Thursday, September 1, 2011

The National Infrastructure Bank Proposal

Give credit where credit is due. According to an Associated Press report published on Yahoo! news, President Obama wants to make a "national infrastructure bank" part of a job creation program. ("Infrastructure Bank Could Be Part of Jobs Program," AP, 09/01/11) As the article opens, "A national infrastructure bank that would entice private investors into road and rail projects could be a major part of the jobs package that President Barack Obama hopes will finally bring relief to the unemployed."

Finally — an idea coming from Washington that we can support, at least in part. Give it a few tweaks, and we'll go for it, 100%. Perhaps the best part (aside from the fact that Obama wasn't waving that finger around — he really ought to practice in front of a mirror a couple of times to see what that looks like) is the recognition that the private sector could finance "road and rail projects," and presumably bridges and other stuff.

So far, so good. What we understand from reading the article and an earlier press release from Ohio Senator Sherrod Brown's office, however, is that the private sector investors will be putting up money for the projects, but the government will own them. This violates a fundamental law of property, that whoever pays for something owns it.

It sounds, however, as if the arrangement might go something like this: private investors put up the money to fund the infrastructure bank's projects. The bank provides financing to pay for new roads 'n stuff. From somewhere (it's not clear where) the bank gets the money to pay interest to the investors, and eventually pays them off, again, from an undisclosed source.

We can understand why Obama and Kerry (who seems to have come up with the plan) are a little leery of talking about the source of funding to pay a return to the investors and ultimately to retire the investment. We assume, of course, that this won't be a return to the rather scurrilous Medieval practice of "beneficia," or "forced loans" that, more often than not, were never either repaid or yielded any return to the "lender." That means that eventually the taxpayer is going to have to come up with the money to pay the interest and principal on the loans.

Translation: Spending is going up. Taxes are going up. The result? Obama's rating in the polls will go down.

We can't support Obama for this and a vast number of other reasons. We don't wish him ill, however. He's got one heck of a hard job to do — and he might finally be appreciating that fact. That's why he might be coming around to the realization that he just might need something new to replace the warmed-over Keynesianism that's ruining the United States and virtually every other country in the world. All it needs is for someone to open the door so that we can give him a few suggestions. Suggestions like —

Bravo! Make it a private sector initiative. That's great! But why limit it only to people who have piles of money? What's wrong with the rest of us getting a piece of the action?

Well, for one thing, if the government is going to own the infrastructure, there's no way ordinary people can get in on it.

We can solve that problem, however, rather easily. Make every citizen an owner of the infrastructure. After all, the idea is that the government owns it on behalf of the people. If that's so, why don't we just own it directly? Too complicated? Have you ever seen the capital structure of, e.g., AT&T? They have to keep accurate and up-to-date lists of shareholders, including how many shares, what kind of shares, different dividend rates, so on, so forth. It's pretty complicated.

So do it this way: give every citizen a single, no cost, non-transferable, fully participating and voting share in the new infrastructure. With only one class of shares, and one share per person, that's pretty easy to track. You'd have to create a private sector for-profit corporation to own all the infrastructure, but you're already talking about a new government institution to finance it, so why not a new private sector institution to own it?

Now — let's talk about that national infrastructure bank concept. It sounds like a good idea, but maybe we can make it better. Keeping in mind the rule of property that whoever pays for something owns it, let's assume that, if somebody owns something, he or she must have paid for it. Doesn't it make sense, then, that the institution that owns the infrastructure should pay for the infrastructure? If we set up a new private sector institution to own the infrastructure (and ensure that every citizen owns that institution), do we really need a national infrastructure bank? Why reinvent the wheel?

The fact is that you only need a national infrastructure bank if the government is going to own the infrastructure on behalf of the people, not if actual citizens are going to own the infrastructure directly through a for-profit corporation.

But wait! Don't you need the national infrastructure bank to finance the infrastructure?

Actually? . . . No. That's the same as saying, don't you need the taxpayer to fund government spending? Well, yes — but remember: this wouldn't be government spending. The taxpayer wouldn't be picking up the tab.

Who would finance the infrastructure? If the for-profit institution — call it a "National Citizens Land Bank" (infrastructure is fixtures on the land, so the for-profit institution might as well take title to all government-owned land, as well) — is going to own the infrastructure, then, obviously, it should finance it.

How?

The commercial banking system and the Federal Reserve were, believe it or not, invented to do just that — finance capital projects that will pay for themselves by creating money backed by the present value of the capital project. (If you want the theory behind this, go back and read the previous 800+ postings on this blog.) The Federal Reserve was never supposed to finance government spending. No wonder Ron Paul wants to shut it down. We say, don't shut it down. It's an essential tool. Just stop using it the wrong way. If you were using your hammer to hit yourself on the head, would you say that not hitting yourself on the head meant that you couldn't use the hammer to hit a nail on its head?

This method of finance (described in Harold Moulton's The Formation of Capital) could work very easily, and all without costing the taxpayer — as taxpayer — one cent. The National Citizens Land Bank can finance all the feasible infrastructure projects it wants, and very quickly, too, by going to local commercial banks and getting "interest free" (but not "cost free") loans. The commercial bank doesn't have to worry about using its own money for this — this is new money, backed by the present value of the infrastructure. The commercial banks then take the loans and "sell" (rediscount) them at their local Federal Reserve branch.

The Federal Reserve creates a demand deposit (or prints currency, it doesn't matter) for the commercial bank that is equal to the rediscounted value of the loan. The commercial bank then creates a demand deposit or hands over the currency to the National Citizens Land Bank, which uses the money to build the infrastructure.

Once the infrastructure is finished and put to use, the National Citizens Land Bank starts collecting tolls and user fees from the people or companies that use the infrastructure. (Remember: we said that the taxpayer as taxpayer wouldn't pay for this, but somebody could be a user of the infrastructure and thus incur a user fee or toll.) This revenue is used to repay the loan extended to finance the building of the infrastructure, maintenance and administrative costs, and, if there's any profit, is paid out as a dividend to every citizen-owner. Oh, yes — give the National Citizens Land Bank the same sort of tax status as a 100% S-Corp ESOP, i.e., no corporate income tax, but anything paid out to the citizen-owners is taxed as regular income.

As the loan is repaid, of course, the money is cancelled, and full title turned over to the National Citizens Land Bank. In this way infrastructure can be financed without taxpayers being on the hook. Further, since new money is not created unless a project has a present value, the new money is backed by an asset that pays for itself, rather than by government debt for which the taxpayer is obliged to fork over.

There are many refinements that could be added to this, giving the politicians something constructive to do, i.e., figure out ways for citizens to become owners and make some money, rather than how to spend taxpayers' money. Why, for example, have just one Citizens Land Bank? Why not one for each state, or maybe even county? What about only subcontracting with construction companies that have significant — and meaningful — worker ownership? Different management contracts for infrastructure owned by local, county, state, and national Citizens Land Banks?

All this can be figured out later. The important thing is not to get locked into doing something just because you've always done it that way. Maybe things are in such bad shape because we've been doing it wrong. Maybe it's time to start doing it right.

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