If Only There Were An Entity That Could Create Money And Use It To Fix The Broken Things

Add this to ‘The Ongoing Suburban Fiscal Crisis’ files.

The New York Times has an article about the ongoing attempts to privatize U.S. infrastructure using private equity firms (boldface mine):

The Times analyzed three deals in which private equity firms have recently run a community’s water or sewer services through a long-term contract. In all three places — Bayonne, and two cities in California, Rialto and Santa Paula — rates rose more quickly than in comparable towns, which included both publicly and privately run water systems. In Santa Paula, where Alinda Capital Partners controlled the sewer plant, the city more than doubled the rates. A fourth municipality, Middletown, Pa., raised its rates before striking a deal.

Now, some of these cities are trying to take back their water. Missoula, Mont., wrested away its water system, which had been owned by the Carlyle Group. Apple Valley, Calif., whose waterworks were also owned by Carlyle, has filed a similar lawsuit. Santa Paula bought its sewer plant from Alinda last year.

Of course, there’s a reason many communities look for private partners to begin with: Their water systems are in poor shape. Budget shortfalls and political mismanagement can represent a real threat to both infrastructure and citizens...

One of the few things Republicans and Democrats can agree on is that the nation faces an infrastructure crisis.

In water infrastructure alone, the nation needs about $600 billion over the next 20 years, according to federal estimates. And yet federal spending on water utilities has declined, prompting state and federal officials to try to play matchmaker, courting private investors to fix what needs fixing.

For years, the Obama administration has been cheerleading public-private partnerships. In a statement, the White House said it backed them “when they are well structured, include strong labor standards, and when there is confidence that taxpayers are getting a good deal.”

During the presidential campaign, Mr. Trump’s team outlined a new plan to incentivize private investors to take on large infrastructure projects.

Wall Street has responded to the call to action. There are now 84 active financial infrastructure funds, according to Pitchbook, a private financial data platform, up 25 percent in just three years. Some belong to big banks like Goldman Sachs, but many are run by private equity firms.

“Across our country, we need solutions for infrastructure deficiencies,” said James Maloney, a spokesman for the American Investment Council, the private equity trade group. “Private equity serves as one of these solutions.”

Some critics are wary of expanding private investment in public infrastructure. Although cities may get cash up front in these deals, “there is no ‘free’ money” in public-private partnerships, says a 2008 Government Accountability Office report. Using roads as an example, the report observed “it is likely” that tolls will increase more on a privately operated highway than one run by the government.

But private equity has done wonders for early childhood development, so I’m sure nothing could possibly go wrong, amirite?

This is a result–a really bad one–of the ongoing fiscal crisis facing suburbs (and exurbs too!). They simply don’t have the tax base to pay for the services they provide and repair their now-old infrastructure:

Something that’s lurking in the background of the U.S. economy, and which will erupt with a fury in ten years or so is the need to replace suburban infrastructure: underground wires, pipes, and so on. This is something new that most suburbs, unlike cities, haven’t had to confront. A suburb that was built in 1970 is long in the tooth today, and time only makes things worse. No suburbs that I’m aware of ever decided to amortize the future cost of repairs over a forty year period–that would require an increase in property taxes. In fact, many suburbs never even covered the expenses of building new subdivisions, never mind worried about expenses decades down the road.

Worse, there’s a tax base problem. That is, the value of property per unit of infrastructure (e.g., the property tax base per square foot of water main) is much lower in the suburbs than it is in cities. Relatives who live in a wealthy suburb close to D.C. (homes go for $900,000 give or take) are in a subdivision with about 40 homes on 25 acres, with a rough property value of $45 million. In D.C., I live in a building assessed at a little over $50 million that covers a quarter of an acre (the population of these two groups is about the same). Once suburbs start having to repair their infrastructure, it’s going to get very expensive to live there (and that doesn’t even include the transportation ‘tax’ of suburban living). Keep in mind, the suburban development I’ve described is definitely on the high end of things–many places will be worse off.

This is an entirely predictable political problem–one which, as the NYT notes, Obama didn’t do very much to alleviate. There is a solution, however:

There is another option, but it’s one our current political dogma simply won’t countenance: deficit spending at the federal level. One doesn’t even have to go Full Metal Chartalist/MMT/MMR (though it helps!). The employment rate still is lousy and we have infrastructure needs. We could spend some money and fix this stuff. That does lead to the question of whether we should be subsidizing suburban sprawl even more than we do now. Can’t wait for that argument.

A wonkish joke-like-thing (not sure it rises to the level of an actual joke) is that the government is a pension and medical plan that also buys a lot of guns. It might be that we start to add ‘sewer builder’ to the list.

Trump might be the worst of all worlds: we’ll get deficit spending that largely enriches the wealthy, doesn’t fix much of our problems, and results in a further wealth transfer from households to corporations. And don’t count on Democrats to embrace deficit spending, even though they should. When it all goes to shit, deficit spending as part of the economic tool box will be discredited (again).

We’re really fucked.

This entry was posted in Bidness. Bookmark the permalink.