U.S. Infrastructure Bank – A New Deal for Our Millenials?

Bob Wolf discusses the risks to the economy if the U.S. fails to upgrade its infrastructure.

By Bob Wolf, SOA Staff Fellow, Risk Management

BobWolf Last week President Obama took to the airwaves to promote his jobs plan and reiterated his support for a United States infrastructure bank, referred to in policy circles as “the I-Bank.” While the late-night cable news coverage focused on the political palatability of the I-Bank in light of the continuing debate on federal debt, it is important to consider how infrastructure spending affects the underlying risks to the economy.

The Risk of Doing Nothing

The World Economic Forum lists infrastructure as one of 12 pillars that underpins the competitiveness of a nation. The United States declined in competitiveness for the third year in a row in the Forum’s 2010-2011 Global Competitiveness Report, dropping to fifth place. With this in mind, there are multiple long-term risks to the economy if the country fails to upgrade its infrastructure. Everything from the quality of Timmy’s education (i.e. fewer school auditoriums) to the price of Tammy’s house could get worse (i.e. supply chain becomes more inefficient).

The Risk of Doing Something

At the same time, as the risks of failing to address the nations’ infrastructure are relatively high, the burden for the taxpayer of financing this upgrade is being suggested to be relatively low. Is it really, though? We’ll ask that again later. As outlined in The Wall Street Journal, the White House I-Bank proposal would provide approximately $30 billion in seed funding for projects related to building bridges, repairing roads, extending broadband lines and upgrading smart grids. The expectation is that the seed money, plus an offer of low-cost loans, would entice private investors to back these projects. And then the shovels hit the ground and paychecks get sent out.

Risky Business

Certainly, this measure has its fair share of risks. For one, there is no guarantee for investors when these projects would break ground or get completed. Second, investors would need to be persuaded that a given project has a strong plan for a sustainable revenue stream (tolls, water usage fees, etc.) or commitments for future tax revenues to pay off the bonds. So is the risk to taxpayers really low here?

In all, this road to recovery has some definitive potholes. However, those potholes might be next to nothing compared to the holes left in an economy made up of collapsed bridges, fewer schools and roads to nowhere.

Our tagline is “risk is opportunity”. What say you? Do the potential benefits of this proposal support the potential risks to the economy? What are the risks you see involved in an I-Bank?

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Discussion

One response to "U.S. Infrastructure Bank – A New Deal for Our Millenials?"

  • Tom Bakos says:

    Not all infrastructure is equal. And, your examples Timmy and Tammy seem unsuportive of your point.

    I, like Timmy, did not get my education in the auditorium. I got it in the classroom and the playground – in that order. A school is not a school without class rooms and playgrounds do not require a significant investment in infrastructure.

    Tammy’s house would cost less now than it would have before. Not only that, the mortgage cost will be less. New home construction has gone down not becasue of problems with infrastructure but because of economic problems.

    Why do we need more broadband coverage? I agree having broadband is essential for me living in SW Colorado and a little isolated from what others call civilization. It makes my business proposition feasible – so, I am not for abandoning it and am not suggesting it has no value. I like the speed. I am not a high bandwidth user – I don’t download movies a lot of music, tweet, or facebook.

    As for the global economic rating of the U.S. — here is the explanation given on the web page you linked to:

    ***
    In addition to the macroeconomic vulnerabilities that continue to build, some aspects of the United States’ institutional environment continue to raise concern among business leaders, particularly related to low public trust in politicians and concerns about government inefficiency.

    ***
    The U.S. ranking is going down not because of a lack of efficient infrastructure but for other reasons.

    Maybe some roads are getting old and some bridges need repair. I thought that was something governments should be doing (paying for with the taxes they already collect) as a matter of course. Homeowners should maintain their homes as a matter of course. Governments should maintain the roads and bridges they build as a matter of course. They shouldn’t need to establish an infrastructure bank to do so. The fact that such a thing is being proposed is an indication of failure not a path to success.

    So, I’m all for examining risk. The first step, however, is to identify the real risks we are exposed to. The only risk in infrastructure is a rare and occasional bridge collapse or a bumpy ride. Certainly, those exposures to risk should be identified and addressed. But fixing those bridges and roads is not going to solve the risk of economic failure we currently exposed to which is inhibiting our ability to pay for those fixes.

    Let’s not simply eliminate the symtoms – we should identify and cure the disease.

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