By Frank Cihak
The purpose of this memorandum is to initiate a conversation regarding funding the nation’s infrastructure. It is understood that modifications to any suggested approach will be made. The methodology described herein is to consider a funding mechanism that will not increase taxes nor add to the national debt.
As of April 1, 2021, the United States Treasury’s official figure for the national debt of the federal government was $28.1 trillion ($28,081,128,042,931.00). At the beginning of the day, April 19, 2021, the national debt has increased to $28,187,133,815,925,027.00. This translates to about $85,307.00 per citizen or $224,748.00 per taxpayer.
The national debt dramatically increased because of the economic problems of 2008, quantitative easing monetary responses, and prosecuting wars in Afghanistan and Iraq. Then, Covid-19 happened. The pandemic stimulus payments, including the most recent $1.9 trillion stimulus program are the reasons for the unprecedented surge in the debt totals.
For example, at the end of fiscal year 2000, the national debt was $5,674 trillion. The various quantitative easing and stimulus packages are not indicators of fiscal policies that invested in economic growth; but rather emergency actions taken to provide short term aid to qualified business entities and citizens. This was spending assistance rather than investment.
Such spending programs were necessary to provide a lifeline to the country’s population. Now, however, funding the nation’s infrastructure projects is the prescription for tangible growth coupled with a surge in employment.
What is the National Debt? The National Debt (“Debt”) is simply the net accumulation of the federal government’s annual budget deficits. It is the total amount of money that the federal government owes to its creditors. Generally, the cause for the upward momentum in the “Debt” is because Congress continues to use deficit spending to fund federal programs while also approving tax cuts. The only method to reduce the “Debt” is to develop structural solutions that will stimulate economic growth.
Coincident with these facts, the Federal Reserve Bank (“Bank”) has a balance sheet of approximately $7.795 trillion in assets as of April 14, 2021. In order to cope with current and prior economic problems, the Bank has employed monetary policy that has effectively flatten the yield curve to unprecedented low interest rates levels for all maturities. Since coordinated monetary and fiscal policy has been absent due to the polarized political climate, the Bank’s balance sheet is bloated by necessity.
The current balance sheet total assets would have been unthinkable in past generations. However, a $10 trillion balance sheet total is not outside the range of possibilities given the prospect of the administration’s $2 billion infrastructure proposal. In fact, if Federal Reserve Bank Governors and their chairpersons of past generations could be apprised of the Bank’s current asset total, they might have considered ritual seppuku. Congress, a divided Congress must bear responsibility for the complete abandonment of fiscal policy to address the myriad of infrastructure projects.
Nevertheless, the core requirements of the Bank is to promote financial stability by regulating the money supply and managing interest rates. The by-product of these actions should be to minimize inflation and encourage a stronger demand for goods and services; thereby, resulting in economic growth and more jobs. Therefore, could the Bank consider a new initiative in conjunction with the Treasury (monetary policy working with fiscal policy) that would fund the nation’s infrastructure projects without increasing the Debt burden nor increasing the money supply?
The Federal Reserve Bank Funds Infrastructure Growth Bonds.
Why not consider having the U.S. Treasury issue “Infrastructure Growth Bonds that would be funded by the Bank? A partial lists of necessary infrastructure projects, such as bridges, damns, the power grid, ports, roadways and public transportation, is supplemented by increasing broadband capacity as well as additional security features for a vulnerable internet (minimizing hackers orchestrated by foreign governments).
All the states have identified infrastructure that are absolutely required to be fixed in order to avoid further deterioration. The federal, state, and local projects could be coordinated by the Departments of Transportation, the Department of the Interior, the Commerce Department, and the Department of Labor by creating a joint task force with underwriting approval by the Treasury and the Bank.
For each project, infrastructure bonds (with a maturity of 20-years, subject to renewal) would be issue having the features of a project financing bond. Repayment of the “Bonds” could occur by imposing a use tax. The concept is that repayment comes from the parties that use or benefit from the project. For example, the repair or construction of a new bridge, may require the imposition of a toll. Essentially, if you use it, you pay for it. It is recognized that such a payments can be regressive.
The projects could be segmented into three tiers:
1. Those projects that are absolutely necessary now;
2. Those projects that are required but are not deemed immediately urgent;
3. And finally, those projects that are on a “wish list”.
The determination of the merit and classification of projects would be independent and nonpartisan, conducted by an entity like the Army Corp of Engineers.
By definition, the Bank has the funds. Therefore, there is no need for deficit spending nor increased taxes to fix infrastructure, nor an increase in the money supply. The infrastructure projects would provide economic growth that would simultaneously aid business and fuel employment. These functions (economic growth and employment) are existing duties of the Bank. The jobs would be good paying jobs that would increase the tax base. A portion of increased tax revenues collected from business and individuals could additionally be used to retire the “Bonds” as well as reducing the national debt (with more tolls or other use taxes).
After the passage of time, there will be projects that fail to meet the repayment criteria, (the obligation to repay the “Bonds”). What is the answer? Potentially, there are several possibilities: however, the following items are enumerated:
1. The given project “Bonds” are restructured (perhaps grouped into like pools akin to mortgage-backed securities);
2. The given project could be leased or sold to a third party using the proceeds to pay the “Bond” debt;
3. The projects in default (an aggregate amount of “Bonds”) could be written off. The Treasury could essentially cancel the Bonds, and in tandem, the Bank would reduce the money supply by an equal amount. There could be a tick up in interest rates resulting in a more normal yield curve. This would mean monetary and fiscal policy has started to return to historical normalcy.
The result would be the country’s infrastructure projects would be upgraded and completed. The companies doing the work would be financially restored. Also, additional employment (construction and manufacturing) would provide a multiplier effect that would yield more consumer and retail jobs resulting in an overall increase in the tax base.
What if new legislation was required to implement such a proposed solution. Since every state would benefit, bipartisan legislation should occur. A negative vote by a legislator would require an explanation to voters about why new jobs cannot occur; especially, without increasing the debt or taxes. This would not be popular irrespective of party affiliation.
This alternative funding mechanism would allow the proposed tax increase to be considered separately. The ultimate goal is to restore fiscal integrity by generating annual budget surpluses; thereby, beginning to get our economic house in order. It is not simple. There is the need to maintain financial discipline.
Why not a test? The suggestion is to fund $250 – $300 billion worth of projects. This would be less than four percent of the Bank’s total balance sheet assets. The reality is $2.0 trillion infrastructure projects will not all start at once. A phased approach means that the proper analysis and sequencing of infrastructure projects will be accomplished. A phased approach means the Bank can have an orderly sale or liquidation of treasury securities and mortgage back securities in order to purchase the infrastructure bonds. This alternative does not preclude the sale of infrastructure bonds to qualified third party buyers.
Frank Cihak is a retired 79 year old who amassed over 50 years of work experience in financial institutions.