If you’ve been disappointed by the U.S. economy’s progress since the financial crisis, get used to it. This is probably as good as it gets for a while. Years of cheap financing plus trillions of dollars in additional liquidity has failed to produce a strong rebound.
The reasons are mostly structural. The workforce is getting older. Productivity growth is slowing. Consumers aren’t tapping their home equity the way they have in previous decades. And, perhaps most important, businesses aren’t investing in new capital stock amid concerns about global demand. Moreover, the soaring debt burden from the past seven years has become an increasing drag on the economy.
These trends point to a very real threat of what former Treasury secretary Larry Summers has called secular stagnation. So, what do we do about it? Monetary stimulus has been exhausted, and gridlock in Washington makes tax reform, regulatory reform and substantive policy action unlikely. The best answer, in our view at Cohen & Steers, harks back to the Marshall Plan, which helped repair Europe’s economy after World War II by rebuilding its infrastructure.
According to the McKinsey Global Institute, $57 trillion in infrastructure investment will need to be spent globally through 2030 — more than the value of all infrastructure assets in existence today. This works out to nearly $4 trillion in spending per year, or roughly the annual output of Germany’s economy. Despite this enormous need, U.S. public investment has been largely absent. Fifty years of declining infrastructure spending relative to GDP has led to crumbling bridges, congested roads, an antiquated power grid and deteriorating services that are costing us more to maintain each year and are eating into productivity.
How bad is it? A 2013 study by the American Society of Civil Engineers graded the condition of U.S. infrastructure an appalling D+. When you’re building bridges underneath other bridges just to catch falling debris, it’s time to do something different.
The good news is that the time may be ripe for an infrastructure push. In its 2014 World Economic Outlook, the International Monetary Fund pointed out that more public infrastructure spending is vital to boosting the global economy. The report finds that if done efficiently, $1 of infrastructure spending can drive as much as $3 in output. And when financed at low interest rates, the added cost can be offset by even higher tax revenues, helping to reduce the economy’s debt-to-GDP ratio. In essence, the stimulus can pay for itself.
Two main hurdles have stood in the way of getting this plan off the ground, however: project approvals and the source of funding. With regard to the former, we believe deteriorating service quality and headlines about infrastructure failures will push government agencies to begin fast-tracking certifications for critical infrastructure projects. The question of who pays for it may prove to be the more daunting challenge. In the present political climate, the reality is that much of this investment will need to come from the private sector. Fortunately, the appetite for infrastructure assets has never been stronger. Private infrastructure funds are raising record levels of capital, while total assets dedicated to global listed infrastructure strategies have experienced exponential growth over the past decade.
As policymakers come to terms with the need for more private sector involvement, we expect to see additional programs and incentives for investment. A prime example from recent history is the government’s support of master limited partnerships. Designed as a tax-efficient vehicle for delivering income to investors, MLPs have raised hundreds of billions of dollars in recent years for new oil and gas pipelines, gathering and processing systems and storage facilities. These investments have played a vital role in the success of the North American energy renaissance while also driving economic growth.
After decades of underinvestment, we believe an infrastructure boom could be a win all around. The economy gets a jolt of demand to lift it out of the doldrums, the public gets desperately needed improvements in service quality, and investors get a vast menu of attractive opportunities backed by hard assets.
As for the U.S., let’s hope it gets at least a passing grade on its next infrastructure report card.
Michael Penn is senior vice president and macro strategist at Cohen & Steers in New York.
