Let’s reward prudent government entrepreneurism
U.S. Speaker of the House Nancy Pelosi rolled out its HEROES Act on Tuesday without the promised innovative municipal bonds. By the afternoon, Larry Kudlow, the Director of the White House National Economic Council, was on Fox News telling Sean Hannity that President Donald Trump was going to take the legislation under consideration, however the administration is likely to come back with a differently targeted economic approach when it comes down to state and local governments, especially incorporating an infrastructure component.
Kudlow Friday morning shifted the discussion to an incentive-based approach to things which undergirds the point of this commentary, albeit one which is twinned with targeted security money to stabilize markets. U.S. Senate Majority Leader Mitch McConnell has thrown in indicating a route to a deal, albeit he sees it as a big gulf to bridge.
The breaking news from the Trump Administration that TSMC will invest to set up a $12 billion chip factory in Arizona makes this discussion of practical near term importance. It will be a partnership between the federal, state, and local governments. Also, Apple will make long term purchases from TSMC for products produced in the facilities.
This project will likely involve substantial outlays of infrastructure dollars from the State, municipalities, and public entities. Facilities of this scale have unique needs with typical sectoral investments being transportation, water and energy intensive and requiring government partners to make their costs of usage low.
As a result, the muni market will be called upon here to deliver results in a way targeted at producing economic growth. Projects such as this one are in the works in many places of varying size, I am advising governments and private investors in several. So, I know from broad market participation and first hand on the deal front that the participants require and expect the infrastructure stimulus vehicles discussed here to be enacted and put to work.
There are, in practice, a limited number of ways to invest in infrastructure and it is impossible to do so without getting involved in state and municipal financing from an effectiveness perspective putting aside cost, because government entities are the primary way the federal government moves its money into the market. So, Democrats and Republicans are now sorting out the mix and extent of direct outlay into the economy through state and local entities and how it will be targeted.
In other words, we do not know when a large-scale infrastructure package will come, but we do know that we will see plenty of infrastructure stimulus on our way. It started with the airports, next we had the Federal Reserve program, targeted agency support, and infrastructure tied up directly into the COVID-19 support. More is on its way in a form still being worked through including how additional tranches will unfold under consideration.
Invariably, infrastructure spending is within popular discussions associated with direct grants, such as the American Recovery and Reinvestment Act shovel-ready program. In practice though, the federal government mainly invests in infrastructure through vehicles that leverage modest amounts of federal money to bring in much larger sums of outside capital from states, municipalities, private investors, and non-profit entities.
In fact, the direct grant approach has not traditionally been a successful durable solution in financial crises from the Great Depression to the 2008 financial crisis, albeit remarkable achievements and seismic progress were achieved in certain states during both of those periods. Alan Krueger, the Chief Economist for the U.S. Treasury Department during the latter crisis, singled out one of the main leveraging bond vehicles as the “unsung hero of the recovery.”
As a result, we should not be overly absorbed into discussions equating an infrastructure stimulus with the reintroduction of a shovel-ready approach to infrastructure investment. Direct grants will be used judiciously and in a targeted manner rather than a large-scale opening up of the federal government’s purse. This money will focus on triage directed at critical essential infrastructure whose challenges are directly caused by COVID-19, not unlike elements of the HEREOS Act provisions.
Rather, we should look to previous leveraging programs such as the Depression Era quasi-public authorities, Reconstruction Finance Corporation, among others as models. Most germane though are the 52 leveraging programs introduced during the recent financial crisis which touched on every sector, were housed within every federal agency, and were used aggressively by both Democrats and Republicans.
Over a dozen of these vehicles were muni market programs. They included the Build America Bonds, non-AMT private activity bonds, Recovery Zone Economic Development Bonds, Recovery Zone Facility Bonds, Qualified School Construction Bonds, Qualified Zone Academy Bonds, Clean Renewable Energy Bonds, Qualified Energy Conservation Bonds, Expanded Enhanced Industrial Development Bond, among others. Importantly, states and municipalities blended these vehicles together as well as with additional existing or innovative and traditional programs.
These vehicles were not preoccupied with lowering the cost of capital for issuers although that was an important aspect. They instead served essential functions such as initiating greenfield capital projects, sustaining the operating and maintenance elements of projects, catalyzing the unlocking of capital through the restructuring of balance sheets, providing an opportunity to sustain long-term planning initiatives, fostering the sustenance of vital sectors in a targeted manner, and offering special shots of support to hard-hit neighborhoods. These are incentive-driven economic growth stimulus programs not fill-ins, although that is part of their function in so far as they are a component of growth stimulus.
The U.S. Treasury Department incentivized their usage in a number of ways. Some were capped in permissible issuance amounts and others were not. Some had windows of usage which remained open for some time while others opened and closed quickly. At times, usage was encouraged through cash subsidies to issuers and, at other times, through the fee structures of service providers.
These programs last time around were used in wildly different ways and unevenly by public entities across the country and from sector-to-sector. Moreover, a number went unused for at least a quarter of early 2009, such as the Build America Bonds which were not simply a reducer of the cost of capital.
As happened throughout the 2008 financial crisis, we are working with governors and other institutionally sound public entities to prepare to use these types of vehicles right out of the gate, effectively, and at scale. Governors and public entities are focused not only on single or bundled project approaches, but also on stand-alone special purpose funds, special offices established to optimize usage, inter-agency coordination mechanisms, among others.
This type of government entrepreneurship is essential. The route to economic growth will be optimized if we treat our COVID-19 mission-critical infrastructure government entities as themselves fiscally prudent entrepreneurs with a long-term outlook. Doing so means some form of HEREOS Act type support as essential regardless of the amount and distributional formulas Washington settles on.
At the same time, that money can have so much more bang for the buck if we provide targeted, sound tools to scale economic growth impacts. In fact, many of our state and municipal corporations and also quasi public entities were created and have sustained over time because of their mix of entrepreneurialism, ability to make difficult business decisions attuned to public consequences, and effectiveness as a catalytic force in growing our nation.
Sure, we are in for a rough ride and the government and private sector each have their own role to play and will do it with mixed success in partnership and at odds with one another, but still keep in mind that many the Fortune 500 companies have not endured and thrived for as long as our substantial public entities have. As well, over time, many private startups have made it big while others have come and gone. Small businesses are a backbone of our economy. Many of our small- and medium-sized entities too have proved durable with their public utility mindset and an entrepreneurship. Let’s give them the array of tools they need to optimize their role in our community and to do their very best to assist private sector enterprises in getting their mission critical jobs done too.