Last week, the news broke that infrastructure spending had been cut from the stimulus bill to make way for tax cuts. Congressman Jim Oberstar (D-MN), chairman of the House Transportation Committee, first shed light on this tradeoff — transit funding for tax cuts, essentially — in a speech to the US Conference of Mayors.
The cuts don’t square with a number of economic and political realities. Obama and his economic advisers are on the record voicing strong support for infrastructure spending, especially as a way of creating jobs; public infrastructure spending has near unanimous support from Americans, according to conservative pollster Frank Luntz; politicians of all stripes want to reduce dependence on foreign oil, and transportation initiatives are a big part of that; and public transit systems are facing dangerous budget shortfalls across the country.
Why, then, is transportation funding getting short shrift?
Here’s my best guess: Wall Street wants it that way.
On Wall Street, infrastructure privatization is the next big thing. It works like this: governments – city, state, and federal – sell off public assets like highways and airports, usually through long-term leases, to private entities like Morgan Stanley or the Carlyle Group. These private players finance the infrastructure deals through bond sales to investors.
High levels of stimulus spending on transportation infrastructure would make it harder for Wall Street to buy off your roads, bridges, and airports at rock-bottom prices.
A few recent press reports indicate that Wall Street is ramping up its push to privatize infrastructure. Last Wednesday, a group of Wall Street firms released a report saying that they could offer a “private stimulus” for the nation’s transportation infrastructure. From a Wall Street Journal article on the report:
A coalition of banks and private-equity firms is pushing for a greater role in reshaping the nation’s infrastructure, hoping to capitalize on government budget deficits and a dearth of funds for transportation projects.
In a report due out Wednesday, a group including Morgan Stanley, Credit Suisse and the Carlyle Group says $180 billion of private capital is available for investment in highways, airports and other transportation infrastructure. The report says this money could help create millions of jobs, boost economic growth, reduce travel congestion and free up government dollars for other priorities.
In other words, Wall Street wants to finance a new infrastructure boom the same way it financed the real estate boom.
Considering the way that last boom went, it seems like poor timing for Wall Street to campaign for control of public assets. And given that Wall Street isn’t so popular with the American public right now, it seems unlikely that politicians would align themselves with its latest financial engineering effort. Right?
Wrong. The same day that the Wall Street coalition plugged its infrastructure plans, Secretary of Transportation Ray LaHood echoed their message, telling his Senate confirmation panel that he favored finding private solutions to the country’s infrastructure problems. His comments were reported in a Wall Street Journal article by Chris Conkey, the same reporter who copied the press release wrote the article reporting on the Wall Street coalition’s plans for a private stimulus.
Speaking at his Senate confirmation hearing, former Republican Rep. Ray LaHood of Illinois said the widening budget deficits at the federal and state levels should lead government officials to take a closer look at allowing private investors to build, operate and maintain new toll roads and bridges.
“There’s not going to be enough money,” Mr. LaHood told the Senate Commerce Committee. “I think we do have to think outside the box.”
He’s right: there isn’t enough money for transportation infrastructure. But a big part of the problem is low levels of funding in the stimulus package.
Wall Street has plenty of other well-connected allies in this fight. Obama’s Chicago, led by Mayor Richard Daley, is at the forefront of infrastructure privatization. Chicago’s pols have been selling off everything from parking meters to airports in recent months.
Upon returning from his trip to the inauguration, Daley made a strong pitch for infrastructure privatization at every level of government, echoing Lahood’s words:
“If they start leasing public assets — every city, every county, every state and the federal government — you would not have to raise any taxes whatsoever. You would have more infrastructure money that way than any other way in the nation,” Daley said. “But, that is thinking outside the box and very few governments ever, ever think outside the box.”
If Daley needs help thinking outside the box, he can always go to his brother Bill, former Secretary of Commerce, who was a board member of the Obama Transition Economic Advisory Board and is midwest chairman of JP Morgan Chase. Or Bill’s son William, a lobbyist for Morgan Stanley.
In recent months, Daley’s solution has proven seductive for many state and local governments, despite the fact that Wall Street control of roads, highways, and transit systems is not terribly popular with the American people (I’m guessing). From a Reuters article last August:
Cash-strapped U.S. state and city governments are likely to sell or lease more highways, bridges, airports and other assets to investors desperate for stable returns after being frazzled by the credit crisis.
The trend is set to pick up speed given worsening budget deficits in state capitals and city halls nationwide.
Of course, if the stimulus geared funding towards transportation infrastructure spending, state and local governments would be less likely to sell off these assets to Wall Street investors. But that funding has been cut substantially, over the protests of Congressman Peter DeFazio of Oregon and others.
DeFazio has blamed Larry Summers for anti-infrastructure bias. But I’m guessing that Summers is just doing what he does best: pleasing his friends in finance.
I’ll have more on this over the next few days.