Rising interest rates could mean the window to fix infrastructure on the cheap is closing
Barry Ritholtz,
Washington Post, July 12



Thanks to the Federal Reserve’s zero interest rates and quantitative easing policies, borrowing costs are near generational lows. The costs of funding the repair and renovation of America’s decaying infrastructure are as cheap as they have been since World War II.

But the era of cheap credit may be nearing its end. And thanks to a dysfunctional Washington, D.C., we are on the verge of missing a once-in-a-lifetime opportunity.

Back in an October 2011 column, we discussed the many ways repairing our fraying infrastructure could help the United States’ economy. Our transportation grid has gotten old and out of shape. The interstate highway system is in disrepair. Bridges are rusting away, with some collapsing now and then. The electrical grid is a patchwork of jury-rigged fixes, vulnerable to blackouts and foreign cyberattacks. The cellular network of the United States is a laughingstock versus Asia’s or Europe’s coverage. Two years later, none of that has really changed.

The argument then was that a major infrastructure repair program would create jobs, keep us competitive with China and improve the security of our ports, energy facilities and electrical grid. And as a fantastic bonus, borrowing costs for funding these repairs were at the lowest levels in a century. Imagine the least costly way to improve and repair our infrastructure imaginable, and that was what was available to us: the deal of the century.

All of the above remains true — except the bit about ultra-low rates. They have begun to move higher as markets anticipate the end of the Fed’s quantitative easing. The most widely held U.S. Treasury, the 10-year bond, was yielding about 2.6 percent late last week — a full percentage point higher than in early May. The 30-year bond, which we tend to think of as the cost of funding infrastructure that will last for decades, has risen almost as fast.

As a nation, we still have a window to take advantage of these historically low rates. However, that window is beginning to close, and we need to act sooner rather than later.

As D.C. dithers, the rest of the economy has already jumped at the chance to put this cheap credit to work. The corporate sector has taken advantage of low rates to refinance its debt. Today, publicly traded U.S. companies have the cleanest balance sheets seen in decades. It is in no small part a driver of the stock market rally that began in March 2009.

Households have also taken advantage of low rates. Families with a reasonable income and a half-decent credit rating should be refinancing their consumer debt, especially home mortgages. And the data show that many of them have been.

That leaves Uncle Sam, along with the states and municipalities, as the odd men out of the debt refinancing boom. Rather than waiting for bridges to collapse to do expensive emergency repairs, we should proactively be upgrading and improving the rest of our infrastructure. We should be refinancing whatever debt we can while rates are still low.

What can we do as a nation to take advantage of these interest rates before they return to normal? Choose your favorite part of America that can be upgraded:

● Our electrical grid consists mostly of wires strung between wooden poles, which may have been innovative in 1850 but is somewhat past its sell-by date today. After Hurricane Sandy, much of New Jersey, Long Island and Connecticut lost electrical service for two weeks. The entire grid needs to be hardened, upgraded against cyberattack — and buried underground.

● We can make our road system “intelligent” by using sensors and software to move traffic more quickly and efficiently than the current “dumb” system does. The productivity boost and fuel savings make this a big return on investment.

● Bridges that are well past their life expectancy should not simply wait to fail. We should be actively replacing these. The alternative is waiting for random events — like the truck crash that caused the Washington state Skagit River bridge collapse — to cause a disaster.

● The United States’ cellular network is a decade behind Europe’s and Asia’s coverage and reliability. Mandate better minimum service requirements and make available cheap financing to wireless providers to do so. We can do the same with broadband as well.

● The interstate highway system has been one of the lasting legacies of the Eisenhower administration. It is time for a full upgrade of this economic multiplier.

The United States once enjoyed what venture capitalists like to call “first mover advantage.” We innovated in these areas and were often the first to deploy these infrastructures and technologies. By virtue of being first, our systems tend to be older and in greater need of repair than in most of the world. Not bringing them up to date leaves us at an economic disadvantage vs. the rest of the world.

We do not want to miss the historic opportunity to finance projects at unusually inexpensive rates. Indeed, dysfunction in D.C. has already impacted state and municipal financing vehicles like the Build America Bonds. Sequestration has eliminated most of their special tax credits, and their usage as a financing vehicle has slowed significantly. It is not surprising that the public works projects that these were funding have fallen off dramatically.

If we fail to take advantage of this once-in-a-century opportunity, future generations will look back at us with a mix of disgust and anger. They will wonder how we let such a golden opportunity slip by and will think of us as “the idiot generation.”

And you know what? They will be right.


Ritholtz is chief executive of FusionIQ, a quantitative research firm. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture. Follow him on Twitter @Ritholtz.

Category: Fixed Income/Interest Rates, Taxes and Policy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

30 Responses to “Rising Interest Rates Will Soon Make Needed Infrastructure Repairs More Costly”

  1. MaryAnn5 says:

    Drive around Texas and you’ll see that construction is happening on a large scale . Waiting for the Federal government to put together a national plan is a lesson in futility, IMO. Each state needs to put together a plan that will address their immediate needs and sell it to their constituents and their legislators.

    Our nation has three electrical grids: the Eastern, the Western and the Texas grid. They all need to be upgraded. Lack of expansion and upgrade is due in large part to fed regs. Is coal going to be used 10 years from now? what about availability of domestic natural gas? will Keystone be completed? the list goes on and on. So many unknowns because of a dysfunctional Washington. This failure to lead impacts business decisions and the nation’s infrastructure continues to weaken.

  2. Pennsylvanian says:

    Two suggestions:
    1) Construct 4 quadrant gates at railroad crossings in the US. Prevents accidents, allows freight to travel faster, doesn’t require the purchase of additional right-of-way, and environmental impacts are benign.
    2) Remove public streetlights from the grid by adding solar panels. Solar powered public lights – for both roadways and streetscapes, are already being implemented on a limited basis across the country. Again, no additional right-of-way need be acquired by the public and environmental impacts are benign.
    I suppose these would be upgrades and not repairs, but are worthy uses of public funds with substantial and immediate returns on investment.

  3. Lyle says:

    2 of the areas cited are private or mostly private, The electric grid and the celluar network. For these areas at least if the current interest rate environment does not make additional investments attractive, then it suggests that other factors than interest rates are in control. Of course the real question is, why should borrowing be needed for any of the issues, why not pay now. After all infrastructure is an ongoing issue, and soon if you borrow it you will pay more per year in debt service than the current investments would yield.

    • Cellular Network relies on Licensed Spectrum — changing that would require a rule change (Want to renew your license? Great, here are the minimum requirements you must have in place, here is the credit line for it, get hopping!)

      Electric grids far less private than you imagine — they use government eminent domain and easement to run lines, large portions were built or subsidized by States or Feds, and the States regulate license power companies.

      Why not pay now? For the same reason most people do not write a 1 time check for a car, house, college, etc. Its a long term investment that pays back over time, and it makes sense to finance it that way.

      • rd says:

        But the funding comes back to rate payers, not out of the federal general fund. Until people’s lights don’t come on, water doesn’t come out of the tap, they can’t make cell phone calls, etc. the rate payers typically refuse to believe there is an issue.

        Out of sight; Out of mind.

  4. Robert M says:

    I agree w/ everything you said but your final two paragraphs:

    “f we fail to take advantage of this once-in-a-century opportunity, future generations will look back at us with a mix of disgust and anger. They will wonder how we let such a golden opportunity slip by and will think of us as “the idiot generation.”
    And you know what? They will be right.”

    The reason is we, as a populace, are not angry now. We are resigned to letting to political parties representing essentially the same people continue to glom all the profits and socialize all the risks to the detriment of the nation. Both parties know that doing these simple infrastructure projects means that one knowledge and two, a better life through knowledge, becomes more available to everyone. It goes so far as to make even the case for national security – protecting the power, water and sewage grids – as a reason to do it irrelevant.

  5. Petey Wheatstraw says:

    2012: “You didn’t build that.”

    2030: But WE should have.

    Isn’t it a bitch contemplating, in real time, the advent of the New Dark Ages?

  6. Pacioli says:

    The main point is only relevant if REAL rates rise. Even if nominal rates are on the rise, real rates are not. Take a look at the 5Y5Y forward implied rates: http://goo.gl/ypILV

    Real rates expectation have actually collapsed recently, not risen.


      You may want to go read yesterday’s missive, The Narrative Fails

      • Pacioli says:

        I did read it, indeed. I am an avid reader of Mr. Roche.

        What I am saying is in exact agreement with the missive. I.e. ‘The Narrative’ of hyperinflation, surging yields, gold, etc. is indeed all wrong.

        Any rise in rates will be moderate and muted, amid the massive private sector debt deleveraging.

  7. Anonne says:

    It would have happened by now if we had elected a Republican to be president. They don’t mind borrowing and spending when they’re in power.

    I’m sorry to say but I don’t think there will be a fix until at least 2022; after the next Census, where hopefully there will be a Democratic realignment that breaks Republican gerrymandering and allows the Democrats to take control of the House of Representatives.

    • rd says:

      They borrow and spend, but not on infrastructure or social services. Instead, it is tax cuts, subsidies for businesses, and wars.

      • MikeG says:

        When Republicans are in power, there’s always lots of money for giveaways to their cronies (tax cuts, corporate subsidies, no-bid contracts), and an oversize Punishment State (military, cops, prisons, border patrol, NSA).

      • 873450 says:

        Reagan proved deficits don’t matter when GOP holds the White House.

  8. willid3 says:

    its the same reason that we can’t seem to get past the spending roads,. that were started back in the 1950s. when we were a much smaller country and less affluent too.

    we have no vision. no real care about the future (the party that spouts of the most about really doesnt care).

  9. slowkarma says:

    While I think a lot of politicians are irresponsible, I don’t think they are idiots. Okay, a few are. But I think both Democrats and Republicans see the major problem facing the US is the funding of entitlements — because however this eventually breaks (higher taxes or entitlement cuts) there’s going to be a lot of financial stress, and the possibility that a lot of political careers will end. For that reason, both parties are reluctant to talk about issues which involve huge amounts of additional spending, above what is needed for the entitlement programs. They *know* that we need to spend on infrastructure — everybody knows it — but the question is, who pays? Especially, who pays not far downstream, when Obamacare kicks in, when boomer retirements surge, and so on? One demonstration is the political dimension of the problem — the way the military contractors have spread themselves across the congressional districts, so cuts in even absurd military programs amount to cuts in employments across many congressional districts. We all know it’s wrong…but the politics make the problem almost intractable.

  10. maspablo says:

    People are brainwashed , gonna be hard to convince. Fred Smith gave a presentation this week (nice charts) http://www.businessinsider.com/fedex-economic-charts-2013-7?op=1.
    Hes no liberal.

  11. MidlifeNocrisis says:

    RE: (higher taxes or entitlement cuts)

    Not the only 2 choices in a country with it’s own sovereign fiat currency. Taxes don’t fund Federal government spending, and the US in not fiscally constrained as long as inflation is controlled. Inflation is likely “controlled” with falling or steady wages.

    The continuing relentless story about “entitlements” is greatly, greatly overstated.

  12. capitalistic says:

    Rising rates will make it more profitable for the private sector to buy infrastructure bonds….

  13. Booger Elvis says:

    A stupid question: Why couldn’t the FED create another lending facility (like they did lots of for the crisis), with low interest loans – like discount window low (since the TBTF banks get to use it), for the states to use exclusively for infrastructure projects?

    • DeDude says:

      For the same reason that states (except North Dakota) have not created their own banks (which could get the money from the Fed). Rich banksters make fat profits from being the middlemen of municipal bond issues. Any legislature that consider doing what North Dakota has done and save its people billions in borrowing costs, get bribed or bullied into dropping the issue.

  14. theexpertisin says:

    Didn’t our President proclaim infrastructure improvement as a primary goal of his 2008 stimulus plan?

    Shovel ready, he said seriously…later, with a sly grin.

    I am all for improving infrastructure. Ideas floated above are quite interesting. I am skeptical of lying politicians using infrastructure as a means to feather the nests of political cronies and the high six figure salaries of union boss fat asses.

  15. Crocodile Chuck says:

    ‘Why not pay now?’: because if infrastructure is designed and built properly, it should last 50+ years. Future generations can pay for what THEY use: inter-generational equity.

    • rd says:

      The baby boom generation didn’t build the infrastructure we are using today. Most of it was constructed when out parents and grandparents were the tax payers. As a result, the baby boomers have large been living off the previous generations’ investments without providing much of our own. Our children and grand-children will pay the price.

  16. Willy2 says:

    The Window of Opportunity to repair US infrastructure has already closed. It lasted from about 1994/1995 into 2008.

  17. [...] Remember my hope that infrastructure work might help the economy?  Rising interest rates may make that dream somewhat less than stellar [...]