Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Trump's America, Front and Center

Politics / US Politics Nov 24, 2018 - 11:38 AM GMT

By: Steve_H_Hanke

Politics

Public infrastructure in the U.S. is in bad shape and has been so for many years. Washington has fingered the importance of doing something about the decrepit state of America’s infrastructure for decades. It’s the bipartisan thing to do.

President Obama’s Council of Economic Advisers devoted a lengthy chapter in its 2016 Annual Report to the Nation’s infrastructure problems. Enter President Trump in 2017. The first thing out of his box was infrastructure. But, the “i” word faded away as rapidly as it entered President Trump’s lexicon. There was a little problem: the White House didn’t really have a fully developed infrastructure plan and most certainly had no legislative action plan. With last week’s elections, President Trump once again trotted out infrastructure, as did Nancy Pelosi—the most likely Speaker of the House, which will be controlled by the Democrats in the 116th Congress.


Before I proceed with a proposal that might receive bipartisan congressional support, allow me to address two obvious questions. Just why is public infrastructure in such a sad state? And, why is the stock of America’s infrastructure capital consumed but not accumulated? It’s all about politicians and their time preferences. After all, it’s politicians who control the investment and maintenance decisions related to publicly-owned infrastructure.

Politicians have very high time preferences: what counts is “today,” not “tomorrow.” Indeed, politicians’ discount rates are very high. This means infrastructure investments that have long lives and produce benefits for many years receive short shrift from politicians. The average tenure for a U.S. Congressman is 9.4 years. This implies that project benefits accruing in year 10 are worth nothing for the average member of the U.S. Congress. So, the implied discount rate for the average Congressman would be approximately 100%. With discount rates that high, it is easy to see why most long-lived projects have trouble passing the congressional “smell test.” Mega white elephants are perhaps the only exception. They seem to generate huge immediate political benefits at ribbon cutting time.

So, what type of infrastructure program might overcome the political time preference bias and win bipartisan support in the divided government that will commence with the 116th Congress? Sale-and-leaseback arrangements (SLBs) might provide a silver bullet. That’s what Steve Walters, a fellow at the Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise, and I concluded. Most governmental entities have vast holdings of poorly maintained infrastructure on their balance sheets. These assets could be monetized via SLBs and “temporarily” put into private hands for maintenance, additions, and improvements.

With a SLB, a government sells its real assets to a private entity and leases them back. This enables government entities to sell their property and receive an immediate cash infusion in exchange for an annual rental payment. There are many variations, but, generally, ownership of the property reverts to its original owners at the end of the lease period. During the lease period, control and management of the property remains with the lessee.

Just how significant might the cash infusions from SLBs be? One high-profile use of SLBs involved the state government of Arizona. It employed such contracts to cope with a 34% plunge in revenue and heightened demand for services arising from the Great Recession of 2007-09. In January 2010, the state raised $735.4 million by selling 14 state buildings via “certificates of participation” that promised institutional and individual buyers annual returns of 4.57% over 20 years and stipulated that the properties would be returned to state ownership at the end of the lease if all lease payments were made. The sale was so successful that the state raised another $300 million with a similar offering six months later. Thus, SLBs helped the state close a $2.6 billion budget deficit in 2010 with an immediate $1 billion cash infusion, though it took on about $76 million in annual lease payments over the following 20 years.

However, sale-and-leaseback instruments should not be seen merely as a means for governments to raise revenues. SLBs can yield tax advantages that enhance their appeal for both buyers and sellers. Because governments are tax-exempt property owners themselves, they cannot benefit from tax depreciation allowances. For this reason alone, government should be asset-lite (read: infrastructure-lite).

Private entities that buy government assets and then lease them back to the government can depreciate the assets purchased for tax purposes. In consequence, the private owners can maintain and upgrade infrastructure at lower net (after-tax) cost than if the government retained the asset ownership.

Instead of being asset-lite, government entities hold huge inventories of real assets, including infrastructure. For example, according to its most recent accounting statements, the government of Baltimore City owns approximately $4.4 billion worth of property that is potentially available for SLB contracts. Most cities and towns of any size similarly maintain holdings of physical assets that would carry depreciation allowance-related tax benefits if held in the for-profit sector. Therefore, the potential demand for SLB contracts is great. So, a key component of any federal initiatives on infrastructure must be the clarification and enhancement of existing depreciation provisions allowed for in SLB arrangements.

The up-front cash infusions from monetizing the infrastructure components of governmental balance sheets that are now essentially “dead” would provide cash strapped governments with funds that could be earmarked, in part, to invest in new infrastructure. But more importantly, SLBs would put the care, maintenance, and augmentation of infrastructure in private hands. Indeed, the most important part of all SLB arrangements are their provisions that dictate exactly how the private lessee must care for and augment the infrastructure projects in a cost-effective manner.

If the encouragement of sale-and-leaseback arrangements isn’t a big part of bipartisan infrastructure initiatives, assets on governmental balance sheets will remain “dead” and infrastructure will remain dead in the water, too.

By Steve H. Hanke

www.cato.org/people/hanke.html

Twitter: @Steve_Hanke

Steve H. Hanke is a Professor of Applied Economics and Co-Director of the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at The Johns Hopkins University in Baltimore. Prof. Hanke is also a Senior Fellow at the Cato Institute in Washington, D.C.; a Distinguished Professor at the Universitas Pelita Harapan in Jakarta, Indonesia; a Senior Advisor at the Renmin University of China’s International Monetary Research Institute in Beijing; a Special Counselor to the Center for Financial Stability in New York; a member of the National Bank of Kuwait’s International Advisory Board (chaired by Sir John Major); a member of the Financial Advisory Council of the United Arab Emirates; and a contributing editor at Globe Asia Magazine.

Copyright © 2018 Steve H. Hanke - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Steve H. Hanke Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in