|The Strategic View
chief economist, Moffatt & Nichol
It is glaringly obvious that the United States needs to invest heavily in its transportation infrastructure; however, the policy debate over government spending in the second half of the artificial “Fiscal Cliff” crisis resolution is preempting this, creating a risk that the capital-starved freight movement industry will be driven into making very difficult decisions.
The problem is that the policy debate generally presumes that more debt is bad. But debt issued to finance transportation infrastructure that can pay for itself and generate economic growth is at least part of the solution to the debt problems and the trends exacerbating them. If the public sector does not get behind this, then financing may have to be arranged at high interest rates, which would likely prevent at least some projects from going forward.
Given the large and growing amount of repairs and improvements needed to support both imports and exports the transportation industry will become increasingly impaired from delivering the services required to sustain economic recovery and growth. The real debt problem may be the mix of reasons the debt was issued and not the actual level of debt.
There is an existing debt problem and demographic trends indicate it is likely to worsen substantially. The debt problem arises not from the level of debt, but from whether or not the activities it has funded will eventually allow the debt to be repaid without serious consequences to economic growth. On that basis, it is unlikely that all government debt is unproductive. Some of it has been used to finance needed infrastructure as is typically the case with municipal bond issuance and bonds issued by federal and state government agencies to fund infrastructure.
Debt used to finance other activities, such as wars and social support expenses, is not able to directly fund itself. That debt is directly repaid through higher taxes on income or expenditures or indirectly via an inflation tax. Since the government is the only issuer of money, it can use the Federal Reserve’s ability to buy bonds, which essentially requires new cash to be introduced into the economy. However, if too much money is introduced too quickly then there will be too much of it chasing too few goods which will start pushing prices up. Higher inflation means interest rates will rise and the government bonds will be worth less, so the government can buy back its debt at lower prices.
If the bonds were issued to finance infrastructure that helps the economy become more productive, then prices of goods and services will not rise quickly and the higher tax revenues from growing activity can be used to pay down the debt, as opposed to inflation eroding the value of the bonds held by investors. The freight movement industry is, therefore, the key value proposition to resolving the debt crisis.
Time is running out for policymakers to make the decision to increase the amount of good debt, debt to finance freight movement and energy infrastructure, in order to resolve the unfunded debt problems. Baby boomers started turning 65 in January 2011. Every year until 2025, according to the U.S. Census Bureau, the number of people turning 65 will increase so that by 2025 almost 20 percent of the population will be of retirement age. Many of these people have not saved enough for retirement and those who invested in real estate and securities such as stocks have lost wealth due to the financial meltdown in 2008. It is likely that the government will have to subsidize the retirement of many Baby Boomers. Responses such as increasing the retirement age can help take a little off the edge of the problem but cannot resolve it. Some people may not be healthy enough to work beyond a normal retirement age.
Funding transportation infrastructure projects is more likely to be a better solution than trying to reduce pension and transfer payments that many people are counting on to fund their retirement, or to increasing the retirement age. For one thing, there is likely to be very aggressive resistance to changing the financial terms of retirement. Increasing productivity, or output per person, if it can be done might be easier to implement, if policymakers can turn their attention to the broader landscape of possible actions they can take, and become less polarized in their positions.
This may be an opportune time for the transportation industry to offer to help resolve the growing public sector debt problem and avoid a European-style public sector debt crisis. If feasible long-term policy solutions are not included in the debt debates then another Fiscal Cliff or outright default situation might occur. That is in no one’s interest except perhaps hedge funds who could take short positions in anticipation of that.
The debt situation will eventually be resolved either in a bad way or good way. The freight movement industry has a large stake in that. It would be better to see general support for investment in the industry rather than badly needed repairs and improvements become a growing problem because of under-investment.
The United States is at a fork in the road and policymakers need to know that there are alternatives to austerity, alternatives that could herald sustained prosperity. Although there is a lot of pessimism over possible outcomes to the debt policy debate, it is important to remember that it’s not over yet.
Kemmsies is chief economist at Moffatt & Nichol, a marine infrastructure engineering firm. He can be reached at (212) 768-7454, or by email.