Saturday, March 30, 2013

Katelyn Fossett — U.S. Eyes Pension Funds to Renew Crumbling Infrastructure

On Friday, President Obama outlined a new plan that, he said, would seek to attract private investment for public infrastructure, while also creating new bonds and offering more loans for similar projects. 
1.3 trillion dollars needed
A think-tank in Washington has one idea for leveraging private investment toward infrastructure: encourage the investment of labour union pension funds in infrastructure projects.
“Couple [our poor state of infrastructure] with pension funds, which are long-term, patient investors, with stable, risk-adjusted returns, and this fits well with our fiduciary duty,” Dan Pedrotty, managing director of benefits and pensions at the American Federation of Teachers, said Thursday at the release of a report on the topic at the Center for American Progress (CAP).
Pension funds present a viable alternative to traditional public financing because their large-scale assets and long-term nature give them the ability to put up a large amount of capital and see projects through to their payoff—obstacles typically thought to be too large for any investor except the federal government.
The report also suggests the time is ripe, both economically and politically, for this kind of change.
Inter Press Service
U.S. Eyes Pension Funds to Renew Crumbling Infrastructure
Katelyn Fossett

This is incoherent from the point of view of monetary economics given the existing monetary system. However, there is actually a rationale to it that works. In providing infrastructure bonds, the federal government is providing safe asset and an interest subsidy for future pensioners, similar to the Social Security trust fund.

While neither taxation nor borrowing are necessary operationally, they are apparently necessary politically in order to elicit the bipartisan support required to pass legislation. The difference is that the Social Security trust fund is "funded" by taxes, while the infrastructure improvements would be "funded by borrowing."

Whatever it takes, I guess, given the prevailing level of asininity in policy making. But it would be simpler to just cut to the chase and use the available policy space to deploy the available resources that are not being requisitioned by the private sector.


Ralph Musgrave said...

This is slightly off topic, but I never stop falling about laughing at the numerous household name economists who keep claiming that now is a good time for government to borrow and invest in infrastructure because interest rates are low.

The flaw in the latter argument is that it’s only relatively short term rates that are currently low (5-10 years). In contrast, infrastructure projects last 20 – 100 years. Thus the relevant rate is the 20 or 30 year rate. And that rate is scarcely influenced by recessions or by central bank attempts to deal with recessions by cutting interest rates.

Matt Franko said...

Watch they will probably issue them at the same rates as Treasuries.

ie no help for current savers, just some orig. fees for the Dealers...


Anonymous said...

This is yet another lever for privatizing retirement systems.

Malmo's Ghost said...

This is worse than a slippery slope. It's a steep cliff if executed.

Dan Lynch said...

The question is who will be doing the borrowing ? Some of this "public-private partnership" stuff makes me think in terms of for-profit toll roads and toll bridges. Why else would private companies borrow money for infrastructure ?

As for state and local governments borrowing to pay for infrastructure, they already have the ability to do that, the only thing this might do is lower their rates. And I believe the Fed already has the authority to buy state and local bonds ?

My take is that this is a privatization scheme camouflaged as a jobs and infrastructure scheme. I wouldn't touch it with a 10 foot pole.

Dan Lynch said...

The article mentions a CAP article on this topic. As always, be aware that CAP is funded in part by Pete Peterson.

wilwon32 said...

Dan has the right idea.

Michael Hudson discusses this concept wrt finance capitalism:

Obviously, those of the elite, who have captured the Executive Branch (whose Department Heads running the Treasury and Justice Depts publically assert that the big banks are TBTF), can surely dream up ways to further the scams to enrich themselves. What better scheme than to simply convince the American citizenry that, because the budget must be balanced, it will be necessary to simply offer public-spirited millionaires/billionaires various opportunities to participate in maintainence of this nation's infrastructure so that the toll-booth economy can go forward? After all, they have already managed to convince their expediters in Congress and the Executive Branch that it was necessary to deplete many of the major pension funds to save those fraud-infested corporations.

Anonymous said...

I think Dan Lynch is right. The "infrastructure bank" is a classic idea of neoliberalism. The public puts up part of the cash to help private companies build infrastructure that the public then has to rent back from the owners.

Tom Hickey said...

National Infrastructure Reinvestment Bank

The creation of a National Infrastructure Reinvestment Bank was first proposed by United States SenatorChristopher J. Dodd and Senator Chuck Hagel in 2007. However, several other iterations of a National Infrastructure Bank have been proposed and considered[1] and it is likely that implementing legislation for the Bank will look quite different from that which was proposed in the original legislation.

Barack Obama backed the proposed legislation in February 2008 and repeated his call in September 2010, although he did not provide specifics about how the Bank should operate....

The Bank would complement existing federal programs to fund infrastructure, such as the Highway Trust Fund or State Revolving Funds. It is expected to invest primarily in surface transport infrastructure, which is likely to include highways and mass transit.....

The original proposed legislation states that the "Bank" is actually "an independent establishment of the Federal Government, as defined in section 104 of Title 5, United States Code."[3] As explained in 5 US Code 104, an independent establishment of the Federal Government is "(1) an establishment in the executive branch (other than the United States Postal Service or the Postal Regulatory Commission) which is not an Executive department, military department, Government corporation, or part thereof, or part of an independent establishment; and (2) the Government Accountability Office."[9]
According to the proposed legislation, the "Bank" would be administratively similar to the Federal Deposit Insurance Corporation (FDIC).

Matt Franko said...

If this 'bank' is publicly owned, then 'profits' would probably be returned to the Treasury for 'deficit reduction' and a nice 'profit for the taxpayers'... ie a tax increase.

I'd imagine revenues would come back from the states via tolls and bus fares that local TAs would charge...

The amount of subsidy this would create for 'investors' depends on what IR they issue the bonds at. I'd assume if they are Federal guaranteed it won't be much more than USTs... Which is near zero.

This scheme looks like mostly a bonanza for the BDs...