The dilapidated state of much US public infrastructure, ranging from airports to highways, can be shocking for a visitor arriving from Europe or Asia. As evidenced by the tragic bridge collapse in Minneapolis last year, this is not just hampering national productivity but is becoming a critical threat to ordinary Americans. Over 25% of road bridges nationwide need urgent structural reinforcement or replacement at a cost of $140bn according to State transport officials, and yet additional Federal spending on bridge repairs is set to be just $1bn this year (and even that paltry amount has been vetoed by the Bush administration). Basic physical infrastructure from waste water treatment and dams to the electrical grid has been chronically underinvested in the US for decades (much of the highway network has seen little upgrading since the Eisenhower era), and sadly it may take further disasters to spur radical political action. The total bill just to repair and replace existing transport infrastructure reaching the end of its design life (without adding meaningful new capacity) is estimated by the American Society of Civil Engineers at $1.6trn; yet total current investment by private and public entities is just 0.6% of GDP, against 3.5% in Europe and 9% in China. A Congressional commission in 2005 recommended spending of $225bn a year over 50 years (twice current levels) just on surface transportation systems. At a time when existing public transit systems are overloaded as ridership soars in response to $4 gas, the need for far more extensive urban transit systems is obvious. The conclusion must be that taxes will go up for Americans, who will accept this inevitability only when they face mounting disasters; the deficit will also expand dramatically, perhaps hitting $1trn within a couple of years as predicted by Bill Gross among others. After many years of private overconsumption and public underinvestment, the pendulum is set to swing in the opposite direction regardless of who sits in the White House next January. A wise candidate would make a virtue of this necessity, and offer voters a new ‘New Deal’ based on long overdue strategic public works spending rather than another stimulus to private consumption that just ends up leaking to foreign central banks. That derisory current spend of 0.6% of GDP will have to soar and I suspect reach European levels of closer to 4% within a decade, or the US economy will begin to seize up as critical system failures multiply. That spend will come directly from a structural reduction in consumption; on a medium term view, sell retailers and mall owners, buy exposure to construction equipment and engineering services. The biggest threat to the infrastructure supporting the US economy isn’t from any number of terrorist bombs but from simple wear and corrosion, which will prove far more devastating if left unchecked.

Tags for this Post:
Commodities, Market Commentary