News & Analysis

Infrastructure: A Potential Source of Political Compromise and Economic Growth

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Los Angeles Department of Water and Power crews assess the damage from a 93-year old ruptured water main near the University of California, Los Angeles. (Damian Dovarganes/AP Photo)

1 in every 5 miles of highway pavement is in “poor” condition.

174 million Americans cross bridges each day that are rated as “structurally deficient.”

1.26 trillion gallons of sewage is spilled every year.

Nearly 70% of America’s 87,000 dams are over 50 years old.

And the United States is in dire need of at least $3.6 trillion in infrastructure investment.

These statistics paint a strikingly horrifying picture of the state of American infrastructure. The “city on a hill,” as pronounced by Puritan John Winthrop in 1630, is quickly lagging behind in terms of infrastructure. America has been the at the forefront of infrastructure innovation since the Reconstruction Period, from the mid-18th century canal investment boom, when in 1884 the skyscraper was invented in Chicago, to modern-day advancements in “smart city” infrastructure. Though all of these developments were followed by cataclysmic economic, political, or social shifts, America has, in recent years, seemingly ignored the more basic infrastructure that is used daily by its 325 million citizens every day.

The term “infrastructure” is surprisingly broad. On first thought, most people would think of roads, water pipes, or airports, but infrastructure is actually any physical asset that is needed for society to function–such as cemeteries and trash collection services. And as society progresses into the 4th Industrial Revolution, a period marked by the developments in artificial intelligence, blockchain technologies, and nanotechnology, infrastructure is undergoing a fundamental shift. Smart city technology is at the forefront of this new wave, with governments across the world committing over $41 trillion in investments across the next decade to make their cities “smarter.” This new, sleek technology making our cities smarter–whether traffic lights utilizing machine learning or energy efficient lights–is just as important as the decrepit concrete roads lining our country; for investors, the demand for new “real” infrastructure (i.e. roads, bridges, water systems, etc.) is a blindingly huge opportunity.

Both traditional and smart infrastructure contribute immensely to the $18 trillion U.S. economy. Many economists are quick to point out that economic growth could be greater if investments in America’s infrastructure would substantially increase to the level they, frankly, need to be at the repair the outdated and developing-world level systems currently patching the country together.  Historian and engineer Henry Petroski detailed these shortcomings in his book, The Road Taken: The History and Future of America’s Infrastructure. He argues that traffic alone, partly stemmed from poor roads and highways, costs the U.S. over $120 billion per year in lost economic activity.

For investors, infrastructure investments are quite attractive. The largest U.S. infrastructure exchange traded fund (ETF), iShares US infrastructure ETF (IFRA) is currently returning around 15% year to date as of writing (March 15). Though this can be partly due to the anticipation of a major multi-trillion dollar bipartisan infrastructure bill that the Trump Administration and Congress have deliberated on, investors find infrastructure projects appealing because they are real assets, which often provide a steady and somewhat predictable cash flow, and act as diversifiers in a portfolio. Infrastructure is often unrelated to macroeconomic developments because infrastructure assets typically hold a monopolistic position in their respective markets; for example, San Diego Gas and Electric (SDG&E), a Sempra Energy company, has a government-granted monopoly over the city’s energy supply. These utility companies have often taken the blame for natural disasters like the 2007 San Diego fires that burned over 2,000 structures and costed insurance companies $1.3 billion in claims. SDG&E’s careless maintenance practices, which one could argue come from the lack of competition in the market, were largely responsible for the fires. Utility company monopolies are not only producing huge financial rewards to private investors, but also endangering our communities. Altogether, the economic opportunity from infrastructure is great enough to justify major investment in the sector, whether it be private, public, or a combination of the two (e.g. public private partnerships).

In today’s hyper-polarized political climate, there is a surprising amount of bipartisan support for infrastructure investment. Many Democrats, including Rep. Alexandria Ocasio-Cortez, have been quick to embrace the $90 trillion Green New Deal, and President Trump has advocated for his own infrastructure plan revolving around public-private partnerships.

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President Donald Trump holds up a chart on the regulatory process as he speaks at the 2017 North America’s Building Trades Unions National Legislative Conference in Washington, Tuesday, April 4, 2017. (Susan Walsh/AP Photo)

His proposed 2018 infrastructure package included $200 billion in federal funding and $1.3 trillion in private investment to spur $1.5 trillion in total infrastructure improvements across the country, but the proposal quickly died after disagreement arose on how exactly the government would pay for it. President Trump nonetheless has remained steadfast on his election night promise to “rebuild our highways, bridges, tunnels, airports, schools, hospitals,”organizing meetings early in 2019 too begin finding solutions for the American infrastructure crisis. In his State of the Union address, he again reiterated his promise, and stated:

Both parties should be able to unite for a great rebuilding of America’s crumbling infrastructure. I know that the Congress is eager to pass an infrastructure bill — and I am eager to work with you on legislation to deliver new and important infrastructure investment, including investments in the cutting edge industries of the future. This is not an option. This is a necessity.

The Democrats, however, have quite a few points of disagreement with the Trump administration and Republican party. First, the Democrats have stated many times that their preferred solution to the high costs of transportation infrastructure improvements is raising the gas tax, something that conservatives are widely opposed to. Second, legislation addressing climate change is at the top of the Democrats’ agenda, as made clear by the recent introduction of the Green New Deal which was rejected 54-0 in the Senate. “Green infrastructure” accomplishes two of the Democrats’ major goals: addressing climate change and investing in domestic projects. The GOP profoundly rejected the Green New Deal due to its high costs and tax raises for the ultra-wealthy, such as a 70% tax on income over $5 million and a permanent 2% annual “wealth tax.” The Green New Deal has also been associated with left-wing radicalism by many, so any moderate support for the legislation would have drawn great criticism in the next election cycle. This legislation proposal, however, did not surprise many, as the Democrats had to differentiate their position on infrastructure in some way from Trump’s since they could not have him simply win on this major issue. The only way that the two parties may consider compromise is if President Trump proposes a plan to create union jobs, a Democratic priority, that also strengthens his base (Midwest and blue-collar) and rebuilds critical infrastructure like structurally deficient bridges, sewage systems, and water pipes.

In normal political times, these discrepancies may have been minor and negligence in getting a deal done, but the U.S. is far from normal political times; these two conflicting views may be great enough to prevent a deal revitalizing the decrepit American infrastructure system altogether. Infrastructure will be an important issue to track during the ensuing 2020 election cycle, as the parties are seemingly moving further apart on an issue that could be a point of compromise.

 

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