On the day of the U.S. elections I wrote about the catch-22 associated with federally funded infrastructure investments in the column, "Guns Beat Butter Again."
The catch-22 I discussed in that column was that the same economic malaise that helped to make a federal infrastructure spending program politically possible as a potential area for fiscal stimulus and job creation would also cause an increase in global military tensions. And those tensions would, in turn, cause defense spending to become a greater priority by the government for discretionary federal spending increases.
This isn't a situation unique to infrastructure though. It's a common theme for all discretionary federal domestic spending programs. That theme has been common especially since President Lyndon Johnson tried to fund both the Vietnam War and his Great Society domestic programs with increased borrowing. Such increased borrowing caused many countries, especially Germany, France and Italy, to convert their U.S. dollar holdings to gold.
Ever since then the U.S. government has been grappling with how to meet the increased costs of transfer payments associated with the increased social welfare and safety net programs implemented by Johnson. The largest of those programs is Medicare/Medicaid, which are statutorily required. As their costs increase the size of the discretionary budget, which would include a federally-funded infrastructure program, declines.
The key issue to be solved is how to make an infrastructure program that does not increase federal spending or borrowing and does not absorb federal dollars away from other areas.
It's actually not difficult to do financially, but it is difficult politically.
The answer is that it has to be made to be self-funding.
Several years ago I was involved in a program to develop an infrastructure system that would provide secure, green electric power to federal facilities. We aimed for a program that would be cheaper to operate than using the grid and would not require federal funding to construct or operate.
For traditional federal procurement procedures this was not possible. Those procedures were and are still predicated on the government providing the funding.
The answer we came up with was essentially that the federal government would have to provide both a long-term lease on government lands to build the facilities and agree to a long-term power-purchase agreement to buy all of the power generated.
With those two key issues met, achieving the desired goals was not difficult.
About 20 years ago I was approached by government leaders in Shanghai, China, following an event at which I explained the then-new concept of having investment banks originate debt to fund commercial properties. Their request was for capital to build the physical infrastructure the city needed to grow (power plants, etc.).
I told them that all they needed to do was provide a central bank guarantee on the private sector debt necessary and it would not be a problem; and they told me that such could be arranged.
In both instances the key was figuring out how to create an incentive for private capital to provide the initial funding, which would typically come from public capital.
The same issues are facing the Trump administration. The most expeditious way of solving these issues is to create a self-funding federal infrastructure bank that would operate as a government-sponsored enterprise, similar to the way Fannie Mae and Freddie Mac operate.
Not only is it possible to make an infrastructure bank self-funding, it could quite easily become a revenue source for the federal government, similar to that provided by the Bureau of Land Management.
Although it is theoretically possible to piecemeal something similar with each federal government agency providing capital guarantees to states, municipalities and public-private partnerships, it is likely not politically viable because it would require increases in federal spending.
If it is to be done on the scale and speed, and with the efficiency that Trump has communicated, an infrastructure bank is the most logical choice and most politically viable. And investors should be watchful for increased discussion of it by members of Congress, especially Democrats.
The largest infrastructure stocks have all boomed since the U.S. elections, based on expectations that some kind of infrastructure program would be pursued by Trump.
If discussion of an infrastructure bank increases, these stocks and similar ones will as well. If it doesn't, these stocks will give up those gains.
I think however, that the support for a bank will increase as more elected leaders are made aware of the benefits of such by the banks, industry and state and municipal governments.