Rising Interest Rates Will Soon Make Needed Infrastructure Repairs More Costly

Rising interest rates could mean the window to fix infrastructure on the cheap is closing
Barry Ritholtz,
Washington Post, July 12 2013

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.

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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.