A top business leader on Wednesday made a rousing appeal for Congress and the Obama administration to strike an agreement on a major new program of highway and mass transit spending. At the same time, the markets yesterday displayed a willingness to lend money to the government at bargain basement interest rates for any use, including infrastructure.
Thomas J. Donohue, President and CEO of the U.S. Chamber of Commerce, devoted a portion of his annual “State of American Business” speech to the idea of jumpstarting a new, long-term program of construction of highways, bridges, light rail and power grid projects before stopgap spending legislation expires later this spring.
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“We’re asking Congress to pass a long-term highway and mass transit bill with full funding—along with appropriate reforms,” he said. “I know the politics are difficult. But isn’t this a pretty good time to try? Since last summer, the average price of gas has dropped $1.45 cents. Isn’t it reasonable to consider investing a dime or two of those savings back into our roads, bridges, and highways to put Americans to work, clean the air, grow our economy, and save thousands of lives?”
Like others in the business community, state government and on Capitol Hill, Donohue argued in favor of an increase in the 18.4 cent per gallon federal gas tax to replenish a sorely depleted Federal Highway Trust Fund and launch a multi-year construction program for highways, bridges, mass transit and other infrastructure projects.
Leading Senate Republicans including John Thune of South Dakota and Bob Corker of Tennessee have actually argued that with gas prices below $2.50 per gallon, Americans can easily afford to pay a little more at the pump to help fix highways and bridges and launch other major construction projects. However, House Speaker John Boehner (R-OH) and Senate Majority Leader Mitch McConnell (R-KY), wary of anything that smacks of new taxes, have said they would oppose such an increase.
Even debt-financed infrastructure projects would practically pay for themselves these days, with long-term interest rates so low. The latest case in point: The yield on the 10-year Treasury note fell to 1.852 percent yesterday – within a few basis points of a 52-week low.
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To help put that in perspective, consider this: The overwhelming majority of the Federal Reserve Board’s Open Market Committee expects that its target interest rate for overnight loans between banks to be above 3 percent by 2017 – meaning virtually all other rates will be higher than that. Yet, the market is willing to lend the U.S. Treasury money for ten years at less than 2 percent.
What’s more, the Fed’s long-run target rate for inflation is 2 percent, and should it reach that level in the next few years, a significant number of investors would essentially be paying the government to hold their money for them. In short, while the business community is saying, “Please build more infrastructure,” the market is begging the government to take its money.
Last fall, the International Monetary Fund released a detailed study indicating that under current economic conditions, debt-financed public works projects will actually pay for themselves – reducing the ratio of public debt to gross domestic product by spurring economic growth, the Fiscal Times reported. The study, written by a team of researchers led by Abdul Abiad, a deputy division chief in the IMF’s research division, found that debt-funded infrastructure projects in advanced economies are particularly cost-effective.
“For economies with clearly identified infrastructure needs and efficient public investment processes and where there is economic slack and monetary accommodation, there is a strong case for increasing public infrastructure investment,” they wrote.
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While President Obama, Boehner and McConnell are in general agreement that something needs to be done this year on the infrastructure front, how best to finance a new program remains the major sticking point. The White House and congressional leaders have bandied about proposals for generating new revenues for infrastructure as part of a major overhaul of the corporate tax code, but precisely how that could be accomplished is elusive.
Donohue, the one-time head of the American Trucking Association, argues that boosting the long frozen gasoline and diesel fuel taxes is the simplest, fairest and most direct way of funding a new infrastructure initiative. Revenues from the federal gas tax have been eclipsed by transportation costs – to the tune of about $16 billion a year in recent times. Construction costs have risen while motorists with more fuel-efficient cars buy less gas.
By some estimates, the current level of federal spending on transportation is about $50 billion per year, compared to about $34 billion a year in revenue from the gas tax. “The bottom line is, we are driving as many miles or more miles on the road and we’re collecting half of the funds that we use to repair roads,” Donohue said.
“What’s needed here is the realization that there are a lot of holes in the road, a lot of bridges in this country that don’t work, and pretty soon we will have a crisis,” he told reporters following his speech.
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