There are work-arounds the U.S. can use to fund affordable housing, drought responses, and other urgently-needed infrastructure that was left out of the two recent spending bills.
Congress has passed two major infrastructure bills in the last year, but imminent needs remain. The 2021 Bipartisan Infrastructure Law chiefly focused on conventional highway programs, and the Inflation Reduction Act of 2022 (IRA) mainly centered on energy security and combating climate change. According to the American Society of Civil Engineers (ASCE), over $2 trillion in much-needed infrastructure is still unfunded, including projects to address drought, affordable housing, high-speed rail, and power transmission lines. By 2039, per the ASCE, continued underinvestment at current rates will cost $10 trillion in cumulative lost GDP, more than 3 million jobs in that year, and $2.24 trillion in exports over the next 20 years.
Particularly urgent today is infrastructure to counteract the record-breaking drought in the U.S. Southwest, where 50% of the nation’s food supply is grown. Subsidies for such things as the purchase of electric vehicles, featured in the IRA, will pad the coffers of the industries lobbying for them but will not get water to our parched farmlands any time soon. More direct action is needed. But as noted by Todd Tucker in a Roosevelt Institute article, “Today, a gridlocked and austerity-minded Congress balks at appropriating sufficient money to ensure emergency readiness. … [T]he US system of government’s numerous veto points make emergency response harder than under parliamentary or authoritarian systems.”
There are, however, other ways to finance these essential projects. “A work-around,” says Tucker, “is so-called off-balance sheet money creation.” That was the approach taken in the 1930s, when commercial banks were bankrupt and the country faced its worst-ever economic depression; yet the government succeeded in building infrastructure as never before.
Off-budget Funding: The Model of the Reconstruction Finance Corporation
For funding its national infrastructure campaign in the Great Depression, Congress called on the publicly-owned Reconstruction Finance Corporation (RFC). It was not actually a bank; it got its liquidity by issuing bonds. Notes Tucker, “The RFC was allowed to borrow money from the Treasury and the capital markets, and then invest in relief and mobilization efforts that would eventually generate a return for taxpayers, all while skating past austerity hawks determined to cut or freeze government spending.”
According to James Butkiewicz, professor of economics at the University of Delaware:
The RFC was an executive agency with the ability to obtain funding through the Treasury outside of the normal legislative process. Thus, the RFC could be used to finance a variety of favored projects and programs without obtaining legislative approval. RFC lending did not count toward budgetary expenditures, so the expansion of the role and influence of the government through the RFC was not reflected in the federal budget.
The RFC lent to federal government agencies including the Commodity Credit Corporation (which lent to farmers), the Electric Home and Farm Authority, the Federal National Mortgage Association (Fannie Mae), the Public Works Administration, and the Works Progress Administration (WPA). It also made direct loans to local governments and businesses and funded eight RFC wartime subsidiaries in the 1940s that were essential to the war effort.
The infrastructure projects of one agency alone, the Works Progress Administration, included 1,000 miles of new and rebuilt airport runways, 651,000 miles of highway, 124,000 bridges, 8,000 parks, and 18,000 playgrounds and athletic fields; and some 84,000 miles of drainage pipes, 69,000 highway light standards, and 125,000 public buildings (built, rebuilt, or expanded), including 41,300 schools. For local governments that had hit their borrowing limits on their taxpayer-funded general obligation bonds, a workaround was devised: they could borrow by issuing “revenue bonds,” which were backed not by taxes but by the revenue that would be generated by the infrastructure funded by the loans.
A bill currently before Congress, HR 3339, proposes to duplicate the feats of the RFC without increasing the federal budget deficit or taxes, by forming a National Infrastructure Bank (NIB).
China’s State “Policy Banks”
China is dealing with the global economic downturn by embarking on a stimulus program involving large national infrastructure projects, including massive water infrastructure. For funding, the government is drawing on three state-owned “policy banks” structured like the RFC.
The Chinese government is one of those systems referred to by Todd Tucker as not being hampered by “a gridlocked and austerity-minded Congress.” It can just issue a five-year plan and hit the ground running. In May 2022, it began construction on 3,876 large projects with a total investment of nearly 2.4 trillion yuan (about $350 billion).
Funding is coming chiefly from China’s “policy banks” set up in 1994 to provide targeted loans in areas where profit-driven banks might be reluctant to lend. They are the China Development Bank, the Export-Import Bank of China and the Agricultural Development Bank of China. As noted in a June 30 article in the Washington Post, China could also draw on its “Big Four” banks – Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd., and Bank of China Ltd. – but “they are essentially profit-driven commercial banks that can be quite picky when it comes to selecting borrowers and projects. The policy lenders, however, operate on a non-profit basis and are often recruited to pour cheap funds into projects that are less attractive financially but matter to the longer-term development of the economy.”
Like the RFC, the policy banks mainly get their funds by issuing bonds. They can also get “Pledged Supplementary Lending” directly from the Chinese central bank, which presumably creates the money on its books, as all central banks are empowered to do.
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