Why is infrastructure is different? (Part 1)
Unlike an economy that is consumer driven, one in which infrastructure is driving the bus, creates what I like to call 'real' economic benefit. Let me explain. Consumer and service economic drivers are a different animal. They generate growth and economic wealth by the population going out and spending money on goods and services. Consumerism drives the banking industry that dishes out the credit, often for people to live beyond their means. It's a tenuous economic model that can be subject to significant disruption if interest rates start to increase. For too long now, ridiculously low interest rates have lulled us into a false sense of security and the likes of the Fed and the European Bank have helped promote this vision, that lending is almost for free. Later in the week, I'll discuss the potential for inflation, as a result of this proposed huge injection of cash, at a time when the American economy is starting to grow again, but for now let's park that subject.
If you want to get your economy on a really strong footing, infrastructure investment is the way to go for so so many reasons. Firstly, it is a long term investment, but more importantly, it generates huge numbers of jobs for non college educated Americans. The big challenge, is not if it's the right thing to do, it's how it is managed. The default choice for many construction projects is to import cheap labor and this is where it can all go wrong. Corporate America jumps in to take advantage of the oceans of public cash available. It employs tens of thousands of Mexicans happy to work for low pay in questionable working conditions. The result is then as it ever was, the rich get obscenely rich while the workers struggle to survive. This is NOT progress. It is essential that those managing the infrastructure implementation do NOT allow this to happen. Of course companies should generate healthy profits, I have no problem with that. However, it must not be done at the expense of the American people and certainly not at the expense of the workers building the new much needed infrastructure.
There is not a state in the country without need of upgraded or new infrastructure. This represents an unbelievable opportunity to create well paid union jobs across the skill spectrum in areas that are blighted by unemployment. From engineers to project managers, to logistics to accounting to labouring jobs. Whilst construction has evolved over the years, it still remains very labor intensive, especially when it comes to the hard work required at ground level. Infrastructure projects provide opportunities for Americans from all walks of life and can provide great well paid jobs for those that were left unemployed as manufacturing was shifted overseas. There are millions of Americans not afraid of hard work and this represents an opportunity to give them back that sense of pride they had in better times. Trump just talked about 'Make America Great', Biden has a chance to actually do it.
When FDR embarked on the New Deal, it wasn't without problems, but he learned very early, the key to success was trust in those that had to oversee the projects and the financing thereof. The key was efficiency and transparency and in the modern era, that will probably be more challenging that building the infrastructure itself. The FDR New Deal was bigger that Biden's proposal, but his proposed bill, will see the largest investment in infrastructure since the New Deal.
The challenge of today is inefficiency and budget overruns. It has long been known that large construction companies quote low to win contracts, then nurture a cash cow as the budget grows and grows during delivery. It is absolutely critical that the administration puts airtight contracts together that penalise inefficiency and missed deadlines. The world's longest suspension bridge, the George Washington Bridge when it opened in 1931, was built in just four years and came in under budget. In comparison, 2 miles of New York subway with three stations came in decades late and by the time it opened in 2017 had cost $4.5 billion. That is the definition of fiscal recklessness and project management madness. Now I'm sure those that built it could point to a whole host of reasons why it happened, but the bottom line is, if you are going to try and deliver infrastructure with that mentality, then you're doomed to failure.
The reality is, infrastructure construction in the US is several times more expensive than it is in Europe. Considering the oppressive regulation in the EU, the cost can't be excused by blaming overbearing regulation. In 30 years between 1960 and 1990 the cost of building a mile of US highway increased four fold, this despite labor costs remaining almost static. So you have to ask yourself, where is the money going? It's long been accepted that you can't ignore the corruption that is endemic in planning permissions and unionised labor, so we can't ignore that as a potential influence on current planning either. The fact is, there are deep structural problems that are baked into the US business model and this remains a huge challenge to Biden as he treads this challenging path.
The US is way behind the leading economies when it comes to budget management on infrastructure. All roads lead back to the need for public private partnerships on major public investment implementation. This is before we consider the political road blocks. Make no mistake, the last thing the Republicans want, is for Biden to have a big win on infrastructure. It is in their political interest to block plans regardless of whether they would be of benefit to the American people. How do I know that? Republicans simply have no policy offering, absolutely NONE. All they have, is tax breaks for the rich and deregulation. This is not a policy agenda, it's a dereliction of duty.
This week is Martin's infrastructure explanation week, it's going to take a few posts to bring this all together. Please come back to join me tomorrow on my path to better explain the way forward and the challenges ahead. I guarantee you will walk away much better informed and I promise not to blind you with economics, science or political jargon. It really does come down to common sense and we are all blessed with that. Wait, maybe if we were, we'd not be offended by the simple task of wearing a mask, but that's a whole other story.
See you tomorrow to continue our chat.