank can operate to boost all infrastructure and economic development nationwide. Through its significant financing of the New Deal and WWII operations, the RFC:

  • Raised median unskilled wages by a factor of five from 1933-1957, which increased aggregate demand for the purchase of goods and lowered income inequality,
  • Vastly stimulated Federal tax receipts by a factor of five from 1941-1945 (aided by structural changes in the tax system),
  • Promoted increased lending by commercial banks, by shoring up bank balance sheets through RFC purchases of their preferred stock (notwithstanding that, by 1940, RFC loans themselves were greater than the loans of all commercial banks combined),
  • Raised the efficiency of the economy (as measured by Total Factor Productivity) which, along with increased aggregate demand, prompted businesses to borrow (in some cases directly from the RFC) and make investments of their own,
  • All of which led to unprecedented economic recovery and growth, while
  • More than 99% of all RFC loans were repaid.

Meanwhile, no proposal was put forth at the Ways and Means hearing to successfully fund all of our infrastructure needs. Rather, too much attention was paid to transportation, and rehabilitating the Highway Trust Fund with a Vehicle Miles Traveled (VMT) tax. At the same time, both Rep. DeFazio, and Ranking Transportation Member Rep. Sam Graves (R-MO-6) stated: “All options are on the table, and the solutions should be far reaching, so that we don’t have to revisit this issue again.”

Therefore, we ask, why not consider a fully funded National Infrastructure Bank that re-builds all of our infrastructure, with cutting edge technologies, while also boosting wages, economic growth and government revenues, and lowering income inequality?  A gas or VMT tax, that reliably produces $80 billion per year, could be leveraged, along with $4 trillion of existing Federal debt, to realize all of these important policy objectives.

Editor’s Comment:

For my response to Rep. DeFazio’s remarks, see “Funding Infrastructure: The Principle of Federal Credit” on this blog. And for a video on the National Infrastructure Bank proposal, click here. 

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