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If China can fund infrastructure with state credit money, so can we

Ellen Brown

The Three Gorges Dam on the Yangtze River in China is the largest hydroelectric scheme in the world. Sovereign governments can fund massive infrastructure projects like this without raising taxes, slashing services, cutting pensions, or privatizing industries.

The week of 14th to 20th May has been designated the “National Infrastructure Week” by the U.S. Chambers of Commerce, the American Society of Civil Engineers (ASCE), and over 150 affiliates. Their message: “It’s time to rebuild”. Ever since the ASCE began issuing its “National Infrastructure Report Card” in 1998, the U.S. has received a dismal grade of D or D+. In the meantime, the estimated cost of fixing its infrastructure has risen from $1.3 trillion to $4.6 trillion.

While U.S. politicians debate endlessly over how to finance the needed fixes and which ones to implement, the Chinese have managed to fund some massive infrastructure projects all across their country, including 12,000 miles of high-speed rail built just in the last decade. How have they done it, and why can’t we?

A key difference between China and the U.S. is that the Chinese government owns the majority of the nation’s banks.

About 40% of the funding for its giant railway project comes from bonds issued by the Ministry of Railway, 10- 20% comes from provincial and local governments, and the remaining 40- 50% is provided by loans from federally-owned banks and financial institutions. Like private banks, state- owned banks simply create money as credit on their books. The difference is that they return their profits to the government, making the loans interest- free; and the loans can be rolled over indefinitely. In effect, the Chinese government decides what work it wants done, draws on its own national credit facility, pays Chinese workers to do it, and repays the loans with the proceeds.

The US government could do that too, without raising taxes, slashing services, cutting pensions, or privatizing any industries. How this could be done quickly and cheaply will be considered here, after a look at the mix of funding proposals currently on the table.

The Endless Debate over Funding and the Relentless Push to Privatize

In a 15 May 2017 report on In the Public Interest [1], the debate taking shape heading into National Infrastructure Week was summarized like this: The Trump administration, road privatization industry, and a broad mix of congressional leaders are keen on ramping up a large private financing component (under the marketing rubric of ‘public-private partnerships’), but have not yet reached full agreement on what the proportion should be between tax breaks and new public money – and where that money would come from. Over 500 projects are being pitched to the White House…

Democrats have had a full plan on the table since January, advocating for new federal funding and a program of infra- structure renewal, spread through a broad range of sectors and regions.

And last week, a coalition of right wing, Koch-backed groups led by Freedom Partners released a letter encouraging Congress “to prioritize fiscal responsibility” and focus instead on slashing public transportation, splitting up transportation policy into the individual states, and eliminating labor and environmental protections (i.e., gutting the permitting process). They attacked the idea of a national infrastructure bank and targeted the most important proposal of the Trump administration . . to finance new infrastructure using tax reform to enable the repatriation of overseas corporate revenues . . . .

In a November 2014 editorial titled “How Two Billionaires Are Destroying High Speed Rail in America”, author Julie Doubleday observed that the U.S. push against public mass transit has been led by a think tank called the Reason Foundation, which is funded by the Koch brothers. Their $44 billion fortune is derived largely from Koch Industries, an oil and gas conglomerate with a vested interest in mass transit’s competitors, those single-rider vehicles using the roads that are heavily subsidized by the federal government.

Clearly, not all Republican politicians are opposed to funding infrastructure, since Donald Trump’s $1 trillion infra- structure plan was a centerpiece of his presidential campaign, and because his Republican base voted him into office. But “establishment Republicans” have traditionally opposed infrastructure spending. Why? According to a 15 May 2015 article in Daily Kos titled “Why Do Republicans Really Oppose Infra- structure Spending?”:

“Republicans – at the behest of their mega-bank/private equity patrons – really, deeply want to privatize the nation’s infrastructure and turn such public resources into privately owned, profit centers. More than anything else, this privatization fetish explains the Republicans’ efforts to gut and discredit public infrastructure …

“If the goal is to privatize and monetize public assets, the last thing Republic- ans are going to do is fund and maintain public confidence in such assets. Rather, when private equity wants to acquire something, the typical playbook is to first make sure that such assets are what is known as “distressed assets” (i.e., cheaper to buy). ”

A similar argument was advanced by Noam Chomsky in a 2011 lecture titled “The State-Corporate Complex: A Threat to Freedom and Survival”. He said: [T]here is a standard technique of privatization, namely defund what you want to privatize. Like when Thatcher wanted to [privatize] the railroads, first thing to do is defund them, then they don’t work and people get angry and they want a change. You say okay, privatize them … ”

What’s Wrong with Public-Private Partnerships?

Privatization (or “asset relocation” as it is sometimes euphemistically called) means selling public utilities to private equity investors, who them rent them back to the public, squeezing their profits from high user fees and from tolls. Private equity investment now generates an average return of about

11.8 percent annually on a ten-year basis. That puts the cost to the public of financing $1 trillion in infrastructure projects over 10 years at around $1.18 trillion, more than doubling the cost. Moving assets off the government’s balance sheet by privatizing them looks attractive to politicians concerned with this year’s bottom line, but it’s a bad deal for the public. Decades from now, people will still be paying higher tolls for the sake of Wall Street profits on an asset that could have belonged to them all along.

One example is the Dulles Greenway, a toll road outside Washington, D.C., nicknamed the “Champagne Highway” due to its extraordinarily high rates and severe underutilization in a region crippled by chronic traffic problems.

Local (mostly Republican) officials have tried in vain for years to either force the private owners to lower the toll rates or have the state take the road into public ownership. In 2014, the private operators of the Indiana Toll Road, one of the best-known public-private partnerships (PPPs), filed for bankruptcy after demand dropped, due at least in part to rising toll rates. Other high-profile PPP bankruptcies have occurred in San Diego, CA; Richmond, VA, and Texas.

Countering the dogma that “private companies can always do it better and cheaper,” studies have found that on average, private contractors charge more than twice as much as the government would have paid federal workers for the same job. A 2011 report by the Brookings Institution found that “in practice [PPPs] have been dogged by contract design problems, waste, and unrealistic expectations”. In their 2015 report “Why Public-Private Partnerships Don’t Work”, Public Services International stated that “[E]xperience over the last 15 years shows that PPPs are an expensive and inefficient way of financing infrastructure and divert government spending away from other public services. They conceal public borrowing, while providing long-term state guarantees for profits to private companies”. They also divert public money away from the neediest infrastructure projects, which may not deliver sizable returns, in favor of those big-ticket items that will deliver hefty profits to investors.

A Better Way to Design an Infra- structure Bank

The Trump team has also reportedly discussed the possibility of an infra- structure bank, but that proposal faces similar hurdles. The details of the proposal are as yet unknown, but past conceptions of an infrastructure bank envision a quasi-bank (not a physical, deposit-taking institution) seeded by the federal government, possibly making use of taxes on the repatriation of offshore corporate profits. The bank would issue bonds, tax credits, and loan guarantees to state and local governments to leverage private sector investment. Along with the private equity proposal, an infrastructure bank would rely on public-private partnerships and investors who would be disinclined to invest in projects that did not generate hefty returns. And those returns would again be paid from the public purse entailing the implementation of tolls, fees, higher rates, and payments from state and local governments.

There is an alternative way of setting up a publicly-owned bank. Today’s infra- structure banks are basically revolving funds. A dollar invested is a dollar lent, which must return to the bank (with interest) before it can be lent again. A chartered depository bank, on the other hand, can turn a one-dollar investment into ten dollars in loans. It can do this because depository banks actually create deposits when they make loans. This was acknowledged by economists attached to the Bank of England (in a March 2014 paper entitled “Money Creation in the Modern Economy”) and also at the Bundesbank (the German central bank) in an April 2017 report.

Contrary to conventional wisdom, money is not fixed and scarce. It is “elastic”: it is created for example when loans are made by banks and is also extinguished when those loans are paid off. The Bank of England report stated that private banks create nearly 97% of the money supply today, and that all borrowing from banks expands the circulating money supply. Unfortunately the U.S. Federal Reserve tried but failed to stimulate the U.S. economy by using its quantitative easing (QE) policies – in an attempt to expand the bank lending that expands the money supply.

The stellar (and only) model of a publicly-owned depository bank in the US is the Bank of North Dakota (BND). It holds all of its home state’s revenues as deposits by law, acting as a sort of “mini-Fed” for North Dakota. According

to reports, the BND is more profitable even than Goldman Sachs, has a better credit rating than J.P. Morgan Chase, and has seen solid profit growth for almost 15 years. The BND continued to report record profits after two years of oil bust in the state, suggesting that it is highly profitable on its own merits owing to its business model. The BND does not pay bonuses, fees, or commissions; has no high paid executives; does not speculate on risky derivatives; does not have multiple branches; does not need to advertise; and does not have private shareholders seeking short-term profits. The profits return to the bank, which distributes them as dividends to the state.

The federal government could set up a bank on a similar model. Since financing is typically about 50 percent of the cost of infrastructure, the government could cut infrastructure costs in half by borrowing from its own bank. Public- private partnerships are a good deal for investors but a bad deal for the public. The federal government can generate its own credit without private financial middlemen. That is how China does it, and other governments can too.

Source: Common Dreams, 17 May 2017

This article is licensed under a Creative Commons Attribution-Share Alike 3.0 License


Ellen Brown is an attorney and founder of the Public Banking Institute. She has authored 12 books, including The Web of Debt, and her latest book, The Public Bank Solution, which explores successful public banking models.


Comments on Ellen Brown’s article on state funding of infrastructure – Editor

This is a well targeted article, and although it advocates and describes the use of fiscal measures for funding infrastructure, it does not utilise all of the principles of Functional Finance (FF) – which reflects the fact that FF is not a widely or well understood subject.

The main thrust of the article is a repudiation of the neo-liberal vision of how infrastructure spending should be financed, and in particular Ellen’s insistence that the way ahead can and should embrace setting up state-owned and operated banks, which the state governments can directly borrow from at effectively no cost to themselves.

Clearly this method of funding infra- structure projects has worked admirably for the state of North Dakota, which – unlike other states within the U.S. – possesses its own state bank.

The last paragraph also suggests that a central (or federal) government could set up a public bank for this purpose, along similar lines to the State Bank of North Dakota. The rationale for doing this seems to be that the U.S. Federal Treasury is currently not permitted to borrow directly from its own central bank (the Federal Reserve, or Fed), although there are ways of bypassing this legislative restriction – as explained in “Federal Treasury finances: a functional perspective” which appeared in ERA Review, vol 9, No 2.

However it should be added that many other governments, including Australia and Canada, are not shackled with such a legislative prohibition, moreover the central banks in these countries are fully state-owned entities. And so in these countries it would not really be necessary for the federal government to set up a new type of state bank in order to fund infrastructure projects using money created specifically for that purpose.

There is a related and important aspect to this story that was not touched on. Namely, that monetary sovereign governments (which includes the currency-issuing central governments of countries such as Australia, Canada, New Zealand, Japan, the U.S. and the U.K.) have the ability to create “net financial assets” and to inject those assets into the real economy. These may be thought of as financial assets which are unencumbered by financial liabilities. State governments and commercial banks do not possess the ability to do this.

Thus whenever a commercial bank creates a new asset for itself (such as a commercial or personal loan) it also simultaneously creates an equal liability – in the form of a deposit of bank credit money in the name of the borrower.

This means that (monetary sovereign) central governments possess natural advantages over commercial banks and lower levels of government, in regard to raising the financial assets needed for funding infrastructure projects – and especially large-scale projects. One of these advantages is that a monetary sovereign always has the ability to meet its financial obligations. Always!

In regard to private sector funding of infrastructure projects, we would say that the oft-claimed greater efficiency of the private sector is really only greater efficiency in regard to the extraction of monetary profits. The evaluation of the efficiency of the projects themselves is left to the consumers, who usually have inadequate information to judge it by before completion, especially as the full picture generally only becomes avail- able at that stage. Competition between alternatives is a very restricted, incestuous and often collaborative affair, again based on the extraction of financial profit.

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