The socialist USA

The ever excellent Peterson Institute for International Economics has a blog post today on the solution to the USA’s crumbling transport infrastructure, namely tolls. Resistance to raising taxes makes it all but impossible for the federal or state governments to pay for renewing the nation’s “150,000 deficient and obsolete bridges”. But why should this be a government responsibility? In the capitalist USA you might expect most infrastructure to be firmly in the private sector but this is oddly not the case.

In the 1990s I covered the European water sector, which was dominated by two French companies, then called Générale des Eaux (whose roots go back to Napoleon III) and Lyonnaise des Eaux. Spain also had a major quoted water company (Aguas de Barcelona) and the whole English and Welsh water sector was in private hands (but not Scotland). These companies operated a range of business models from outright ownership to long term concessions (assets rented from the public sector). They did a pretty good job and the finances stayed off the government’s books (though there were a number of corruption scandals in French towns, notably Grenoble).

These companies tried hard to get into the US water sector, predominantly owned by towns and cities. Yet they found it very hard, much harder than entering developing economies (though that often ended badly as in Lima and Buenos Aires – putting up water charges that hit the poor is not a popular policy). There is a history and strong tradition in the US of municipal control of infrastructure, with the partial exception of electricity. It made sense for the interstate highway system to be built by the federal government because it’s a national system (the Chinese are currently building something similar and probably with the same strong boost to productivity).  But much of that system is financed by tolls, avoiding general taxation. Local level assets can and should be financed by the private sector.

It was always amusing when we Europeans explained to our American counterparts that most European water infrastructure was privately financed, including especially in what they regarded as the communist republic of France. (Actually the French are very good at capitalism, they just seem embarrassed to admit it).

The American Society of Civil Engineers, admittedly not entirely disinterested in this matter, estimates a need for $2.2 trillion US infrastructure spending over the next five years. There isn’t the slightest chance of that being spent. Politicians are finding it hard to protect current spending and will soon – very soon – have to figure out how to constrain the health care spending monster if the US is to avoid bankruptcy. That’s real bankruptcy, not just a politically motivated decision to default. Finding new money for even worthy projects is not going to happen.

With a large pool of savings in the rest of the world and a growing appetite for long term assets offering slightly better than bond yield returns (to match long term pension liabilities in ageing developing economies) there is a nice fit between the US demand and rest of the world supply. I should point out that McKinsey Global Institute think that the savings “glut” may disappear soon because of rising investment elsewhere. All the more reason to get on with it quickly before the cost of capital rises. It’s a great time to be borrowing for hard assets in a politically stable environment. I think that still includes the USA.

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