Economists Alan Blinder and Alan Krueger criticize President-elect Donald Trump's infrastructure initiative in a recent Wall Street Journal op-ed by focusing on the proposed 82 percent tax credit, calling it a scheme to enrich private equity investors. While it's a fine academic argument, in the real world most infrastructure projects take too long and return too little to attract private equity. Reasonable returns and timelines for infrastructure make this investment class ideal for direct investment by pension funds and insurance companies, investors with return expectations in the 6-9 percent range, and the willingness to buy and hold infrastructure assets for decades.
Blinder and Krueger cite the New Jersey Turnpike Authority as a model for investing in roads, because it can borrow money at a cost of 3.4 percent. There comes a point, however, where a state, or an Authority, reaches the limit of what it can borrow at such low rates, and then other forms of investment must be found. That's when toll roads, some privately financed, can enter the picture.
Moreover, there is infrastructure that need not be financed by public authorities. The electric grid is the best example. The U.S. grid is the largest privately owned network of infrastructure projects in the world. The National Academy of Engineering voted it the single greatest engineering accomplishment of the 20th Century. Everyone agrees that homes and businesses must have a robust, up-to-date, and uncongested transmission grid. But major additions and renovations to the grid take a decade or more to bring on line. Because the grid has never been built to facilitate interstate trade, being built instead largely within state boundaries, America's grid is balkanized and states do not trade with one another nearly as much as one would expect.
Our grid is aging. As cheap fossil fuel prices and decreasing wind and solar prices bring more and more manufacturing back to the United States, the grid is having trouble keeping up, thanks largely to cumbersome, antiquated permitting and an insufficiently entrepreneurial culture among the companies that built the grid and maintain it.
Transmission investment could become a major part of President-elect Trump's vision of revitalizing the American energy economy - in this case, its enormous but plodding power sector. Stimulating investment in transmission would not require a penny of taxpayer investment. It requires instead freeing the power sector from its 20th century (in some cases 19th century) shackles. Simply stated, transmission investment should be open to all qualified participants, not just utilities. Newcomers can bring billions of dollars of competitively priced capital from pension funds and insurance companies into the transmission sector. Competition can sharpen the dormant animal spirits of the utilities.
High tech manufacturing needs a high tech power grid. The United States can be the place where the next generation of chips, computers, and yes even iPhones are made. But the power demands of these companies are huge, and the prevailing ethos of energy conservation above all is one of the reasons we have lousy power service and the exodus of manufacturers to places that cater to factory power needs.
So let's invest in the grid, but let's do so in a competitive way. Bring the big pension and insurance investors directly into this market. Allow them to compete with incumbents. Make competition in transmission the rule. Who knows, we may make the American power sector great again.