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A Conservative Investment

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By Emil W. Henry Jr.
Monday, December 8, 2008

In the wake of the recent electoral rout, we conservatives must redefine ourselves in a world that has changed since the birth of the Reagan Doctrine. One new reality is the imperative that our government modernize America's aging energy, water and transportation infrastructure.

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Many conservatives are uneasy with such talk -- clinging to the notion that government investment or oversight is anathema to Reagan orthodoxy and other core conservative beliefs. They fear the creation of another permanent bureaucracy, foresee a strain on the budget at a time of extreme economic distress and argue that such spending is an ineffective economic stimulus. These are all legitimate worries, but they miss the bigger point: Our infrastructure needs are at a critical juncture.

Like the maintenance of a strong military -- investment that protects prosperity -- investment in key infrastructure is consistent with Reagan principles. Moreover, such "expansion" would promote several conservative ideals: economic growth, energy independence, national security and U.S. competitiveness.

A dramatic change in the national political climate favors such investment. Leaders in both major parties are giving voice to historically underemphasized concerns such as the impact of airport, seaport and roadway congestion on productivity; the dangers of aging water and wastewater systems; and the need for an expanded and reliable transmission grid to enhance competition among suppliers of electrical power. Barack Obama has indicated his intention to make infrastructure spending a central tenet of his economic plan and may even promote establishing a stand-alone agency in the form of the National Infrastructure Bank.

The Bush administration had little taste for such expansions, but I don't fault its reasoning. The priority at the federal level was on securing critical infrastructure because that was the hand the administration was dealt -- a nation at risk. Today we have new priorities, and the private sector alone cannot handle the job. And given the complexity of multiple intersecting jurisdictions, the states are not appropriate venues for much of the prioritization that must occur.

Economic conservatives recognize the difference between spending and investment. We view sound economic growth as the best way to promote prosperity and protect economic freedom. Infrastructure expenditures are capital investment for future growth. By investing in the reduction of air, automotive and rail congestion, and by improving the reliability of our power supply, we will increase productivity and foster competitiveness.

Conservatives are also the protectors and defenders of private enterprise. Companies invest today so they can grow tomorrow. A manufacturing CEO understands that he is not behaving responsibly if his company's capital expenditures fall below annual depreciation for a sustained period, or if it invests less in its plant and equipment than competitors do. But this is exactly the scenario today: The average age of our water pipes is about 40 years. Many U.S. power plants were built in the 1950s. China is building the equivalent of one new world-scale (1,000 megawatt) power plant per week. Our transmission grid, with more than 180,000 miles of active high-voltage wire, is an outdated balkanized patchwork of regional systems in multiple regulatory jurisdictions. U.S. investment in infrastructure has fallen 50 percent since 1960, to 2 percent of gross domestic product. By contrast, China and Europe are budgeting 9 and 5 percent respectively as a share of GDP. The United States also lacks high-speed rail.

We have reached an environmental tipping point in a new world order. Energy independence, national security and U.S. competitiveness are inextricably linked to infrastructure development. Renewable energy will be key in our future; electric transmission lines must be built or upgraded to carry renewable energy from remote locations to population centers. We cannot tolerate infrastructure breakdowns in which the failure of isolated pieces of equipment translate into systemwide chaos, as happened during Katrina's early hours in New Orleans or the Northeast blackout of 2003. Investment in public transit, energy-efficient buildings, renewable energy and the systems required to implement roadway congestion pricing will all reduce demand for oil in our goal of energy independence.

Conservatives know that the private sector is better than the government at designing, building, operating and financing infrastructure. This, combined with the magnitude of the spending required, means government will have to tap private capital and expertise. Conservatives can supply leadership in private-sector participation, encourage public-private partnerships, and help ensure that central planning and prioritization are rooted in clinical cost-benefit analysis, not politics.

Conservatives should stay true to the Reagan legacy in the coming infrastructure debate. Unimaginative adherence to a historical orthodoxy that ignores economic realities and global competition may simply extend the Republican stroll in the wilderness.

Emil W. Henry Jr. was assistant secretary of the Treasury from 2005 to 2007; his duties included oversight responsibility for Critical Infrastructure Protection. He is managing director of Neuberger Investment Management.


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