Investment in the nation’s infrastructure would improve productivity while laying the foundation for economic growth in the future. It would address both unemployment and sluggish economic growth, increasing tax revenue and reducing pressure on the federal deficit and debt. There seems to be broad agreement on this.
Infrastructure spending traditionally has been funded through federal grants, bond issues on the commercial market or by public-private partnerships, or a combination of these. But these tools, constrained as they are by policy and tight budgets at the federal and local levels, have not kept up with infrastructure needs. The American Society of Civil Engineers estimates that there is a backlog of needed infrastructure spending of between $2.5 and $3 trillion. This is what would be needed to bring ports, sewer and water systems, roads and bridges up to 20th century standards.
It does not include the costs of preparing the economy for the next generation of technology: microgrids, widespread internet broadband, electric and/or hydrogen fueling stations. Physical infrastructure to support emerging technologies is as critical to their commercialization as an encouraging policy environment.
A dynamic US private capital market is one of America’s strongest comparative advantages. But private capital is reluctant to enter uncharted seas. Innovators complain that they can’t get venture capital to scale up unless they have venture capital to scale up. Cleantech investments have experienced a drop since 2010, despite the Department of Energy’s contribution of funds from the 2009 stimulus for commercialization of promising technologies. Some of the projects aided through this program failed (Solyndra, A123, etc.), but the overall failure rate of 8% was remarkably better than the usual rate of failure private equity experiences with emerging technologies, which is more than four times that. In short, the program demonstrated the benefit of partnering with private equity to reduce risk and bring more new technologies into the commercial market. It is not about picking winners, but about helping more contestants onto the field.
Together, Infrastructure and new technology underpin greater productivity and real economic growth.
Is there a way to establish a regular stream of finance available to pay for both infrastructure and new technologies without adding to the federal debt or raising taxes?
The InfraBank Project: A new program to amass capital via five-year tax-advantaged bonds for corporations and the public, lent by commercial banks under contract to the US Government for infrastructure (70%) and commercialization of emerging technologies (20%). Capital plus interest to returned to bondholders an non-reportable income.
Estimates vary, but according to some economists, there may be as much as $4 trillion in sitting in liquid assets in the U.S. or overseas. Some of this apparently awaits the next Congressional tax holiday, when it may be possible to repatriate profits at a lower corporate profit tax rate. The last tax holiday did not result in the corporate expansion and job growth its proponents hoped for, so there is resistance to another holiday. Meanwhile, there is a lot of capital not productively employed.
Suppose instead of irregular tax holidays, a permanent method of investing profits were created? If a corporation purchased a 5 year, non-transferable bond in the national Infrastructure Bank (“InfraBank”), it would pay just 15% corporate profit tax, and redeem the capital together with any gains tax-free after five years. It would offer an attractive tax rate in exchange for routing money through a process to benefit economic growth, after which the funds would be returned to the corporation.
Why not make such an investment available also to individual investors?
Individuals saving to buy a home, fund retirement or pay for college generally have to choose which of these objectives their savings will be used for long before it is clear exactly how much they will need for which purpose and what the value of their accumulated savings for these admirable goals will be. Laws governing IRAs or 529 college plans generally both force taxable withdrawals and penalize citizens for changing their plans. Why not make InfraBank bonds available in $500 denominations to individuals for five-year investments, as well, after which time both capital and interest would be payable as non-reportable income? This would align corporate and individual interests in building a stronger future for all.
One more thing: limit top bank salaries. In keeping with the conservative, pragmatic nature of the InfraBank’s mission, let its senior most officials’ salaries be capped at 50 times the median salary at the bank.
The InfraBank would operate as a financial hybrid: a nonprofit investment bank, perhaps with some form of government insurance. The idea is to underwrite the future without debt or more taxes by attracting private capital for a fixed term fueling progress, economic growth and future tax revenue.