Is there any substance behind Obama’s infrastructure proposal?
In his State of the Union address, President Obama sketched a broad outline of the need to rebuild 70,000 “structurally deficient” bridges and other infrastructure in the country, but never got more specific. In a follow up, the White House announced the specifics of his infrastructure proposal.
The sum of his proposal, $50 billion, is barely enough to excite a huge amount of support or a significant fight in Congress. For 2013 the budget of the Department of Transportation is $98 billion. State and local governments issued $54 billion of municipal bonds to fund transportation last year. The president’s proposal is about 1/3 of current annual transportation spending, and he proposes no way to pay for it. It’s rhetorical fluff meant to sound good to voters, but it has little chance of going anywhere.
One part of the Obama proposal is a replay of his “National Infrastructure Bank,” which has been proposed twice and received no traction in Congress. The NIB would begin with $10 billion of federal funds to guarantee private investments made for public infrastructure. The main Senate sponsors – Massachusetts’ John Kerry and Texas’ Kay Bailey Hutchinson – have both left the Senate, and no sponsor has stepped forward to take over, according to Politico. It is unlikely that any prominent sponsor will step forward, seeing as the National Infrastructure Bank seems like a ruse to give public guarantees to private investors. Using the nation’s balance sheet to increase private profits would be a very unpopular political position to defend at election time. There are other concerns, which Politico details:
Critics also are concerned about creating a new federal bureaucracy to decide how to spend money, unmoored from being closely managed by appropriators. House Majority Leader Eric Cantor (R-Va.) once likened a national infrastructure bank to “almost like creating a Fannie and Freddie for roads and bridges.”
The Hill reports:
Republicans in Congress have said they favor allowing states to create their own infrastructure banks, but transportation supporters have noted that more than 30 states do not have one in place.
The second leg of the Obama proposal is spending $40 billion on the “Fix It First” program for repairing roads and bridges. This is a good idea, but Obama didn’t propose a funding source. The most obvious way to raise the revenue would be to increase the federal gas tax, which has not be raised since 1993 when it was instituted. Raising this tax would be politically unpopular and require some heavy lifting by Obama’s team, but it could be sold as a direct way to improve roads and create jobs.
The third leg of Obama’s proposal is a new iteration of Build America Bonds (BABs), which were part of the 2009 Recovery Act legislation: The White House describes the proposal:
America Fast Forward (AFF) bonds program would build upon the successful example of the BABs program, broadening it to include similar programs like the qualified private activity bonds program and relaxing certain limitations in the way the combined program could be used.
Investors may not be so fast to jump on that train since the tax subsidies that supported BABs have already been under review for revision as part of the sequester. As Michael Pietronico of bond house Miller Tabak tweeted:
“AFF” bonds are dead on arrival as BAB investors already burned by D.C. once – “A”fter “F”inding “F”ault with the prior subsidy..
— Michael Pietronico (@MillerTabak) February 20, 2013
It’s not clear that the federal government needs to add another municipal bond category, as institutional investors are already buying muni bonds, according to the Federal Reserve Flow of Funds. Insurance firms owned $449 billion and banks owned $327 billion of the securities as of the third quarter of 2012. This $776 billion is much higher than the $180 billion of BABs that were issued. There is clearly demand for the tax-free flavor of muni bonds among institutions. It also seems unlikely that Congress will agree to another round of tax subsidies while cutting the subsidies on the first round of BABs.
The president’s plan is a disappointment given the need to rebuild America’s infrastructure, strengthen the nation’s assets and create good jobs. It has little chance of support or passage. It’s all just rhetorical fluff.