Countdown to the Election: Infrastructure Spending

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Enabler of private-sector growth
The first presidential debate of the 2016 election season was held last week to much fanfare and record-breaking viewership. In her opening comments Secretary Clinton said she wanted to invest in the future, which includes jobs in infrastructure. In fact, that is one thing the candidates didn’t argue about, as both agree greater spending on infrastructure is needed. And that makes sense given how woefully neglected our nation’s infrastructure has been—and how positive it can be for the US economy going forward.

In 2012 the Department of the Treasury along with the Council of Economic Advisers published a report entitled “A New Economic Analysis of Infrastructure Investment.” The report advocated for greater infrastructure spending, but underscored that it’s not only the short-term benefits in terms of job creation, as Secretary Clinton focused on. Rather, it’s the long-term economic benefits to the country, especially the private sector.

The Treasury Department report cites research by David Aschauer and others that suggest there is a positive relationship between public infrastructure investments and private sector productivity. So the impact of infrastructure spending is not just short-term in nature, i.e., the creation of jobs, but it is longer term in nature, providing a public benefit that can last for decades. That makes sense given the impact that the New Deal’s Works Progress Administration (WPA) had on the economy in both the short and longer term.

The WPA’s outsize impact
The WPA was created in 1935 when the United States was in the midst of the Great Depression and it is arguably a model of how fiscal policy can directly reduce unemployment—if only temporarily—and create infrastructure benefits for decades to come. The WPA existed for just eight years but employed more than eight million people during its existence. These people were primarily involved in building infrastructure.

For example, LaGuardia Airport in New York, the Cow Palace in San Francisco and numerous high schools and highways were some of the projects built by the WPA. The WPA also built the Golden Gate Bridge and the Grand Coulee and Fort Peck dams. So not only were there short-term benefits in terms of an increase in employment, but there were long-term benefits in terms of infrastructure that enabled commerce to flourish and have lasted more than seven decades.

The Treasury report recognizes that not every infrastructure project is a worthwhile one that provides a return on investment. It argues that thoughtful investing is critical and advocates for a national infrastructure bank in order to “leverage private and other non-federal government resources to make wise investments in projects of regional and national significance.” Therefore a private infrastructure bank proposal, similar to the one that Secretary Clinton is proposing, could be beneficial because the private sector is often better able to discern those projects that will provide a greater return on investment.

America’s infrastructure grade: D+
There are so many areas in which to invest. In 2013 the American Society of Civil Engineers (ASCE) produced a report card on America’s infrastructure, giving it an overall grade of D+ and stating that $3.6 trillion was needed in investment by 2020. Needed infrastructure includes not only our highways, bridges and tunnels but electrical grid infrastructure, telecom infrastructure and water infrastructure.

In fact, drinking water infrastructure received a grade of D. In an updated report by the ASCE in 2016 entitled “Failure to Act,” the underfunding of drinking water and waste water infrastructure was a topic of focus. Interestingly, 8% of US community water systems provide water to 82% of the population, underscoring the need to update and secure the infrastructure—much of which is aging and decrepit.

What the candidates are proposing
While both presidential candidates understand the need for more infrastructure spending, their proposals are not exactly a magic bullet. Secretary Clinton plans to spend $275 billion on infrastructure; this would include a $25 billion national infrastructure bank and $250 billion in infrastructure grants. Mr. Trump, meanwhile, has stated that he will spend at least double that amount on infrastructure. But the needs are still much greater, as articulated in the ASCE report card. So while this is a start which should provide a needed boost in the short term, much more is needed to make a significant long-term impact.

In addition, we need to recognize that 1) Congress would need to go along with any infrastructure spending proposal, and 2) it could take time for infrastructure spending to have an actual impact on the economy. First, the legislation has to be agreed upon and passed in a budget-conscious Congress, and then there is the red tape such as environmental impact statements, etc. Several years ago, when President Obama proposed greater infrastructure spending, including an infrastructure bank, he included with it a memo to his executive department heads to expedite permitting and environmental reviews for high-priority infrastructure projects. He recognized that it was important to clear “the red tape that slows down too many construction projects.” We need to recognize that red tape can cause significant delays in the impact that infrastructure spending can have on the economy.

But the candidates’ infrastructure proposals are at least a start. So how do investors play this? Since infrastructure is one area that both candidates can agree on, investors could begin to increase exposure now. We see opportunity in infrastructure stocks, some commodities and infrastructure debt. In particular, infrastructure debt offers substantial revenue streams and a low correlation to other asset classes. So regardless of which candidate comes out on top in November, infrastructure could be a winner.

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About the Author
Kristina Hooper is the US Investment Strategist and Head of US Capital Markets Research & Strategy for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law, a master's degree from Cornell University and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.

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