Lagging Infrastructure

John Gapper in the Financial Times (pointer from Mark Thoma):

 If anyone doubts the problems of US infrastructure, I suggest he or she take a flight to John F. Kennedy airport (braving the landing delay), ride a taxi on the pot-holed and congested Brooklyn-Queens Expressway and try to make a mobile phone call en route.

That should settle it, particularly for those who have experienced smooth flights, train rides and road travel, and speedy communications networks in, say, Beijing, Paris or Abu Dhabi recently. The gulf in public and private infrastructure is, to put it mildly, alarming for US competitiveness.

You might have expected that investing in US infrastructure would be a hot political topic this year. Well, no. Hillary Clinton spent the final week of her Indiana campaign standing on the back of a pick-up truck arguing for a temporary suspension of the “gas tax”, the fuel duty that pays for highways. ... Mrs Clinton suggested cutting its source of funds (which she claimed could be made up by a tax on oil companies). It was more important to give Americans a summer break from $4-per-gallon petrol.

At times I wonder whether the world’s biggest economy has the will to solve its challenges or will end up wandering self-indulgently into the minor economic leagues. I expect it will get serious when the crisis is too blatant to ignore...

I could not agree more: having just taken that JFK drive - two and and half traffic jammed hours and almost missed flight And then what about the inside of Kennedy Airport -the security line wrapped around the entire first floor;  not a seat to be had near our gate - people lined up everywhere like cattle.

The US infrastructure problem is a huge drain on competitiveness. In Washington DC, our electric power would go our every single thunderstorm; we were ready to buy a generator, except our neighborhood had no natural gas running it. I mention this in Toronto, and my colleagues just look at me with astonishment.

Compounding this is the sprawled out spatial structure of US suburbia, and the lack of adequate rail transport in many places.  Rising fuel costs will hit hard at many working families; and rising time costs of commuting is a huge drain on productivity. US infrastructure and suburbia, which provided so many advantages in the age of fordist industry, now look to be looming competitiveness issues.

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Comments

[hayden fisher]

I think we'll see a move away from "major" airports altogether and more net-jet for business-professionals services. This will hurt the US tourist industry (ultimately) more than the business infrastructure itself. That said, what an aesthetic drag generally.

As for power, get ready to watch the solar explosion. A handful of US no-co companies (sound familiar...) are poised for explosive growth.

[Michael Wells]

Since the Reagan era, anything to do with government has been seen as an expense rather than an investment. Highways, airports, etc. AmTrak, the natural connector in Mega-regions has seen a campaign to destroy it. HUD funding for housing has been devastated, fueling the twin crises of homelessness and the housing bubble (both supply & demand issues.)

With deregulation the private sector airlines and utilities have also cut back on their infrastructure investment in search of short term profits. I remember the electricity regularly going out in India in the 90's and thinking how primitive -- well now its more common in US Cities. Except India is moving forward and we're moving backwards.

The chickens are coming home to roost. All of this is fixable of course, it just takes the will to invest for longer term than the next fiscal quarter or next election cycle.

[Michael Wells]

Two further thoughts. Speaking of infrastructure, one of the reasons for the success of Google, perhaps today's most successful company, was the founder's insistence on keeping it private through its early growth stages. By resisting the IPO temptation, they kept control of the company's finances and ruthlessly reinvested in growth. By the time they went public they were too big, and had too much built infrastructure, for Microsoft to squash or even match. This was the case with the US also as recently as the late 1980's, but the countries and cities mentioned in the Financial Times and many others, have caught and possibly surpassed us.

Richard's description of JFK again reminds me of India. The Mumbai (Bombay) International Airport is adequate by international standards if not fancy. But the Mumbai domestic terminal looked like a backwoods Greyhound station. There weren't even chairs, people sat on the floor. No shops, poor lighting, pit toilets. Richard talks about people lined up like cattle, in India nobody lines up, the people or the cattle who share the roads. I was there in the early 90's, the airport may have improved but again -- India is moving forward and we're moving backwards.

When we go to NYC we fly to Newark, there's direct train service to Penn Station. I realize that's not possible from everywhere.

[Robert]

I agree completely with Dr. Florida's post above. Other posters please take note of this since I have been accused of trying to "trash" Dr. Florida because I was jealous of his success which is incorrect.

The electricity grid in America is in serious need of upgrade but apparently most of the necessary money that was borrowed from foreigners was spent on building houses, CEO bonuses, and salaries for hedge fund managers that used massive leverage in the form of borrowed money sometimes up to 100 to 1 and have put the entire American financial system at risk. That is they would borrow $100 for every $1 they raise in private capital. Now that homes have fallen in value many hedge funds and the banks that have lent to them are in big trouble. That is why there is a big credit crisis that is getting worse now not better. Homes will continue to go down and in addition to that consumer auto loans and credit card loans will deteriorate which will cause even more pain to the banking system and more credit contraction.

[hayden fisher]

Michael, great posts, but you ignore (as do most others) the tax credits the government has issued to spur growth. In particular, the rail industry is undergoing its biggest boom in more than 100 years and, THANKFULLY, most of this occurred BEFORE the foreign-oil chicken came home to roost. America is ready to deliver products globally.

Here's another example (and a great stock tip!!!). Sunpower (www.sunpowercorp.com) has grown its solar business on subsidies (essentially) from the US military. Now it has its solar business model and products ready for profitable commercial delivery to the market at an affordable price. Solar will be the mid-term answer to the electrical grid issue; clean-coal (an American commodity) will be the short-term answer and nuclear will be the long-term renewable answer.

Robert, as for wanting to write off the US, the credit crunch has been largely quashed and the American economy is about to ROAR again like nothing we've ever seen. It's going to roar on the industrial and commodity delivery market. It's going to roar on the technology delivery market, Apple will be the company of the Next decade worldwide with Google running close behind. And America is going to roar on the alternative energy delivery market. And let's not forget the global online advertising and marketing markets; as well as the global entertainment markets. And that's without even mentioning the smart weaponry and arming of the global policing business markets. We'll swap news articles in a year.

[linda stuhmer]

What are Florida's thoughts about the Orphan Works bills' affects on the creative class?

[Robert]

TO: Hayden Fisher

The credit markets are still largely locked up. A lot of the bond markets including the student loan and auction rate bond market are still locked up the last I read. There is some easing of credit in some other areas from what I read but not that much.

The following article shows that credit is still a problem.
http://www.nytimes.com/2008/05/09/business/09loan.html?_r=1&ref=business&oref=slogin

"Banks Fear Demand for Corporate Loans
By LOUISE STORY
Published: May 9, 2008

When times were sunny, banks promised scores of companies money for a rainy day. Now that day is here — and the banks, hard pressed themselves, are worried they will have to keep their promises.

With the economy struggling, some corporations are starting to tap so-called revolving lines of credit and other forms of backstop financing. If others rush to do the same, the banks might have to lend hundreds of billions of dollars at a time their own finances are stretched, forcing them to raise money to cover the loans."

One main point is that because of the HUGE amount of leverage in the American financial system a small loss in a security due to an economic slowdown can cause margin calls by the hedge fund's bank that loaned the hedge fund the money. This would force the sale of the security on the open market which will drive down the selling price to much lower than what was paid for it. This would cause the bank to write down the asset affecting its capital reserves which would in turn limit the amount of money it can lend out and this would slow down economic growth. This could start a downward spiral feedback loop.

I agree that new jobs will be created while others are destroyed but the KEY question is the amount of jobs NET and at what rate of pay. If there aren't enough jobs at the wage needed to sustain people's debts then people will start to default and because of the enormous leverage used you won't need a huge number of defaults to get the negative feedback loop rolling.

Another key point is that these new jobs in fields you mention have to be created in America and held by American citizens that pay taxes to the American government and have homes, and cars in America. If not then it does nothing to support the securities based on American home loans, car loans, and credit card debt. If these securities loose value then the negative feedback loop can start.

[Zoe B]

The state of our infrastructure seems a repeat of the old 'problem of the commons' - if it's public, people feel entitled not to invest in is as much as they use it. So it deteriorates.

Previous generations of Americans supported major investment in public works. I think we Americans like the excitement of building things, but find maintenance boring. Lots of private foundations fund pilot programs to discern the best policies or methods, but even a generation after Reagan I think they still assume that the government will take on the responsibility for paying for those programs after the pilot stage is completed. I do think that private foundations should be the venture capitalists of social programs. But the model of 'perfect it and pass it on' too often becomes 'perfect it and then let it die'. We are doing that now with the international space station. We are bound by treaty to complete the thing, but no one is budgeting the funds to use it afterwards. It's going to get mothballed.

[hayden fisher]

Robert,

I will certainly concede that the credit markets remain at risk and the American markets operate on leverage-- a good thing so long as there's a safety net and adequate contingency-planning in place. That said, I think our national credit and finance systems represent the biggest potential weaknesses in the American economy; or at least the most vulnerable. The scenario you paint almost unraveled last August. In retrospect, I think that the Fed has done a MUCH BETTER job that we've been willing to give them credit for during the last 9 months and have avoided some seemingly near-certain disasters via prudent and decisive decision-making.

Our security lies in the reality that America remains the most significant and influential economy in the world and that will not change in the foreseeable future. All of the global markets are so intertwined with the American market that it would be hard to imagine a devastating credit collapse in America occurring without a global intervention bailout taking place-- and vice-versa. We also saw that last summer with the bailout-investment by ME markets when pedestals in the American economy began to show fatigue of a failure magnitude.

But putting aside the very complicated business of our and the global financial systems, the American economy and markets are poised for explosive growth largely owed to the opening of new markets abroad and a newly developed infrastructure here. Our rail-and-ship capacity is stronger than it has ever been. And we have a strong and diversified set of products and services to offer the world at the lowest price in contemporary history.

In any event, good discussion!!

Hayden