It Failed in Japan, So Let’s Try It Here!

According to a recent article in Forbes, “A state infrastructure bank will be at the core of President Obama’s “jobs program” that he plans to unveil after his vacation. He will argue we desperately need a new government entity to repair our crumbling infrastructure and create jobs.”

An infrastructure bank is not a new idea, it has been kicked around for years. The basic idea is to put some of the federal government budget into a new agency that would loan those funds out to state and local governments to build infrastructure.

On the up side, investing in infrastructure is a better use of federal dollars than most other uses it puts those dollars to. At least we get something that provides benefits to some taxpayers for a long time, rather than just ephemeral political payback for government largess.

On the down side, most infrastructure is, and should be, primarily funded by user fees. Meaning the people who use it pay for it. Why should taxpayers in Pennsylvania help pay for a sewer in Terre Haute?

And, as the Forbes article goes on to explain,

A president who preaches internationalism must look to the experiences of other countries. Japan is a mega model for state infrastructure banks. Its Japanese Postal Bank (JPB), with its 25,000 branches, is the world’s largest bank. JPB attracts about one out of every three yen of household savings. It is the world’s largest holder of personal savings with household deposits of some $3.3 trillion. Japan has the JPB. It also has high speed trains. The model looks like a good fit for us. Right?

It so happens that JPN is also the world’s largest political slush fund. Politicians at all levels direct its funds to voters, constituents, friends, and relatives for infrastructure, construction, and business loans. They basically use it to buy votes, curry favor, and get rich. They waste depositor money for political gain. If there are losses, we have enough reserves to cover them.

The result: Japan’s economy has one of the world’s highest investment rates and one of the world’s slowest growth rates. Rates of return on invested capital are only a small fraction of that in the U.S. Over time, we get moderate to high rates of growth from a small amount of capital. Japan gets zero or slow growth from huge amounts of capital.

In other words, the government run investment system of the JPN makes bad investments that don’t produce growth. My colleagues detail the eerie and disturbing parallels between Japan’s “lost decade” economy and President Obama’s economic policy in a Reason magazine article and in a full policy study (pdf).

As my colleague Bob Poole has written, keeping a government infrastructure bank focused is devilishly tricky. “The idea of targeting investment to “projects of national and regional significance” has merit, but it’s questionable whether an entity beholden to the President and Congress would really be able to do that.” We have seen how earmarks for projects desired only by a few local special interests can gobble up billions of dollars in federal spending bills. Is it likely the infrastructure bank would be any different?

In another article Bob wrote about how a infrastructure bank would have to be structured for it to avoid being a disastrous slush fund. But you have to ask how likely it is those conditions will be met.