As Infrastructure Crumbles, So Does US Manufacturing
America is essentially in an infrastructure collapse that is having dire effects on manufacturing. Crumbling water systems that are unreliable can shut down production lines. Congested highways mean late deliveries, production loss, increased fuel and wage costs and excessive wear on assets. Port congestion, lock delays and the penalty associated with not having infrastructure in place to handle larger ships make American products more expensive.
Before I address the benefits of an infrastructure upgrade, let’s take a look at the state of our aging infrastructure:
Water and Sewer
Beneath most major cities, our current water and sewer distribution systems are from 50 to 150 years old—mostly beyond their design life and in need of replacement. The old systems are leaking an estimated 20 to 25% of our public water every year. Washington D.C. alone sees an average of 400 to 500 water main breaks per year, and an estimated 240,000 water main breaks occur every year in the U.S. The EPA estimates that upgrading the public water system will require $335 billion over 20 years, and upgrading the sewer systems will require $298 billion over 20 years.
According to the Society of Civil Engineers, more than 9% of U.S. bridges are structurally deficient. There have been 600 bridge failures in the U.S. since 1989, several of them deadly. The federal government estimates the cost of a backlog of planned bridge rehabilitation projects at $123 billion per year.
The U.S. Department of Transportation says that over two thirds of our roads are in “dire need of repair and upgrades.” Traffic jams and congestion cost commuters 4.2 billion hours and about 2.8 million gallons of gasoline per year. In the past, we relied mostly on the Highway Trust Fund—which supplies 80% of highway funds—but the highway fund is running out of money. The gas tax has not been increased since 1973 and since 2008, the trust fund has spent $103 billion more than it has collected. Spending in 2018 alone is expected to exceed revenues by $9 billion.
In addition, the 2017 American Society of Civil Engineers’ Infrastructure Report Card shows funding gaps for airports, inland waterways, dams, electricity, schools, rail, public parks, levees and hazardous waste. This adds up to a whopping $3.5 trillion in unfunded infrastructure costs. “Doing nothing on infrastructure," says the ASCE, would mean a loss of $3.9 trillion in GDP and the loss of 2.5 million jobs by 2025”.
In a 2017 speech to Congress, President Trump said he wanted a $1.5 trillion investment in infrastructure rebuilding because it would create "millions of new jobs". His plan is to use federal funding for 20% of project costs. An additional $1.3 trillion would come from the states and private investors.
“For too long, lawmakers have invested in infrastructure inefficiently, ignored critical needs, and allowed it to deteriorate,” Trump said. “As a result, the United States has fallen further and further behind other countries.”
This public/private funding plan is still very vague and could include purchasing public assets. It would allow private investors to build, own and operate airports, bridges, tunnels, treatment plants, drinking water systems, highway rest stops, and dams. It could also increase highway tolls, and, of course, the private firms would be able to increase fees to the consumers to cover their costs.
Trump has also said that any infrastructure plan must be revenue-neutral, meaning it cannot add to the federal deficit, and not require a tax increase. That raises the question: Where will the public money come from?
Depending on private funds is also not especially practical. In our current economic trend toward financialization of the economy and short-term profits, the financial sector does not look favorably on investing in long-term profits. Some of these projects are very large and could take 10 to 15 years to complete. Financial investors do not like waiting years to get their money back. Plus, there is a question about project risks if something goes wrong with the project. Many private investors will want their projects underwritten by the government and have assurance that the U.S. taxpayers will bail them out, just like they bailed out the big banks in 2007.
One idea being bounced around by administration is the idea of offering private investor tax credits. This has never been tried before and comes with significant risks. Wilbur Ross, secretary of commerce, and Peter Navarro, head of the national Trade Council, have recommended that the government allocate $137 million in tax credits for private investors to underwrite infrastructure projects. They estimated that these credits would spur $1 trillion in investment. But, there is considerable skepticism from free-market-oriented investors who want quicker returns and revenue streams during the project. Business and labor executives told a House transportation committee in February of 2017 that “private investment won’t provide nearly enough to address America’s infrastructure woes.”
What might help get infrastructure rebuilding off the ground would be to raise the gas tax. The U.S. Chamber of Commerce, a business lobby, would like to see a 25-cent increase in the gas tax, which has not increased since 1993. This tax increase would generate $394 billion in new revenue. But the Koch brothers and other hard-right GOP leaders in Congress are against any tax increases.
So if the Trump infrastructure plan cannot raise taxes and must be revenue-neutral, where will the money come from?
So far, the Trump infrastructure rebuilding program does not have a funding solution and does not yet offer specifics or priorities in infrastructure spending. Trump wants $1.5 trillion in new spending on infrastructure, and Congress has, so far, only allocated $21 billion. This is about 1% of the president’s request. So Trump’s proposed public/private infrastructure plan has become fake news.
Infrastructure Investment Is a Big Opportunity
Despite the political and economic
backsliding, rebuilding our infrastructure is perhaps the best economic investment we could make in the 21st Century. In no other major economic investment could we achieve the number of new jobs, increased GDP growth, and immediate safety gains.
Dan DiMicco, chairman emeritus of Nucor steel and a trade advisor to President Trump during his 2016 presidential campaign, said it best a few years ago.
“I know that Americans are worried about the national debt I know they worry about government waste,” DiMicco said. “But infrastructure is not waste. In the context of competing globally, the supposed costs are quickly overshadowed by the benefits. The investment is going to pay off not just 5 to 19 years from now, but 30 or 40 years from now as well.”
A 2014 study by the University of Maryland for the National Association of Manufacturers concluded that an “$83 billion infrastructure investment package—the equivalent of approximately 0.6 percent of GDP—would create 1.7 million jobs in the first three years, accounting for both direct and indirect employment effects.” In the shorter term, the manufacturing sector would directly benefit from supplying the materials for the infrastructure upgrade: concrete and asphalt for highways, pipes for drinking and wastewater, new towers for electrical grids, etc.
A study by the Economic Policy Institute suggests that a debt-financed $250 billion annual investment in infrastructure would boost GDP by $400 billion and overall employment by 3 million net new jobs by the end of the first year.
Now that Congress has just increased the Federal deficit by passing corporate tax cuts, there will be pushback against any kind of government spending. But we need to ask ourselves, why is it that we had enough money to fund the corporate tax cut in 2018 ($1.5 trillion), the Iraq War ($2. 4 trillion), and bank bailout ($4.4 trillion), but do not have the money to invest in our own country?
This is an opportunity to modernize the country for all citizens, businesses, and economic sectors. By committing to a multi-trillion-dollar program of investment, we can achieve massive multiplier affects during and after the construction phase. If we want to be a competitive economy, we cannot afford not to invest in our infrastructure.
Originally published: https://www.industryweek.com/economy/infrastructure-crumbles-so-does-us-manufacturing?NL=IW-07&Issue=IW-07_20181029_IW-07_730&sfvc4enews=42&cl=article_1_b&utm_rid=CPG03000001464245&utm_campaign=30392&utm_medium=email&elq2=3991310ed720473ba4ddd843e44a188f