...against fictions and other tall tales

Tuesday 15 March 2011

The proposed American Infrastructure Financing Authority: loan availability isn't the problem, insufficient spending is

In this article, we read that Senator John Kerry is about to introduce legislation that would create a federal financial authority (the American Infrastructure Financing Authority) whose sole purpose would be to provide seed funding for "commercially viable" infrastructure projects. The funding would be provided in the form of loans consisting of no more than 50 percent of the total investment.

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.

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.

* Rates on inflation-protected bonds rates are a good measure of the private cost of borrowing to start new businesses or expand existing ones.

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