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Obama Could Avoid Depression by Rebuilding America's Crumbling Infrastructure

Economics / US Economy Nov 08, 2008 - 09:28 AM GMT

By: Jennifer_Barry

Economics Best Financial Markets Analysis ArticleOn a daily basis, we drive on paved roads over bridges, take a hot shower, turn the lights on and off, and take out the trash. Most of us take these experiences for granted, expecting that our needs will be satisfied in a safe and convenient way. The universal availability of these services differentiates a modern country from a developing nation.

However, this infrastructure didn't come into existence overnight. It took planning, effort, and a great deal of money. When the U.S. was still a colony of Britain, most of the country was untouched wilderness. A few years before the adoption of the Constitution, George Washington had plans to connect the Hudson River to Lake Erie, settle Ohio, and build steamboats. The Erie Canal for example, was not finished until 1825, 26 years after his death. It cost $7 million to build, a fortune at that time, but it cut the cost of shipping items from Buffalo to Manhattan by 90%. It paid for itself in ten years over in tolls collected, not to mention the development and trade it engendered.

Repeatedly through history we see that building infrastructure not only improves the standard of living through greater conveniences, but leads to increased general prosperity. The transcontinental railroad connected the railhead at Omaha, Nebraska to Sacramento, California in 1869. It cut travel time from the east coast to the Pacific from about five months to six days in an instant. Within a decade of completion, $50 million worth of goods had been shipped cross-country. Asian products reached the cities of the Northeast, Western settlers had access to Eastern finished goods, and the vast mineral resources of the heartland were available for exploitation. It was the internet of its day; it allowed ideas to travel quickly from one end of the U.S. to the other.

The transcontinental railroad was echoed later by the Interstate Highway System, which was initiated in 1956 and which is still not complete today. This led to the dominance of the automobile, and the exodus from the inner cities to the suburbs. Jobs and residences shifted outward. Massive economic development sprang up along

the highway corridors. Railroads were largely abandoned for the now-cheaper roadways.

Unfortunately, the last few decades have seen very little investment in infrastructure in the U.S. In response, the American Society of Civil Engineers (ASCE) began grading the state of the nation's infrastructure in 2001 to raise awareness of the silent crisis. They determined that every area from aviation to roads to wastewater needed serious attention. The problems in the electric grid were not addressed, among other areas, leading to the major blackout in 2003. In ASCE's latest report card issued in 2005, the society determined that the U.S. has made little progress, earning a collective “D.” To repair all the areas of infrastructure to good condition or a grade of “B” would cost $1.6 trillion over 5 years time.

I was glad to see that President-elect Barack Obama has plans to make infrastructure repair a high priority in his administration. He proposed an infrastructure “bank” to spend $60 billion over the next ten years. He also supports a $25 billion Jobs and Growth Fund to replenish the Highway Fund that has been depleted by Congress, and to compensate for spending cuts by financially strapped local and state governments.

Unfortunately, $85 billion is a tiny fraction of the urgent need. Fifty years ago, the U.S. spent a much higher percentage of its budget on infrastructure. Now hundreds of billions of dollars are going to bail out banks, GSEs, insurance companies, and even the carmakers. Most of that deficit spending won't save jobs or stimulate the economy because it's going to unwind trillions in derivatives or strengthen the balance sheets of frail banks. Obama himself voted in favor of the $700 billion Troubled Asset Relief Program which will enrich bankers but won't repair a single levee or bridge.

Even if the funds are available, bureaucratic fumbling can prevent effective action. This is exemplified America's inability to fix the areas devastated by Hurricane Katrina in 2005. In Lousiana, the state government has delayed disbursing most of the $750 million in house elevation grants. Some families still live in government trailers as they have no money to repair their homes, and areas such as Terrebonne Parish are waiting for the Army Corps of Engineers to rebuild levees . In contrast, 18 months after the massive earthquake in Kobe, the Japanese government spent the equivalent of $113 billion to fix buildings, port facilities and other infrastructure.

Another obstacle to improving America's infrastructure is the current credit crisis. Municipal bonds have been sold by hedge funds and others seeking liquidity, so yields are up substantially year-over-year. This sharply increases the cost of financing large public work projects. Banks are increasingly unwilling to lend despite the large influx of capital, so world trade in commodities needed to build infrastructure is freezing up. The Baltic Dry Index, a measure of shipping costs, has dropped 80% this year alone as few firms in the maritime sector can find funding.

Hopefully, Obama can reverse the crumbling infrastructure trend. Instead of rebuilding and replacing its aging infrastructure, the U.S. is literally dismantling and selling itself to China to pay for manufactured goods. America's major exports to that nation are wood pulp and metal. The Chinese often buy loads of unseparated scrap metal and process it themselves since shipping and labor costs are so cheap. These exports are effectively subsidized by the trade of high-value goods brought from China to the U.S. and is not sustainable.

I call the phenomenon of a developed country exporting raw materials and importing finished goods reverse

mercantilism. Warren Buffett has warned against selling off the nation's assets to compensate for the overindulgence in imports. He believes that if Americans don't change their behavior, they could become a nation of “sharecroppers” working for foreign owners.

Unfortunately, the U.S. government has not heeded Buffet's wise advice. Major pieces of infrastructure have been sold or leased to foreign companies and this trend doesn't seem to be reversing. For example the Indiana Toll Road was leased in 2006 for 75 years to Cintra-Macquarie, a Spanish-Australia consortium, for a payment of $3.8 billion. An Australian company bought the U.S. half of the tunnel between Detroit and Windsor, Canada in 2001.

Many key pieces of infrastructure have already been acquired by foreigners without much fanfare. In 2006, there was a huge furor in Congress over Dubai World Ports, a corporation owned by the government of the UAE, acquiring operations at six major U.S. ports. However, there was little attention paid to the fact that a British company had previously run these operations before the merger with Dubai World Ports. In fact, about 3/4 of the terminals in American ports are already managed by foreign companies.

Even your tap water is not immune. A French company, Veolia Water, serves over 600 municipalities in the U.S. Earlier this year, the corporation signed an agreement to design, build and operate Tampa's expansion of their water treatment facility.

Government officials claim that selling roads or other projects will save the taxpayers money because they will not have to pay to maintain or repair these aging structures. The private corporations are more willing to raise fees than politicians since they don't have to get re-elected. However, the citizens have frequently already paid for the projects through taxes, tolls, bond financing or other mechanisms, and these assets are sold off at below-market rates. Not only do public coffers lose out on toll revenue, contracts may contain restrictive clauses that don't allow the government to “compete” and build new infrastructure as needed.

I am not opposed to private companies providing services to states and localities. Frequently, the private firms are cheaper and more efficient than their bureaucratic counterparts. However, careful oversight by citizens is needed so that public assets are not sold off to favored corporations for pennies on the dollar. This is an insidious process that Catherine Austin Fitts, former Assistant Secretary of Housing under the first President Bush calls “piratization.” Now that the tables are turned and foreigners are investing in America, I don't want their companies exploiting the U.S. taxpayer. In addition, it's a security issue for non-domestic firms to own so much of America's critical infrastructure. These corporations, many of which are arms of foreign governments, do not necessarily care about the safety and budgets of American citizens.

I would argue that no nation ever became more prosperous by selling off its assets in order to solve a short term budget crisis. In fact, the U.S. became the richest country in the world by developing its infrastructure. From

the Erie Canal to the popularization of internet broadband, the buildout of infrastructure has created jobs, improved living conditions, facilitated trade, and opened up new economic opportunities for people.

On the flip side, the lack of investment in infrastructure will erode these gains and lead to senseless loss of life as we saw so tragically in the Hurricane Katrina disaster. America needs to seriously study and address the crumbling bridges, dams, tunnels, and other structures that have exceeded their design life. While the $1.6 trillion advocated by

the ASCE to fix the problems is considerable, Joseph Stiglitz estimates it's about half what the U.S. will spend on the wars in Iraq and Afghanistan.

Senator Obama plans to move all troops out of Iraq by the summer of 2010 which will save billions of dollars per day. However, he intends to add thousands of soldiers to Afghanistan, and will likely pursue the “War on Terror” with vigor, including strikes on Taliban bases in Pakistan.

While war stimulates economies, it does so at the cost of destruction. New construction would at least build jobs and wealth, even though it would increase the deficit in the short term. Obama seems quite willing to borrow money and increase government spending, and the alternatives seem much worse than repairing infrastructure. In fact, I wouldn't be surprised if the President-elect renewed the Works Progress Administration in 2010 to combat what I predict will be an economy sliding into depression.

by Jennifer Barry
Global Asset Strategist

Copyright 2008 Jennifer Barry

Hello, I'm Jennifer Barry and I want to help you not only preserve your wealth, but add to your nest egg. How can I do this? I investigate the financial universe for undervalued assets you can invest in. Then I write about them in my monthly newsletter, Global Asset Strategist.

Disclaimer: Precious metals, commodity stocks, futures, and associated investments can be very volatile. Prices may rise and fall quickly and unpredictably. It may take months or years to see a significant profit. The owners and employees of Global Asset Strategist own some or all of the investments profiled in the newsletter, and will benefit from a price increase. We will disclose our ownership position when we recommend an asset and if we sell any investments previously recommended. We don't receive any compensation from companies for profiling any stock. Information published on this website and/or in the newsletter comes from sources thought to be reliable. This information may not be complete or correct. Global Asset Strategist does not employ licensed financial advisors, and does not give investment advice. Suggestions to buy or sell any asset listed are based on the opinions of Jennifer Barry only. Please conduct your own research before making any purchases, and don't spend more than you can afford. We recommend that you consult a trusted financial advisor who understands your individual situation before committing any capital.

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