U.S. Capital Stock Declining

According to a recent article by Reis, a leading real estate and property research firm, the capital stock of America is depreciating at its fastest pace in 72 years, even faster than at the depth of the Great Depression.

Thanks to Mark Waterhouse from Garnet Consulting Services in Connecticut for calling this interesting article to our attention.

Go here to read the Reis article.

This is a serious problem with implications for states and communities across America. It has short and long term implications for economic competitiveness. In short, it hampers our ability to grow. It also reminds us that we should grow in a "smarter" way in the future to better manage our infrastructure costs. It may suggest in some cases that cities and counties need to seriously consider moving toward governmental consolidation, following the recent move by Louisville and Jefferson County, Kentucky.

Business investment levels were healthy across the 1993-2000 period. These levels have fallen off sharply in the past three years due to the recession and national security issues delaying planned investments. They will not return until we reduce the high level of risk and uncertainty that exists across the world.

Government has been running behind in its investments in public infrastructure and facilities for many years. This problem worsened in the 1980's and 1990's, sparked by a major pull back in Federal investments in revenue-sharing and major infrastructure projects. Plus most states and communities are now experiencing the back side of their infrastructure system life cycles. Putting the issue lightly, these systems are suffering from old-age. Is it little wonder that states like Ohio are looking for alternatives to state management of their turnpike system, or why Indianapolis decided several years go to turn over the operation of its waste treatment plants to the private sector?

Economists worry about the long-term effects of under-investment in public infrastructure on overall productivity growth, which is a much understated source of productivity growth in the economy. For one, talk to Randy Eberts at the Upjohn Institute.

How do we cope with this problem? As the Reis article says, our public capital stock is unlikely to get much help during this current period of increased defense spending. Will the prospects improve beyond our current environment? Most state and local governments have adopted a "make do" attitude about infrastructure, favoring basic maintenance over more costly system improvements.

All public finance is "creative" finance in today's world of capital scarcity. To meet the investment challenge described in the Reis article, state and local governments must do one of two things: 1) take on more public debt; or 2) look to the private sector to respond to these needs through new "market-based" initiatives. And yes, some combination of the two is also possible.

Now you know why you cannot raise funding for all those deserving infrastructure projects in your community.