Modernizing Civil Engineering Means Modernizing Financial EngineeringBalancing a Nation's Assets with its Liabilities
By Luke HartiganPublished December 16, 2020
By many accounts, infrastructure in the United States is in dire condition. Most Americans can share in the frustration of daily infrastructure failure. Crippling traffic on the commute to work, regular public transit delays, and dilapidated schools have become all too common in everyday life throughout the country. On a larger scale, this failure manifests in toxic drinking water, structurally unsound dams and bridges, and a detrimental lack of sustainable energy.
Every four years, the American Society of Civil Engineers (ASCE) publishes a comprehensive report grading the current state of infrastructure in the United States, with the most recent report released in 2017. In back to back reports, the United States received a D+ for the state of its infrastructure. This grade denotes infrastructure that is “in poor to fair condition and mostly below standard, with many elements approaching the end of their service life.” Additionally, the ASCE found “significant deterioration” in large portions of infrastructure and held “serious concern [for a] strong risk of failure.” The 2017 report calls for immediate action, and indicates that a recommended $4.5 trillion in direct investment by 2025 would only raise the grade to a B, translating to a classification of just “adequate” infrastructure.
Addressing the overt infrastructure failures faced by Americans on a daily basis, the ASCE report puts emphasis on roads, transit, schools, and bridges, with energy, drinking water, and dams also included among a total of sixteen categories of infrastructure that received individual scores in their review.
Of these four categories emphasized, only bridges received a score of higher than a D+, but not by much. The C+ awarded reflects the fact that more than a third of all bridges in the country are more than fifty years old and the report estimated it would cost $123 billion to repair them nationwide. Schools received the next highest score of D+, as an estimated 24% of the nation's schools were in ‘fair or poor condition’– further exacerbating the extent to which inequities in funding based on zip code contribute to inequities in access to education. Roads were given a D, with 32% of urban roads and 14% of rural roads considered in ‘poor’ condition. In fact, according to a report by the US Department of Transportation in 2015, $836 billion of unmet capital investment is needed in highways and bridges that would be “cost-beneficial to address.” This is not to mention the annual amounts spent on vehicle repair due to damaged roads. In New Jersey and California respectively, such repair costs were as high as $601 and $586 per taxpayer in 2014. Transit fared the worst in the report, scoring a D-, as the ASCE recommended $90 billion would need to be allocated to reform and improve public transportation. In the prior 2013 ASCE study, only 51% of people said they could get to a grocery store via public transportation.
Other areas scoring poorly included dams, which were given a D as a result of the 15,500 high-hazard dams in the US in 2016, and energy, receiving a D+, for the estimated $177 billion gap in infrastructure needed to support energy between 2016-2025. Finally, an estimated two trillion gallons of treated water are lost each year, contributing to its grade of a D. The water crises in Flint, Michigan, and Newark, New Jersey are the most salient examples of infrastructure failure in recent memory. Evidentially, this report outright condemns the failures of domestic infrastructure, while outlining a comprehensive and ambitious plan for reform.
Numerous infrastructure plans have been proposed on both sides of the aisle in recent years, with mixed reception. The Green New Deal, a proposal enthusiastically supported among the more progressive members of the Democratic Party, including Bernie Sanders and Alexandra Ocasio-Cortez, has been criticized by Republicans as a “Trojan horse for socialism”, while President Trump’s corporate tax cuts have emptied the coffers even more by adding approximately $2 trillion to the federal deficit over ten years, hindering chances of meaningful, bilaterally-supported reform. Joe Biden’s plan for addressing infrastructure, the ‘Build Back Better’ initiative, puts a heavy emphasis on sustainable infrastructure, to build an economy for the future. A diet version of the Green New Deal, it is nonetheless a surprisingly ambitious plan for a nominally moderate candidate. It calls for an allocation of $2 trillion in direct investment in his first term toward building a modernized and equitable economy. The highlights of the general infrastructure goals are to create millions of union jobs in rebuilding crumbling infrastructure, to achieve a carbon pollution-free power sector by 2035, to create one million auto jobs, and to provide zero-emission public transportation options through improved bus lines, new railways, and increased infrastructure for bikers and pedestrians. Additionally, the plan aims to dramatically drive down costs of sustainable technologies such as battery storage, renewable hydrogen, and advanced nuclear energy. Finally, the initiative oversees the building of 1.5 million sustainable homes and housing units, along with 250,000 jobs in plugging abandoned oil wells and employing millions more in sustainable agriculture, with heavy emphasis on combating climate change, improving public health, and providing equitable access to clean air and water.
In theory, this plan appears to be a silver bullet– a comprehensive, and more importantly, time-sensitive solution to our failing infrastructure and weak response to climate change. That is, until we are faced with the traditional stumbling block: how will this be paid for? It is the Gordian Knot that has perplexed politicians and economists alike for decades, and has contributed directly to the political gridlock in Congress. However, it is also here that we can look to Modern Monetary Theory (MMT) as a possible solution to this question. MMT suggests that because the United States operates a sovereign currency, in that it prints its own money and borrows in that same currency, fiscal policies should not be bound by intellectually appealing deficit constraints, but instead by inflationary and resource constraints. This is not to say that we can print an infinite supply of money as the solution to all of the US’s problems, as inflation will skyrocket and purchasing power will consequently plummet. Instead, inflationary constraints allow us to effectively ignore deficits while achieving the economy’s full productive capacity. Because the U.S. borrows in the form of Treasuries, widely perceived to be a risk-free investment, the money is always readily available in the capital markets to finance government spending, and can be issued in the form of a new Treasury bill (short-term debt) or Treasury bond (long term debt). This allows us to shift the focus from deficits to inflation, recognizing that as long as the capacity exists to pump money into the economy without risking inflation, it is beneficial to do so. The Congressional Budget Office recently estimated the federal budget deficit for 2020 to be $3.3 trillion– a number that is understandably alarming to many people. But it is a fundamental misunderstanding of this deficit that leads to flawed thinking in government spending. As MMT economist Stephanie Kelton notes in her book, The Deficit Myth, a common myth is
“that deficits make the United States dependent on foreigners. This myth would have us believe that countries like China and Japan have enormous leverage over us because they hold large quantities of US debt. We will see this is a fiction that politicians wittingly or unwittingly propagate, often as an excuse to ignore social programs in desperate need of funding./We’re not really borrowing from China so much as we’re supplying China with dollars and then allowing them to trade those dollars in for a safe, interest-bearing asset called a US Treasury. There is absolutely nothing risky or pernicious about this. If we wanted to, we could pay off the debt immediately with a simple keystroke. Mortgaging our future is yet one more instance of not understanding—or willfully misconstruing for political purposes—how sovereign currencies actually work.”
If true, what does this all mean for infrastructure? Instead of being tied to fiscal deficits, the government can instead focus on the economy’s productive capacity, and whether the resources exist, in the form of physical and human capital, to undertake a project of such magnitude. The implementation of a federal jobs guarantee, a common feature of MMT, could prove vital in achieving Biden’s goals. A federal jobs guarantee allows the economy to reach full capacity, as a job will exist for anyone who wants one. In addition, it establishes an effective minimum wage, as any employee working for less than that wage in the private sector has an economic incentive to quit and work for the government. In a COVID-defined world, a federal jobs guarantee may prove especially beneficial, as it effectively serves as an addition to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, providing emergency relief to desperate workers while simultaneously ensuring that sustainable infrastructure and a modern economy can be built. With the unemployment rate steady at around 8 percent, there is certainly no shortage of workers seeking employment, either. As Kelton notes, “it is never money that the federal government lacks to address needs like infrastructure and housing; real resources are the actual constraint. And there’s no reason to think America is on the verge of running out of concrete, steel, wood, or metals. In fact, when it comes to housing, we actually have far more empty homes than we have homeless Americans”. Modern Monetary Theory’s implementation can reform how we think about government spending, and in turn, the viability of a comprehensive infrastructure plan like Biden’s.
In 2021, the ASCE will publish its quadrennial update on the state of our infrastructure. On our current path, we’ve done very little at the federal level to ensure that we don’t see another D+ in a year’s time. In order to avoid such an outcome, an ambitious, time-sensitive infrastructure plan like Biden’s is necessary to rapidly modernize our economy with an eye on climate change. To fund this, basic principles of MMT can be implemented to reform government spending, shifting the emphasis from deficit constraints to inflationary and resource constraints. At the end of the day, regardless of race, socioeconomic status, or even gender, we all sit in the same traffic, cross the same bridges, and take the same subways. Whether you want to Make American Great Again or to Build it Back Better, it has to first start with better grades.
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