Wednesday, August 10, 2011

2.22% For Infrastructure Investments -- What A Wasted Opportunity

From the Financial Times:
“The US electrical grid has been plagued by ever more and ever worse blackouts over the past 15 years,’’ according to a report by Massoud Amin, director of the Technological Leadership Institute at the University of Minnesota – Twin Cities.

The Texas grid operator instituted Thursday power cuts to big industrial customers and warned of potential rolling blackouts to others. It said all power sources were being tapped to meet record demand amid an unrelenting heatwave that knocked out power from 20 plants.

The crisis follows three months of record power demand amid 100 degree Fahrenheit temperatures. In February, the Electric Reliability Council of Texas was forced to institute rolling blackouts amid a winter freeze.


“The power grid continues to struggle to keep pace with growing demand.”

Many coal-fired plants date back to the 1940s. Dozens of nuclear reactors are 40 years old, with no new plants built in 30 years. Many of the country’s transmission lines were built 50 or more years ago, before the boom in personal computers and flatscreen televisions that has put a strain on the grid.

I live in Houston, Texas. This time of year we are hot -- as in 100+ degrees for most of August and early September. So heat is nothing new. Yet our power grid -- which we know will be hit by massive demand considering we're growing at a strong pace -- is of poor quality.

At the macro level, this is absolutely amazing. We are the largest economy in the world, and yet countries like China -- supposed "developing countries"-- engage in massive infrastructure projects that help to make their economy that much more competitive and capable of dealing with international competition. Here we, well, don't. And that's eventually going to shoot us in the foot big time.

In the last Texas state legislative session -- when we faced a massive deficit of over $25 billion -- there were no new tax increases. Instead we cut such unnecessary programs as education - which makes complete sense considering we already perform poorly in things such as graduation rate and have a school board that spent the better part of a year debating whether to include religious dogma in scientific text books.

It's situations like the above that make the current austerity debate in Washington so incredibly counter-productive and downright stupid. Right now, we could borrow at 2.22% for 10 years and rebuild our infrastructure. The rate of return in terms of growth far outweigh the costs. This would ultimately increase the denominator of the debt/GDP debt ratio calculation (I know -- math is a bit difficult for most people now). We could solve some of the basic problems faced in the jobs market. And yet, here we are doing the exact opposite. Thanks to the idiots in Washington, we're stuck with a crumbling infrastructure. As such, we're left with the following:

We now also understand that the US is not going to make meaningful investments in its economic future. The conservative position that all spending is evil obliterates any distinction between investment and consumption, between the long term and the short term. The US suffers with an increasingly third-world level of infrastructure, third-tier education system and enormous gaps in the preparedness of its workforce. The debate has now ended; money to upgrade those faltering systems will not be forthcoming. And by the way, the US is not going to take on any other major problems either – immigration, tax reform or climate change, for example. It is not going to do so for the same reason it has failed at sensible economic management: because the Tea Party has a veto.