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Is Infrastructure Spending a Good Idea When You are Broke?

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infrastructureMany developed market politicians are talking up infrastructure spending as a way to generate an economic stimulus, but here in The Wall Street Journal, Phil Gramm pokes some holes in the idea that building highways-to-nowhere will get economies out of their rut. In fact, he likens the push to the same policies that led the world into global recession in 2007-08.

More government spending, particularly for infrastructure projects, is the mantra in Washington and other capitals. But two factors stand in the way. First, the governments of most developed economies are broke. According to their own government figures for 2015, the total public debt of European Union members as a share of GDP is 85%, U.S. debt is 101% and Japanese debt is 229%. Second, the rates of return on infrastructure investments are generally low. As European Central Bank President Mario Draghi said in an interview last October, “There aren’t many public investments with a high rate of return.”

With infrastructure spending so popular and government coffers so empty, the appeal of subverting private wealth to serve government objectives has become even more attractive. The latest scheme to do so is the European Union’s attempt to “incentivize” more insurance investment in public infrastructure as part of its “Solvency II” regulatory regime. In January the EU lowered capital standards for infrastructure investments by as much as 40% but cited no major errors in the old risk model or any new empirical evidence to justify the change. Instead, the EU repeatedly emphasized its need for “€2 trillion in [infrastructure] investment” by 2020.

The U.S. seems set to follow Europe’s lead. The Treasury Department’s new Federal Insurance Office released a report last year encouraging “state insurance regulators to assess the current [risk-based capital] approach and explore appropriate ways to increase incentives for infrastructure investments by insurers.”

Haven’t we seen this movie before? Didn’t lowering capital standards in the mortgage industry have a bad ending? Remember the subprime-mortgage meltdown and the 2007-08 financial crisis?

Private vs Public: Infrastructure Spending

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West (RIP JB) and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.
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