Vice President, Theory, Research and Policy & Executive Director, Next System Project
Why Not a New Deal Financed by Workers?
America’s infrastructure is in disrepair, but the Obama administration’s proposed solution emphasizes public-private partnerships with all the risks they entail. Instead, a true partner for rebuilding America can be found in the untapped potential of workers’ vast pension fund assets. Such an approach could create important institutional alliances of state and local governments, public workers and labor unions, and lay the basis for a very different pattern of political economy capable of reversing spiraling inequality and displacing corporate power.
Last month, the American Society of Civil Engineers (ASCE) released their quadrennialreport card on the state of America’s infrastructure - the roads, bridges, ports, railways, airports, levees, dams and public buildings that make up the core of the built environment and the basis of the US economy. Overall, the United States scored a disappointing D+, a slight improvement over 2009’s D rating, but still a desperately poor grade. The physical fabric of America is literally crumbling away.
Underinvestment in basic infrastructure impacts everything from economic performance to health and safety. A recent report found that Americans spend almost 5 billion hours a year in traffic, wasting nearly 2 billion gallons of gasoline at a cost to the economy in excess of $100 billion. “More time on lower quality roads,” theEconomist reported in 2011, “makes for a deadlier transport network.” The road fatality rate in America that year was 60 percent higher than the Organization for Economic Cooperation and Development (OECD) average.
Nor are matters likely to improve on the current path. Looking ahead, ASCE estimates America’s infrastructure gap - the difference between the $3.63 trillion needed to raise standards to a B grade (otherwise known as “good repair”) and the $2.02 trillion in planned investment between now and 2020 - to be $1.61 trillion, or around $200 billion per year. Other organizations arrive at similar figures: The National Surface Transportation Infrastructure Financing Commission puts the annual gap at $172 billion just to maintain existing levels and $214 billion to improve infrastructure; 80 experts convened by the Miller Center at the University of Virginia in 2010 concluded that between $134 billion and $262 billion per year is needed.
This state of affairs is even more scandalous given the continuing output gap in the economy as a whole. Unemployment today stands at 7.6 percent and is probably nearer 13.8 percent if measured to include those who are forced to work part-time for economic reasons and those marginally attached to the labor force (U-6 rate). In the construction sector, it has reached 14.7 percent. Infrastructure investment has long been recognized as one of the most obvious stimulus measures, dating back to the early years of the New Deal, when large-scale public infrastructure projects helped reduce unemployment from 25 to 15 percent. The benefits to the economy of such investments are long-term and significant.
In a saner world, the US government would simply create money to close this infrastructure gap. In monetary terms, it is no different in principle than “quantitative easing” - the Federal Reserve’s current policy of electronically pumping money into Wall Street - and would be a lot more effective in stimulating the economy and putting Americans back to work. Predictably, faced with political stalemate in Washington and lacking the vision and appetite for bold ventures, the Obama administration is responding to the infrastructure gap with a raft of half-measures, mostly mild reforms to attract private and foreign investment to the sector. During his 2013 State of the Unionaddress, Obama highlighted his “Partnership to Rebuild America” infrastructure program designed to attract “private capital to upgrade what our businesses need most.” The White House budget proposal sent to Congress on April 10 includes $50 billion in direct spending and the creation of a national infrastructure bank that would use public funds to leverage private investment - neither of which is likely to survive Republican scrutiny - as well as a new “America Fast Forward” bond program and tax breaks for foreign investors. Even if all these measures were to come to fruition, they would go only part way toward renovating America’s failing infrastructure.
Moreover, turning to private corporations and capital to fund infrastructure investment carries considerable risks. Public-private partnerships (sometimes called PPPs) for the construction and/or operation of infrastructure have a decidedly checkered history, both here and abroad. A recent report by the Brookings Institution found that “in practice [PPPs] have been dogged by contract design problems, waste and unrealistic expectations.” For example, in 2010-2011, the private operators of the South Bay Expressway, a San Diego toll road, failed to generate expected revenue and declared bankruptcy, resulting in the need for a public rescue by the San Diego Association of Governments at the expense of other road projects. The Dulles Greenway, a toll road near Washington, DC, charges an extraordinarily high flat-rate (rather than distance-based) fee, resulting in severe underutilization in a region crippled by chronic traffic problems. Infamously, in California the City of Stockton’s water privatization contract with operator OMI/Thames resulted in higher-than-promised rate increases, equipment failure, lack of maintenance and a sewage spill into a local river, leading to eventual cancellation of the contract. Ellen Dannin, a law professor at Penn State, points out that many public-private infrastructure contracts are “full of ‘gotcha’ terms” - including clauses forbidding counties and states from building or even maintaining alternate, competing public roads or transportation networks.
Even more alarming is the evidence from elsewhere in the world. Take Canada. In British Columbia, the Golden Ears Bridge project nearly failed when its private financial partners almost collapsed, requiring large scale taxpayer rescues. Ontario’s Brampton Civic Hospital project cost $200 million more than if it had been publicly financed and built. The city of Ottawa was forced to bail out three PPP arena projects after their private partners demanded greater returns. A PPP project at the University of Quebec in Montréal failed, doubling the cost from $200 to $400 million. And Hamilton, Ontario, had to take back its wastewater services after private partners - including a subsidiary of Enron - created a serious financial mess as well as an ecological crisis from the spilling of raw sewage.
In the United Kingdom, proliferating private finance initiatives (PFIs), begun under the last Labor government and continued by the current Conservative-led coalition, have now reached almost 800 in total. They are a monument to the dangers of such an approach, permitting a dramatic rise in off-balance-sheet spending, but resulting in zero-risk sweetheart deals for investors, huge cost overruns and a debilitating legacy of public sector debt that is pushing some 22 hospital trusts toward bankruptcy. The private company Metronet entered into a £30 billion partnership to upgrade the London Tube, only to fail and be taken over by the City of London’s transport authority at an extra cost to taxpayers of £2 billion, leading the Economist to conclude that PPPs look like “complicated costly mistakes.” To make matters worse, three quarters of the funds invested in PFIs in the UK are registered in offshore tax havens. Even proponents of PPPs warn that they “can also drive rent-seeking behavior, and create significant risk of improper collusion between political actors and politically preferred firms and industries.”
Liberal apologists for the Obama administration will surely claim that the PPP approach, with its promise of giveaways to corporations and financiers, is a necessary expedient, appeasing Republicans in Congress so that the urgent task of rebuilding America can begin. To be fair, the cramped horizons of the current deadlocked political system do place severe constraints on what can be done. But stalemate in Washington should not be an all-purpose excuse. There are far more creative proposals emerging even from such mainstream venues as the Clinton Global Initiative and the Center for American Progress. The most interesting of these deserves some serious exploration.
Instead of the public-private partnerships that have proven so problematic in the past, the administration should be encouraging the creation of public-public and public-worker partnerships with organized labor, using workers’ vast pension fund assets to rebuild America while putting people back to work. Such an approach would afford underfunded pension funds a reliable stream of income, maintain public ownership of critical infrastructure, and protect workers’ rights while creating well-paid jobs. Think of it as a New Deal financed by the workers themselves. These funds already exist; they belong to workers as their deferred earnings, obviating the need to go to Congress with a begging bowl.
Public-sector pension funds in the United States today have around $3 trillion in assets, a huge pool of investment capital whose owners - public-sector workers through their retirement savings - have as close to an identicality of interests as could be wished with the public need for infrastructure investment. Add in private-sector union pension funds - another $1.5 trillion - and closing the infrastructure gap with labor’s capital seems an eminently achievable proposition.
The penny is already beginning to drop in some high-level quarters. At the Clinton Global Initiative in 2011, the American Federation of Teachers pledged to dedicate $10 billion to investment in American infrastructure over five years; the Center for American Progress last month released a major report calling for policies and programs to encourage additional commitments, including “a new federally subsidized, taxable bond instrument that can offer pension funds sufficient return for debt investments in infrastructure,” as well as enabling “infrastructure projects where pension funds are majority equity owners to tap the tax-exempt bond markets.”
Public-sector and union pension funds are the perfect partners for infrastructure investments. They represent patient capital with a long-term investment horizon. Most importantly, their owners - the workers - are stakeholders with a deep-rooted interest in the communities in which they live, work and vote. They are ideally suited to the role of partners in the stewardship of vital community assets. And they stand to benefit doubly from an investment model that also results in economic recovery, the creation of good jobs and sound public finances. Such partnerships will mean they can look forward to prosperous working lives and economic security in retirement, safe in the knowledge that their assets are being deployed to preserve and enhance their jobs and communities, and not to undermine them.
The trustees of labor’s capital must be made more receptive to such proposals. In fact, an only slightly expanded definition of fiduciary responsibility ought to require that these assets be invested in alignment with the interests and well-being of their ultimate owners, America’s public sector and unionized workers. Of course, such partnerships need to be constructed with care, distributing risk appropriately and respecting some obvious conditions that labor pension funds should insist upon - including a requirement for union labor in delivery contracts and a bar on privatization so public-sector workers know their assets aren’t being used to privatize their jobs. At the same time, directing labor’s capital toward long-term investments that rebuild communities and secure jobs would represent a particularly appealing solution to a thorny problem that has bedeviled the labor movement for many years: how to advance what Damon Silvers, William Patterson and J.W. Mason have identified as “a worker-owner view of value in the allocation of capital by firms and markets.”
The last point is worth underscoring. The lesson of the past few decades is that if workers do not wield their capital toward their own ends, then it will inevitably be wielded against them. The “boring world of pension provision,” as Robin Blackburn warned a decade ago, “fuels the glamorous world of high finance, property speculation, rogue traders, media and technology mergers, and stock exchange bubbles”: [S]o much of the investment which shapes our future is undertaken by pension funds…. At present the pension funds are integral to a globalised economy which decrees that shopping malls and shiny office blocks will proliferate while parks, swimming pools, libraries and theatres open to all will not, that some regions will boom while others decay, that commercial gain will displace the ethos of public service, that the poorest will have to tighten their belts if economic ‘adjustment’ is required, that natural resources accumulated over millennia will be consumed in a few short years, and that the abundance of the oceans will be poisoned and destroyed. (Blackburn,Banking on Death, p. 5)
Historically, the rise of pension funds and the resulting shift from capital markets made up of individuals to those dominated by big institutional investors helped fuel the major economic restructurings of the last decades of the 20th century. Workers in declining industrial areas - the Rust Belt of the American Northeast and Midwest or the British manufacturing towns and coalfields - were subjected to massive downsizings and layoffs on behalf of a blind and aggressive pursuit of shareholder value. Workers’ own savings were mobilized against them by Wall Street and the financial services industry to fuel the export of their jobs through overseas investment and the deposing of old-line managements in hostile takeovers. Economist Teresa Ghilarducci brilliantly captured what she termed “the Cheshire cat problem of pension investments that earn high returns but create no jobs. All that will remain is the ‘toothy grin’ of high rates of return, with no workers left to be covered by pensions.”
Numerous scholars have upbraided pension fund management for its paralyzing risk aversion, short-termism, herd instinct, hyperactive churning of stocks (frittering away gains through transaction costs), timid preference for blue chip stocks and dismal venture capital record. Even labor’s role in the storied “shareholder revolution” became, through the actions of trustees and managers, a focus on eliminating antitakeover devices, enabling buyouts and hostile takeovers (with their subsequent layoffs and downsizings) by further emphasizing the instant gratification of quick boosts in shareholder value. Some of this was the result of perverse incentives built into fiduciary law, but a lot of it was simply due to the corporate culture of money management.
The real question for workers, as Jeremy Rifkin and Randy Barber posited as far back as 1978, “is whether they will continue to allow their own capital to be used against them, or whether they will assert direct control over these funds in order to save their jobs and their communities.” This problem kicked off a discussion within the trade union movement and among its allies which continues to this day, a push for alternatives to the current patterns of institutional investment with much of the focus on raising awareness among the trustees of labor’s pension fund assets that there are radically different investment options beyond those currently on offer from the satraps of casino capitalism. Leo Gerard, the international president of the United Steelworkers of America, has described the question of how to use workers’ capital to drive different investment priorities and force capital markets to maximize long-term value for workers as one of the key challenges facing the labor movement:
All too often, investments made with our savings yield short-term gains at the expense of working Americans and their families. Destructive investment practices that rely on layoffs, mergers and acquisitions, plant closures, and off-shore job flight can create quick profits and short-term stock price increases, but, over time, these management practices erode America’s wealth. The challenge for labor is to align workers’ savings with workers’ values … Our capital is patient and long term, and our challenge is to develop a capital strategy that moves our savings beyond the quick saccharine highs of destructive corporate behavior. (Gerard in Fung et al, Working Capital, p. vii)
This brings us back to the infrastructure gap. Ironically, Obama’s own proposal targets pension fund capital from overseas by offering tax breaks to foreign pension funds for infrastructure investments. Why not bring this policy back home and further mobilize the assets of American workers on a sufficient scale to close the infrastructure gap? Why the preference for a failed model that underwrites accumulation for the wealthiest private equity operators while neglecting win-win opportunities for a broad group of working people and their families?
In fact, the implications of re-orienting labor’s capital to infrastructure investment go far beyond the immediate benefits in terms of jobs created and bridges rebuilt. Such an orientation could alter entrenched power relationships in local communities by creating important institutional alliances of state and local governments, public workers, and labor unions. This in turn holds out the prospect of a very different pattern of political economy that could address deeper systemic challenges concerning spiraling wealth inequality and the long-term health of the economy. Add in demographic changes and the building crisis of retirement security, and things start to get very interesting indeed.
Looking ahead, the issues wrapped up with the operation of pension regimes are a ticking time bomb at the heart of the current economic system. Obama’s budget proposal places Social Security cuts on the table, and the difficulties are only going to multiply with the shift to an older population in years to come. The issue of pre-funding may soon arise, although even if it doesn’t, pay-as-you-go systems can soon accumulate a surplus, as has been the case with the Social Security Trust Fund. Then the question becomes, as with existing pension funds, where and how to direct the investment. This scares the hell out of conservatives, who fear the economic muscle it could give to public agencies, a route to nationalization of large companies by stealth. As Blackburn observed: “A national debt, giving financiers leverage over the state, [is] one thing. A national investment fund, giving government leverage over business, quite another.” And the most famous conservative economist of them all, Milton Friedman, once wrote:
I have often speculated that an ingenious way for a socialist to achieve his objective would be to persuade Congress, in the name of fiscal responsibility, to (1) fully fund obligations under Social Security and (2) invest the accumulated reserves in the capital market by purchasing equity interests in domestic corporations … Suppose the president’s proposed policy had been followed in the most extreme form from the outset in 1937, i.e. the whole excess of the Social Security payments … had been invested in the stock market … In that case the Social Security Trust Fund would own more than half domestic corporations! To return to my fantasy, full funding would have long since brought complete socialism. (Quoted in Blackburn, Banking on Death, p. 385)
Anything that worried Margaret Thatcher’s favorite economist must surely be worth a second look. In the context of a general crisis of liberalism and wholesale retreat from progressive possibilities, the issues raised by labor’s pension fund capital go back to the central economic question of control over the means of production. It is high time that these assets - one of the largest pools of investment capital in the world - were put to work for their real owners. Rebuilding America’s infrastructure is a good place to start.