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Why Spending on Infrastructure Won’t Lead to Prosperity

“Hey, your light isn’t working”, Daily Reckoning editor Dan Denning pointed out to the security guy checking passports at San Francisco International Airport (SFO).

“Yeah, well, that’s your tax dollars not at work,” he replied. “There’s supposed to be a light fixed to the desk here, instead they’ve given me this hand light which wasn’t designed to be used like this. I go through four sets of batteries a day.”

There was no stopping the guy now…

“I was trained by the best – your countrymen”, he said, nodding towards your editor, “I know what to look for anyway…”

With that Dan and I sidled through as a lady named Sultana, who may have been from Pakistan or India or Bangladesh or Sri Lanka underwent a full body patdown by another security guard.

Your editor has a confession to make – we love visiting America.

Yet there’s a weird mixture of the realisation that things ain’t what they used to be, contrasted by others who still believe that America is just as great as it’s always been.

As we sat eating cheeseburgers at the Firewood Grill restaurant at SFO, waiting for our connecting flight to Baltimore, we watched the TV from across the bar.

It was the opening weekend of the NFL American Football season and the local team, the Oakland Raiders were being thrashed.

But that’s not what interested us the most. More interesting was the commercial for 0% finance for 72 months car deal being offered by Government Motors (GM).

And after being in the country for less than 24 hours, we’ve seen more auto financing commercials than we can shake a stick at.

Apart from Government Motors spruiking their wares, we’ve had Jerry Springer telling us about the great 0% financing at Liberty Ford where you can “Buy with no money down” and where there are “special discounts for State and Federal workers.”

Woohoo! More favours for the unproductive public servants!

But our favourite commercial so far is the Crazy 88 offer. It may be crazy, but boy is it great if you’re a consumer.

The folks at Crazy 88 tell the audience “Everyone will be approved – Guaranteed.” Even if you’ve got bad credit. Even if you’re bankrupt. Don’t worry about it, because the guys at Crazy 88 don’t. They’ll approve you for an auto loan on the spot.

As I say, it’s great if you’re a consumer.

And all the customer has to do is hand over an USD$88 down payment and pay USD$88 a month and a new car is yours.

But get this, it gets even better. If you’ve got a car that’s valued at say $20,000 but you’ve got a $30,000 loan against it (negative equity), they’ll let you trade in the car and they’ll also pay out the existing loan in full!

Forget the subprime housing bubble, the subprime auto financing bubble is alive and well.

And all of it backed and guaranteed by the US taxpayer. Are we glad we’re not one of those.

It makes a mockery of the claims we hear on CNBC of the idea that the US economy is back on track and on the road to recovery.

It’s clear that the US auto industry is still as much of a dog as it was before the government bailouts. Perhaps even more so.

It’s an industry that can afford to almost give away its product for free because it knows it’s getting paid for it by the government – courtesy of the taxpayer – to stay in business.

But again, that makes it great for the consumer.

Why wouldn’t you take them up on the offer to buy yourself a new SUV or a pick-up truck when you’re paying 0% interest for seven years?

But it’s not so good for the economy when you’ve got so much public and private money pouring in to prop up a bankrupt industry.

Money being given to people to buy a new car they don’t really need when they can’t even afford to pay off the old one doesn’t strike me as an economy in recovery.

That’s typical of the wasteful spending of the public sector.

But that’s not all the US government is spending taxpayer dollars on.

Some may have cheered when President Obama announced that $50 billion would be spent on infrastructure spending – “At least it’s being spent on something useful”, the argument went. It’s an argument we see and hear all the time in Australia – “Spend on roads, spend on ports to reduce bottlenecks, spend on schools,” and so on.

Well, if you want to see the longer term impact of infrastructure spending and how it isn’t the golden egg laying goose, just take a look at America today.

On the front page of the weekend edition of the Wall Street Journal was the headline, “Gas Blast Obliterates a California Neighborhood.”

The story states that, “the explosion in San Bruno, Calif.,… killed at least four and leveled 38 houses.”

Looking at the pictures of what looks like downtown Baghdad you can see why they’re unsure about how many have been killed.

But the most interesting part of the story was an accompanying graphic that showed the number of “Significant Gas Pipeline Incidents, Onshore”.

I can’t reproduce it here, but it shows the number of incidents rising strongly over the last twenty years. From an average of around thirty per year in the 1990s to an average of around fifty per year over the last ten years.

Then you look at some of the other recent infrastructure stories in the US.

A few weeks ago a dam collapsed in the American west causing widespread flooding. A dam that – from memory – was only about fifty years old.

Then last week we saw the news that the famous arch in St Louis, Missouri is being threatened by rust. And that it’ll need extensive, and doubtless, expensive repairs.

What has this got to do with anything?

Simply this, infrastructure is not only expensive to build but it’s expensive to maintain.

The idea that just spending on infrastructure will lead to long term prosperity is false.

Infrastructure isn’t the cause of wealth and prosperity. In most cases it’s either the result of wealth and prosperity, or an aid to wealth and prosperity.

By itself it doesn’t actually create wealth.

For instance, a railway line isn’t what creates the wealth, it merely aids it.

What creates the wealth are the goods that are made and transported using the rail infrastructure.

Without the production of goods the infrastructure is either useless or just a major expense.

It would be like saying having a car makes you wealthy. It doesn’t. A car is an expense. It costs you money. Yet it helps you get to work therefore the expense is worth it. But if you don’t have a job, the car isn’t going to suddenly start earning money for you. It’s the same with infrastructure spending.

Don’t forget, these big American infrastructure projects – the dam and arch – were built during America’s glory days.

Yet the spending on them didn’t end there. The spending on them continues today.

That’s the thing with infrastructure spending, it’s ongoing. You build it then you’ve got to maintain it.

When the economy is booming it’s affordable. The infrastructure serves its purpose.

But as soon as the economy stops being productive then the infrastructure becomes and albatross around the economy’s neck.

It strikes us that that’s the situation the US is in right now. It has forgotten how to be productive and is now paying for the largesse of the past fifty years. Only it can’t afford it.

And if Australia isn’t careful, it’s something we’ll also suffer from in the future.

The mining boom won’t last forever, yet the call for infrastructure spending assumes it will.

If Australia isn’t able to create a productive side to the economy aside from the mining sector, then before long you’ll find Australia is left with the maintenance bill for a whole lot of infrastructure that is no longer useful and which the country can no longer afford.

We can only hope that sense prevails and it doesn’t come to that.

Cheers.
Kris Sayce
for The Daily Reckoning Australia

Kris Sayce
Kris Sayce began his financial career in the City of London as a broker specializing in small cap stocks listed on London's Alternative Investment Market (AIM). At one of Australia's leading wealth management firms, Kris was a fully accredited adviser in Shares, Options and Warrants, and Foreign Exchange. Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. In late 2006, he joined the Melbourne team of the leading CFD provider in Australia.

26 Comments

  1. Gary says:

    All I can say is, word. Having seen Katter and the other idiots who are now the fulcrum of control in the parliament blabber on about infrastructure for the bush to support the mining boom, all I can think is, great, what about when the boom ends? And with the BER and NBN (I wonder what other TLAs will be thrown our way before this is over, maybe we should import Mogambo’s one, WFD) are we just going to be left with a lot of shells littering the landscape?

    Then again, never expect a bunch of people milking things for 3 years to think too far into the future.

  2. Biker says:

    “And with the BER and NBN (I wonder what other TLAs will be thrown our way before this is over, maybe we should import Mogambo’s one, WFD… )”

    What about BFNs? :D

    http://www.watoday.com.au/business/chindia–you-aint-seen-nuthin-yet-20100923-15o2v.html

  3. Greg says:

    How did it become Katter’s fault? He is the only independent who didn’t side with the stimulus spenders.

  4. Peter says:

    Infrastructure enhances productivity. Building a railway enables good to be transported from one point to another more efficiently, enhancing productivity.

    Building an extra road reduces travel time. Building another dam removes limits to growth. If the hoover wasn’t built, other cities would be more crowded or expensive, or the population wouldn’t be in the US at all.

    GDP = population growth + productivity. As long as the infrastructure enhances productivity relative to its cost, its good. Your article fails to make that point.

  5. Andrew says:

    This is interesting as far as it goes, but all you have pointed out is that there is a difference between the ceremonial invocation of the infrastructure god as practiced by politicians, and appropriate infrastructure for the economy. This is not a general argument against infrastructure building, just an IQ requirement for those doing the planning. There is plenty of productive infrastructure Australia needs – there is renewable generation capacity, rail networks which move produce more effectively and at lower cost than those expensive to maintain roads, urban rail which does not waste hours of worker time in commuting, education etc. All quite productive.

  6. Biker says:

    “Inevitable inflation will follow.”

    Yep, as long predicted, it’s inflation, inflation, inflation*… .

    Of course the rising Ozbuck may temper the figures!~ :D

    * Goodfer Gold, Lachlan!~ ;)

  7. Robert says:

    Really good comment, interestingly the best Lean corporations see assets as liabilities, as they get damaged, need storage, and cost in finance.
    At home the more we own the more timeor money we spend maintaining lawns, pools, cars, rooms and yards with less time for leisure.
    Better to keep funds in shares to get a return than cars to get a depreciation.
    Non productive assets will ruin you.

  8. Biker says:

    “Better to keep funds in shares to get a return than cars to get a depreciation.”

    Not sure I really understand this comment. While I agree that cars* are an incredibly poor investment, after that you lose me… .

    * One of cars (18 y.o.) actually _generates_ income, but our other cages just get us from Ayterbee.

  9. Rocket says:

    If you like cheap cars you dont have to pay off America is the place to be.

  10. Biker says:

    Cheap cars are $3100.00 each. You pay cash.
    America is the place2B*?
    Get a Green Card, now! :D

    * They’re giving houses away, too. ;)

  11. Steve says:

    Steve’s quote of the day

    “What goes up must come down, well… that is everything apart from the Australian residential property market that defies economic principals and is “SPECIAL”"

  12. Biker says:

    I guess you’d find those ‘economic principals’ managing business schools, Steven? Let me guess, you’ve ignored yet another of my free mentoring tips…
    you know, the one about getting a dictionary.

    Your wise sayings always seem to be ‘floored’, Steven. If you want us to believe you know what you’re talking about, why not start by checking that you actually _do_ know what you’re talking about? ;)

  13. Steve says:

    why not start by checking that you actually _do_ know what you’re talking about?

    yes biker just like you accusing me of being Realist

  14. Biker says:

    I think you mean ‘realistic’, son.
    You’re not, you know.
    You had two opportunities to use your cash to get into a good apartment… and you blew both.

    Here’s a third hint: Have you bothered putting any of your cash into the FHSAS, yet? Pays 21.25% after tax. If you really do have any money-in-the-bank, I mean.

  15. Biker says:

    OK, I realise you’re probably totally confused about the FHSAS, although I’ve described it before, in a previous attempt to lift you out of your ongoing funk. It’s the First Home Saver Account Scheme.

    It’s a no-risk plan to assist you to get into a home; which, if you’re in the 30% tax bracket, guarantees you 21.25% after-tax.

    My guess is that any money you currently have in the bank is earning you less than 7%, from which you’ll then lose tax.

    Another free tip from yer old mate, The Biker!~ :D

  16. Ned S says:

    Have a play around with this link if you don’t already use it maybe Steve? :

    http://www.refindhouseprices.com/

  17. Biker says:

    Brilliant link, Ned. I’ve added it to our others.
    Two nice features: days on the market; price reduction.

    We’ve just checked our figures on our rents, which have risen by just over 30% in six years; or 5% rise per year. Against those figures interest costs are down 2.74% for the last two years, the two years we’ve seen least rise in rents. Kinda evens out… . :D

  18. Ned S says:

    And the shiny stuff hit USD 1,300 per oz tonight mate? Shoes will be proud of you! :)

  19. Biker says:

    I’m sure when he wants my opinion, he’ll ask for it, Ned.

    Could it be possible, even remotely plausible, that Steve is Shoes?!~
    (Or vice versa, that Shoes is Steve?!~)

    Now, before you scream-in-hysterical-laughter, think about it: Five letters, both start with ‘S’, both taunt the old Biker mercilessly, both are incurable bears, both have long periods of incomprehensible silence…
    perhaps hibernating… .

    Nah, couldn’t be… . ;)

  20. Ned S says:

    Steve is Shoes? Well, from where I sit knowing that Biker isn’t Ned, I’d judge that as being considerably more likely than Biker being Ned mate … But still NOT very likey at all! ;)

  21. Ned S says:

    No-one ever came back to me regarding my offer of a modest little wager mate … Maybe I scared them off when I said “BIG”? But I swear I wasn’t thinking in terms of anything too much over half a mill. So it was only ‘working class’ BIG as opposed to ‘Packer Family’ BIG I figured? :D

  22. Biker says:

    Nah, I’ve been thinking hard about this and I figure Steve really IS Shoes, Ned. I mean, look at the coincidences!!!!~

    I think I’ll insist on an IP address check… and a DNA test…. fingerprinting… a retinal scan… a stool sample… a GPS fix…. ;)

  23. Ned S says:

    “a stool sample” – What on earth could some evidence that they might both spend a lot of time sitting down prove mate? ;)

  24. Biker says:

    Well, according to David Attenborough, diet and foraging habits tell us a great deal about bears, Ned. There’s a particularly noisy Irish bear, for example, which is partial to the beans of basques.

    Think I’ll leave that part of the inquiry to David.

    I see I’ve just been given the finger, so shift/command/3 has captured a screenshot for print analysis. :D

  25. Ned S says:

    The “beans of basques” as foraged by bears – Yep, Mr Attenborough is a true devotee of matters that could inspire only the most enquiring of minds mate! I do hope Dr Watson has advised Sherlock his territory is in danger of being encroached on though? Goodnight ‘n Tamara!!! :)

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