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We're in a hole--how about trying to grow our way out?
09/18/2009 8:30 am EST
Now what should we do?
Pass a second national stimulus package scheduled to take effect in 2011, when the effects of the first stimulus have largely worn off?
Move to reduce the deficit because the biggest threat to the nation’s future is the huge amount of debt that the country has run up in the bubble and after the bubble burst?
Or something else? And if something different than either more stimulus or cutting the deficit, exactly what?
That was the question I was asked to answer at a September 15 symposium sponsored by the New America Foundation at a secret location in Washington, D.C. The second in the Bernard L. Schwartz series at the foundation the idea is to generate ideas to throw into the policy debate in Washington.
My answer is that the country needs (no, not a good 5-cent cigar) a clearly articulated national growth strategy. One that’s simple to understand. That’s got a real commitment from the administration and the major powers in Congress. And that the investors who read my blog could believe in.
I’d recommend building it around investment in infrastructure. You know bridges, roads, high voltage power lines, ports and airports, an upgraded Internet. Everybody understands that improving these bones of our economy can lead to gains in productivity and higher economic growth in our future.
That’s what a lot of us hoped we’d get in the first stimulus package. Some of us got really excited at the idea that the country was finally going to put real money into its decaying infrastructure after decades of neglect. We were also really, really disappointed when the infrastructure money included in the final package turned out to be peanuts.
And I know from reading your emails and comments that many of you still think that a series investment in infrastructure would generate serious growth. You and I certainly spend enough time looking for infrastructure plays involving other countries. Why not here?
The other folks who spoke at the symposium, many of them liberal economists, made a convincing case that we have to do something. And something radical. Otherwise we’re going to be stuck with unemployment at 10% or so for an unacceptably long time. Years not months.
I don’t even want to think about what years of 10% unemployment would do to politics in the U.S. of A. I think we’d wind up looking back on time when a Congressman called the President a liar on the floor of the House as the good ol’ days.
The problem as Carmen Reinhart, the co-author with Kenneth Rogoff of This Time is Different: Eight Centuries of Financial Folly, told the gathering is that while in the normal recession takes two years for the economy to go from peak to trough and then another two years to regain its former heights, a recession accompanied by a financial crisis lasts much, much longer. Japan’s lost decade isn’t an aberration. That’s about how long it takes to heal a ravaged financial sector so that it kill of every incipient recovery by uncovering another round of bad debt or another wave of bankruptcies.
And boy to do have a lot of financial sector damage to undo. Although the rhetoric right now focuses on the huge run up in government debt, the real need for debt reduction is on the private side. According to figures put together by Sherle Schwenninger and his team at the New America Foundation from Federal Reserve data, the total debt—public, private household, and corporate sector—of the United States hit 373% of GDP in the first quarter of 2009. (That means that we owe an amount equal to 3.73 times the annual output of the entire U.S. economy.
That 373% is a record, by the way. In 1980 it was just 161% of GDP.
But the fastest rate of increase from the runaway spending in Washington. (Pretty scary when the politicians aren’t the worst in the room at handling money.) Household debt climbed to 97% of GDP in the first quarter of 2009 from just 48% in 1980. And financial sector debt climbed to 120% in the first quarter of 2009 from a relatively miniscule 19% in 1980.
This huge debt overhang in the private sector is why the economy is likely to grow at such a slow speed for so long. You don’t get sustained growth at 3% or 4% when you constantly have to drain income or profits out of any expansion to pay off past debt.
And it’s why any attempt to “solve” our current problems by focusing on cutting the public or government debt isn’t going to work.
Growth isn’t the total solution either. But if we want to lessen the pain of reducing our debt and if we want to shorten the period when U.S. living standards are in real decline, then we have to do everything we can to get the economic growth rate up in the United States.
Infrastructure is a great place to start because it has a commonsense relationship to productivity. If you build roads, bridges, ports, or whatever that move stuff and people faster and less expensively from Point A to Point B the economy gets more productive.
Here’s an example that I used at the symposium. Everybody who drives the highway regularly knows that you’ll hit a traffic jam on the New Jersey Turnpike at Exits 8 and 7. The road in this section narrows from 6 lanes in each direction to four and then to three. On a good day, it takes an extra 20 minutes to go these 10 miles. On a bad day, the Sunday after Thanksgiving, for example, it can take 60 to 90 minutes to drive that distance.
Every passenger car, every truck going from Philadelphia to New York (or vice-versa) pays that toll of wasted time and energy. Take that cost out and the economy is more productive.
The readers of this blog know that infrastructure investment work. That’s why we scour the economies of the globe to find stocks of airlines cutting hours out of travel in South America or cell phone companies in Africa that have become de facto banking systems.
Many nations in the world get it. China is building roads and railroads and airports as fast as it can. (Perhaps too fast.) India is trying to whip a dysfunctional bureaucracy into shape so that it can catch up with China. Angola is trying to parlay its new-found oil wealth into Chinese-built infrastructure projects.
Here in the United States on the other hand it’s hard for individual investors to find good infrastructure bets. Sure, there are natural gas pipeline master limited partnerships like Enbridge Energy Partners (EEP) or ONEOK Partners (OKS). But try to find a way to invest in expanding and upgrading the national energy transmission grid or the expansion and upgrading of our ports.
A national infrastructure growth strategy could tap into both the need for investment in this area and the desire for investors to find U.S.-based infrastructure investments (particularly if they carry a reasonable yield.)
Models like the state college investment programs come to mind as do vehicles like master limited partnerships in the energy field. Maybe the government could limit its role to setting up an exchange—with rules and disclosure—that would let interested investors find infrastructure projects looking for investors. (Could there finally be a use for the Google (GOOG) IPO auction model that company used to go public?) Maybe the government could help vet projects by providing a 10% investment in those it judges to be worth the investment—and here I see federal money but often state and local judgment on what’s worth it. (One exception would be the national electricity grid, which has to be, well, national.)
A lot of this investment could be do via the Internet using models pioneered in micro finance and in small business loan matching exchanges.
Setting up an infrastructure growth initiative wouldn’t fix the growth problem. But it would be relatively easy. It makes intuitive sense. And by setting it up, we’d learn a lot about building other growth/investment strategies.
And if we’re going to grow our way out of some of the hole that we’ve dug for ourselves we ought to be trying everything we can think of. And then some.
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