Is inflation higher than central banks think?

By: Claire Jones

© AP

There’s an interesting paper out from the University of Essex looking at whether the public actually listen to central bankers.

This listening matters for monetary policymakers because central banks often justify their inflation targets by saying it gives them an easy-to-communicate goal to the public. This in turn, they claim, helps expectations adjust to the desired slow-but-steady inflation and the target becomes credible and self fulfilling.

There’s much in the paper, Central Bank Announcements: Big News for Little People?, to worry policymakers, then. Notably that most people are not paying attention to what the most powerful group of central bankers in the world, the US Federal Reserve’s Federal Open Markets Committee, or FOMC, say:

Our main finding is that FOMC announcements have little measurable effect on consumers’ perceptions and expectations of inflation and interest rates.

What we want to draw attention to now though is something that we’ve noticed elsewhere -- and is, we would suggest, a facet of the public having their mind on things other than central banking. That is, that people think inflation is much higher than the measures central bankers rely on tell us it is.

Those polled by the paper’s authors, for instance, say they think inflation is a whopping 5 per cent:

For reference, the measure the Fed uses, the Bureau of Economic Analysis’ PCE, puts inflation in the year to November at 1.5 per cent. The Fed targets inflation of 2 per cent.

Nor is this an issue confined to the US.

Benoît Cœuré used his farewell address at the European Central Bank to warn that people in the eurozone think inflation’s been averaging 9 per cent a year. The measure the ECB looks at, HICP compiled by Eurostat, the European Commission’s statistics agency, has averaged 1.6 per cent over the period in question.

As the FT’s Frankfurt Bureau Chief Martin Arnold writes here, the odd German is even thinking of moving to South America -- not the most obvious haven for those that want to escape the clutches of high inflation -- to avoid what many view as steep rises in the cost of living.

Ask anyone at the European Central Bank’s headquarters 20 miles away in Frankfurt about inflation and they are likely to express frustration at its persistently low level. Yet at the Mainz farmers’ market, many people think the opposite.

Prices shot up in shops and restaurants when the euro replaced the Deutsche Mark in 2002, said Ludwig Kloster, a baker from the nearby town of Bad Kreuznach, adding: “The cost of living is still going up.” He aims to retire to Latin America, where “things cost half as much”.

It’s the same in the UK too, with polls showing the public believes inflation is twice as high as the Bank of England’s preferred reading does.

So what on earth is going on?

Our suspicion is that this difference in perception in Europe has a lot to do with substantial rises in the price of housing, which are taken into account to a far lesser degree than one might think.

There is also the issue that while the likes of e-commerce -- and low wage rises -- have helped keep overall prices in check, the cost of living for big-ticket items such as healthcare and education has risen sharply, via FRED:

We’d add that this inflation gap is a massive problem for policymakers. Central banks on both sides of the Atlantic have -- and continue to act -- on the basis that inflation is too low.

But if the public thinks it’s too high, then none of their policies are going to make any sense whatsoever.

We’d be interested in any fixes our readers have in the usual place.


Why it can make sense to pay exorbitant asset-management fees

There is a case for paying more if it truly diversifies your portfolio

Asure way to irritate a private-equity manager is to say the “t” words: two-and-twenty. Their eyes roll: this again. Two-and-twenty (or 2-and-20) is, or used to be, a common fee arrangement for a certain class of asset managers. It comprises a 2% annual fee and 20% of the profits.

With a sigh, the manager tells you how it really is. He gets paid a 20% performance fee only if the returns clear a hurdle rate. The typical management fee is in the low to mid ones. And big investors get fee-free stakes in a fund’s portfolio companies (“co-investments”).

High management fees are avoidable. You can build a diversified portfolio that includes developed- and emerging-market stocks and bonds, plus commodities, using low-cost index or exchange-traded funds. True, it is a bit harder to get cheap access to assets that truly diversify your equity risk or are reliable hedges against inflation. But you could always simply hold more cash.

Yet it is quite wrong to insist, as many do, that the only good fee is a low fee. There is a case for paying more for access to a stream of cash flows that is genuinely different from those you already have. The asset manager may not deserve the fee for his efforts. It may just be a pure rent. But sometimes it is best to suck it up. After all, it is returns net of fees that you should care about.

There has been a long-running shift in assets under management from high-fee, actively managed portfolios into low-fee, “passive” index funds. It is almost quaint these days to pay a hefty fee for stock-picking or for a bespoke bond portfolio. But push down fees in one place and they tend to pop up somewhere else. Capital has also poured into “alternative” assets, including private-equity, venture-capital and hedge funds, which levy the sort of fees that incite a taste for yacht-racing and caviar.

The appeal for investors is in large part raw returns. The best private-equity or venture-capital funds have paid out jackpots. It is also diversification. For many people’s tastes, private equity is repackaged stockmarket risk, with added leverage. But some alternatives are truly different.

If you are up to your teeth in the mature, ripe-for-disruption firms that make up much of leading share indices, it might be a sensible hedge to also get exposure to the would-be disrupters the venture-capitalists are busy grooming.

A common view is that the performance-fee part of charges is fine, but the management-fee part is indefensible. Say you invest $100m in an alternative fund. And, for simplicity’s sake, say “success” means after ten years you double your money and “failure” means you get it back. At 1.5-and-20, you pay $35m in fees if the fund is a success and $15m if it fails.

If the structure was, say, 0.5-and-30 it would better align the incentives of the manager with yours. The charge for success would also be $35m; but for failure it would be just $5m. Why don’t funds offer this kind of a fee structure?

Actually, some do. But there’s a twist: pension-fund managers are not always keen. Should the fund prove wildly successful, they would have to explain to their trustees why they gave away such a big slice of the upside.

What really matters, says Dylan Grice of Calderwood Capital Research, is whether you are getting value for the fees. The flagship fund of Renaissance Technologies, a wildly profitable hedge fund, charged 5-and-44, before it was closed to outside investors. The net-of-fee returns were amazing; why complain?

This attitude might be applied to other niches: funds that invest in esoteric corners of the credit market, say; or funds that lend to biotech or oil-exploration companies in return for a stream of royalty payments, which they package and sell to investors. These might earn, say, a steady 15% gross and pay investors 10% net.

This is attractive, especially if it adds true diversity to your existing portfolio. The fee is the price of entry to a market that is hard for most investors to navigate. Or as Mr Grice puts it: “They know how to do it and you don’t.”

Fees are a drag. The more they take, the less you keep. And it can be galling to stump up for access. Few asset managers will admit that this is what you are paying for. The best venture-capital funds, for instance, claim they are world-class developers of the startups in their care.

But in many ways they resemble elite universities.

Because the best students turn up at their door, they are able to charge high fees—not so much for the stewardship of these precious assets, but for the accreditation and the social networks they provide. So be it. Some irritations are best ignored.

Xi Jinping faces China’s Chernobyl moment

The coronavirus crisis could lay bare the absurdities of autocracy for all to see

Jamil Anderlini

Xi Coronavirus
© James Ferguson/FT

Throughout Chinese history, the reign of an imperial line was believed to follow a pattern known as the dynastic cycle. A strong, unifying leader establishes an empire that would rise, flourish but eventually decline, lose the “mandate of heaven” and be overthrown by the next dynasty.

Similar to Europe’s “divine right of kings”, the mandate of heaven differed in that it did not unconditionally entitle an emperor to rule the Celestial Empire. While on the dragon throne, the “son of heaven” had total power over his subjects. But he did not have to be of noble birth and he could lose his heavenly mandate for being unworthy, unjust or plain incompetent. The right of the populace to rebel was implicitly guaranteed if the heavens were seen to be displeased. Natural disasters, famine, plague, invasion and even armed rebellion were all regarded as signs the mandate of heaven had been withdrawn.

After the powerful peasant emperor Mao Zedong won a civil war in 1949, the Chinese Communist party attempted to dispel such beliefs as unscientific superstition. Since taking power in 2012, President Xi Jinping has encouraged a revival of some ancient traditions and beliefs.

But he has studiously avoided mention of the dynastic cycle and the mandate of heaven, especially as traditional omens have piled up over the past year.

A trade war with China’s biggest trade partner, open rebellion in the former British colony of Hong Kong and pork shortages caused by the devastating spread of African swine fever would all be traditionally regarded as ominous portents that the end of the dynasty is near. But each of these pales in comparison to the unfolding coronavirus pandemic that began late last year in the central Chinese city of Wuhan.

In a twist of history, Wuhan was where the first shots were fired in the 1911 revolution that toppled the last emperor of the Qing dynasty. Today it is the source of a terrifying plague that has already spread across China and around the world and has prompted the biggest ever attempted quarantine of a population — some 60m people.

The fact that China’s authoritarian system is particularly poor at dealing with public health emergencies that require timely, transparent and accurate information makes this far more significant than any other challenge Mr Xi has faced so far.

If the virus can be contained in the coming weeks, then it is still possible Mr Xi could emerge relatively unscathed after blaming provincial officials for the crisis. Having shut down swaths of the economy to contain the outbreak, he may even be able to argue for greater surveillance and control of Chinese society. But if the virus cannot be contained quickly, this could turn out to be China’s Chernobyl moment, when the lies and absurdities of autocracy are laid bare for all to see.

Official censors are already struggling to control the online outpouring of derision and disgust at initial attempts to cover up the disease. One early target for ridicule was the senior health official sent from Beijing to Wuhan to publicly reassure the masses the disease was “preventable and controllable”. He contracted the virus himself and has become a symbol of government incompetence and mendacity.

Outspoken academics and intellectuals have braved imprisonment to lambast the Communist party’s failure of performance legitimacy. Some have explicitly referred to the mandate of heaven and pointed to numerous examples of late-stage dynastic decay. But the defining moment of this crisis — the moment when it went from being a serious challenge to a potentially existential problem for the party — was the death last week of a 33-year-old Wuhan ophthalmologist called Li Wenliang.

In the early days of the crisis, Li had raised the alarm in online chat groups with his medical school classmates after witnessing numerous cases of a strange new pneumonia that did not respond to normal treatment. For that he was reprimanded by his hospital and summoned in the middle of the night by the police, who forced him and at least seven other doctors to sign confessions and pledges to cease spreading “rumours”.

When Li contracted the disease himself, ordinary Chinese were outraged. Even the Supreme People’s Court in Beijing reprimanded the police and praised the doctors who first raised the alarm. But when Li died last week the response was volcanic.

The fact the news was released first by reporters from state media hints at cracks appearing in the fearsome party-controlled propaganda apparatus. Censors were unable to keep up with the outpouring of online demands such as “I want freedom of speech”.

Li’s story is so powerful in part because it fits neatly into another ancient archetype in Chinese history. The incorruptible Confucian scholar who speaks truth to the emperor but is persecuted, and ultimately dies for his honesty, holds a special place in China’s scholarly tradition. Li fits the role perfectly.

The path the virus takes next could determine whether Li is eventually compared to a more contemporary historic figure — the young Tunisian fruit-seller who immolated himself in protest at the injustice of the regime, sparking the Arab Spring and the downfall of several dynasties across the Middle East.

Yes, Rates Are Still Going To Zero

by: Lance Roberts

- Over the last decade, the Federal Reserve has kept rates at extremely low levels, and flooded the system with liquidity, which did not have the effect of fostering either economic growth or inflation to any significant degree.

- The trouble currently is that global short-term interest rates are still close to, or below zero, and cannot be cut much more, which has deprived central banks of their main lever if a recession strikes.

- The biggest challenge the Fed faces currently is how to deal with a recession. While the Fed talks about wanting higher rates of inflation, it can't run the risk that rates will rise.

"If the U.S. economy entered a recession soon and interest rates fell in line with levels seen during the moderate recessions of 1990 and 2001, yields on even longer-dated Treasury securities could fall to or below zero."

- Senior Fed Economist, Michael Kiley - January 20, 2020
I was emailed this article no less than twenty times within a few hours of it hitting the press. Of course, this was not a surprise to us. To wit:
"Outside of other events such as the S&L Crisis, Asian Contagion, Long-Term Capital Management, etc. which all drove money out of stocks and into bonds pushing rates lower, recessionary environments are especially prone at suppressing rates further. Given the current low level of interest rates, the next recessionary bout in the economy will very likely see rates near zero."

That article was written more than 3 years ago in August 2016.
Of course, three years ago, as the "Bond Gurus," like Jeff Gundlach and Bill Gross, were flooding the media with talk about how the "bond bull market was dead" and "interest rates were going to rise to 4%, or more," I repeatedly penned why this could not, and would not, be the case.
While it seemed a laughable concept at the time, particularly as the Fed was preparing to hike rates and reduce their balance sheet, the critical aspect of leverage was overlooked.

"There is an assumption that because interest rates are low, that the bond bull market has come to its inevitable conclusion. The problem with this assumption is three-fold:
  1. All interest rates are relative. With more than $10-Trillion in debt globally sporting negative interest rates, the assumption that rates in the U.S. are about to spike higher is likely wrong. Higher yields in U.S. debt attracts flows of capital from countries with negative yields, which pushes rates lower in the U.S. Given the current push by Central Banks globally to suppress interest rates to keep nascent economic growth going, an eventual zero-yield on U.S. debt is not unrealistic.
  2. The coming budget deficit balloon. Given the lack of fiscal policy controls in Washington, and promises of continued largesse in the future, the budget deficit is set to swell above $1 Trillion in coming years. This will require more government bond issuance to fund future expenditures, which will be magnified during the next recessionary spat as tax revenue falls.
  3. Central Banks will continue to be a buyer of bonds to maintain the current status quo, but will become more aggressive buyers during the next recession. The next QE program by the Fed to offset the next economic recession will likely be $2-4 Trillion which will push the 10-year yield towards zero."
Of course, since the penning of that article, let's take a look at where we currently stand:
  1. Negative yielding debt surged past $17 trillion, pushing more dollars into positive-yielding U.S. Treasuries, which led to rates hitting decade lows in 2019.
  2. The budget deficit has indeed swelled to $1 trillion and will exceed that mark in 2020 as unbridled government largesse continues to run amok in Washington.
  3. The Federal Reserve, following a very short period of trying to hike rates and reduce the bloated balance sheet, completely reversed the policy stance by cutting rates and flooding the system with liquidity by ramping up bond purchases.
The biggest challenge the Fed faces currently is how to deal with a recession. Given the current expansion is the longest on record; a downturn at some point is inevitable. Over the last decade, as shown in the chart below, the Federal Reserve has kept rates at extremely low levels, and flooded the system with liquidity, which did not have the effect of fostering either economic growth or inflation to any significant degree. (As noted, the composite index is of inflation, GDP, wages, and savings, which has closely tracked the long-term trend of interest rates.)
Naturally, at any point monetary accommodation is removed, an economic and market downturn is almost immediate. This is why it is feared central banks do not have enough tools to fight the next recession.
During and after the financial crisis, they responded with a mixture of conventional interest rate cuts and, when these reached their limit, with experimental measures, such as bond buying ("quantitative easing", or QE) and making promises about future policy ("forward guidance").
The trouble currently is that global short-term interest rates are still close to, or below zero, and cannot be cut much more, which has deprived central banks of their main lever if a recession strikes.
The Fed Is Trapped
While the Fed talks about wanting higher rates of inflation, as shown above, it can't run the risk that rates will rise. Simply, in an economy that requires $5 of debt to create $1 of economic growth, the leverage ratio requires rates to remain low or "bad things" happen economically.

1) The Federal Reserve has been buying bonds for the last 10 years in an attempt to keep interest rates suppressed to support the economy.  
The recovery in economic growth is still dependent on massive levels of domestic and global interventions.  
Sharply rising rates will immediately curtail that growth as rising borrowing costs slows consumption. 
2) Rising interest rates immediately slows the housing market, taking that small contribution to the economy away. People buy payments, not houses, and rising rates mean higher payments. 
3) An increase in interest rates means higher borrowing costs, which leads to lower profit margins for corporations. This will negatively impact the stock market given that a bulk of the "share buybacks" have been completed through the issuance of debt. 
4) One of the main arguments of stock bulls over the last 10 years has been the stocks are cheap based on low interest rates. When rates rise, the market becomes overvalued very quickly. 
5) The massive derivatives market will be negatively impacted, leading to another potential credit crisis as interest rate spread derivatives go bust. 
6) As rates increase, so does the variable rate interest payments on credit cards. 
With the consumer being impacted by stagnant wages, higher credit card payments will lead to a rapid contraction in disposable income and rising defaults. 
7) Rising defaults on debt service will negatively impact banks, which are still not adequately capitalized and still burdened by large levels of risky debt. 
8) Commodities, which are very sensitive to the direction and strength of the global economy, will plunge in price as recession sets in. (Such may already be underway.) 
9) The deficit/GDP ratio will begin to soar as borrowing costs rise sharply. The many forecasts for lower future deficits have already crumbled as the deficits have already surged to $1 Trillion and will continue to climb. 
10) Rising interest rates will negatively impact already massively underfunded pension plans leading to insecurity about the ability to meet future obligations.  
With a $7 Trillion funding gap, a "run" on the pension system becomes a high probability.
I could go on, but you get the idea.
The issue of rising borrowing costs spreads through the entire financial ecosystem like a virus. The rise and fall of stock prices have very little to do with the average American and their participation in the domestic economy. This is because the vast majority of Americans are living paycheck to paycheck.
However, since average Americans require roughly $3000 in debt annually to maintain their standard of living, interest rates are an entirely different matter.
As I noted last week, this is a problem too large for the Fed to bail out, which is why it is terrified of an economic downturn.
The Fed's Endgame
The ability of the Fed to use monetary policy to combat recessions is at an end. A recent article by the WSJ agrees with our assessment above.

"In many countries, interest rates are so low, even negative, that central banks can't lower them further. Tepid economic growth and low inflation mean they can't raise rates, either. 
Since World War II, every recovery was ushered in with lower rates as the Fed moved to stimulate growth. Every recession was preceded by higher interest rates as the Fed sought to contain inflation. 
But with interest rates now stuck around zero, central banks are left without their principal lever over the business cycle. The eurozone economy is stalling, but the European Central Bank, having cut rates below zero, can't or won't do more. Since 2008, Japan has had three recessions with the Bank of Japan, having set rates around zero, largely confined to the sidelines. 
The U.S. might not be far behind. 'We are one recession away from joining Europe and Japan in the monetary black hole of zero rates and no prospect of escape,' said Harvard University economist Larry Summers. The Fed typically cuts short-term interest rates by 5 percentage points in a recession, he said, yet that is impossible now with rates below 2%."
This too sounds familiar, as it is something we wrote in 2017 prior to the passage of the tax reform bill:

"The reality is that the U.S. is now caught in the same liquidity trap as Japan. With the current economic recovery already pushing the long end of the economic cycle, the risk is rising that the next economic downturn is closer than not. The danger is that the Federal Reserve is now potentially trapped with an inability to use monetary policy tools to offset the next economic decline when it occurs. 
This is the same problem that Japan has wrestled with for the last 20 years. While Japan has entered into an unprecedented stimulus program (on a relative basis twice as large as the U.S. on an economy 1/3 the size) there is no guarantee that such a program will result in the desired effect of pulling the Japanese economy out of its 30-year deflationary cycle. The problems that face Japan are similar to what we are currently witnessing in the U.S.:
  • A decline in savings rates to extremely low levels which depletes productive investments
  • An aging demographic that is top heavy and drawing on social benefits at an advancing rate.
  • A heavily indebted economy with debt/GDP ratios above 100%.
  • A decline in exports due to a weak global economic environment.
  • Slowing domestic economic growth rates.
  • An underemployed younger demographic.
  • An inelastic supply-demand curve.
  • Weak industrial production.
  • Dependence on productivity increases to offset reduced employment. 
The lynchpin to Japan, and the U.S., remains demographics and interest rates. As the aging population grows becoming a net drag on "savings," the dependency on the "social welfare net" will continue to expand. The "pension problem" is only the tip of the iceberg."
It's good news the WSJ, and mainstream economists, are finally catching up to analysis we have been producing over the last several years.
The only problem is that it is likely too little, too late.

Crumbling Infrastructure – or Crumbling Cliché?

Democratic US presidential candidate Pete Buttigieg unveiled an infrastructure plan that magically settled on the same trillion-dollar price tag that candidate Donald Trump announced in 2016. But is America’s infrastructure really so bad?

Todd G. Buchholz

buchholz2_Eric HindsEyeEmGetty Images_potholecautiontape

SAN DIEGO – America’s infrastructure has been crumbling ever since George Washington crossed the frozen Delaware River on a leaky boat. That seems to be a bipartisan “truth.” And every four years, presidential candidates remind us of the claim.

Most recently, Democratic candidate Pete Buttigieg unveiled an infrastructure plan that magically settled on the same trillion-dollar price tag that candidate Donald Trump announced in 2016.

But is America’s infrastructure really so bad? After all, Amazon has figured out how to deliver everything from bananas to cough drops within hours of a customer’s click. No one could do that in George W. Bush’s era, much less George Washington’s.

It is a mistake simply to count up potholes and rusty rivets on bridges and then declare a crisis.

In fact, the Department of Transportation reports that the number of bridges deemed “poor” has fallen by 22% over the past decade. Regardless, we should be assessing what I call “infrastructure load,” and instead ask whether more goods and services are being delivered on time.

Under the lens of infrastructure load, we see the gig economy unleashing a slew of new services that work around potholes. Uber and Lyft boost the economy’s efficiency because fewer vehicles are sitting idle. The San Diego International Airport cut the ribbon on a beautiful $128 million parking garage in 2018.

You can easily slide into a parking spot, because nearly half are vacant. As a result of ride-hailing options, one-third fewer high-school kids are bothering to get a driver’s license. This threatens automakers in the long-term but provides a revolutionary convenience for those who need a ride home from the pep rally or the pub.

For those who prefer to stay home, DoorDash and Grubhub drivers scurry to bring customers hot meals, battling snow, rain, and gloom of night, like the heralded postmen of the past. Gig workers are getting the job done.

In the business-to-business sector, railway companies like Norfolk Southern and CSX have recently adopted “precision-scheduled railroading” to pack more containers onto trains, reducing the need for more departures. Norfolk Southern figures it can lay off 500 of its locomotives. UPS, FedEx, and DHL are battling it out on the roads and in the sky to deliver goods more cheaply, aided by tech logistics startups like Convoy, which is backed by Bill Gates and Jeff Bezos.

At America’s freight ports, the biggest problems are not structures, but union rules that have stirred up trouble ever since Marlon Brando starred in On the Waterfront in 1954. Meanwhile, passenger terminals are booming. In the 1970s, the television show The Love Boat featured Princess Cruises’ fleet of just two ships. Today, Princess has 19 ships and, along with its competitors, hosts about 14 million vacationers annually, departing from Florida, California, Alaska, and Hawaii.

Infrastructure load must also count digital loads, including this year’s rollout of 5G. Our “Golden Age of Television” is made possible by broadband speeds that allow smart TVs and phones to stream innumerable programs. “Netflix and chill” relies not on a comfy sofa, but on rapid-fire electrons beaming through space.

True, streets in the 1970s were plagued with fewer potholes. But most households back then were lucky to receive a few television channels clearly (and when the president gave a speech, he showed up on all of them!). If you live in the United States, which infrastructure era do you really prefer?

Of course, America does have too many potholes and too much traffic. For many people, commuting can be miserable. Long-distance commuters are 33% more likely to suffer from depression, according to a RAND study. Radio host Howard Stern once launched a New York gubernatorial campaign by promising to ban daytime road construction. Stern’s plan no doubt lifted listeners’ spirits and drew some voters.

One solution is telecommuting. A Gallup poll reports that 31% of employees now work remotely. Still, something must be done for those who do travel. The answer is not simply more government spending.

In a remarkable Boston Globe essay, former US Treasury Secretary Lawrence Summers documented how bureaucratic bungling and special-interest niggling delayed a repair of the 232-foot (71-meter) Anderson Bridge in Cambridge, Massachusetts by five years and inflated the cost by $5 million. The original bridge, built in 1912, took 11 months to build.

There are no “shovel-ready” infrastructure projects when special interests grab hold of the shovels. The NIMBY (“not in my backyard”) mentality that opposes new infrastructure will not subside. When delivery by drone is perfected, NIMBY will become NAMBY: not above my backyard.

But alternatives exist. For starters, more cities and states should adopt “congestion pricing,” which makes it more expensive to drive during peak hours. A recent study showed that Stockholm’s congestion pricing cut air pollution by 5-15% and reduced asthma attacks, while also making it easier to move around the city.

Second, we should repeal laws that unnecessarily drive up construction costs, including the Davis-Bacon Act of 1931, which requires federal contractors to pay “prevailing wages,” usually defined as union wages, even though 87% of construction workers are non-union. The Congressional Budget Office estimates that repeal would free up an additional $12 billion for federal projects over the next ten years.

Finally, to spur construction of new toll roads, which are usually financed through municipal bonds, a special tranche of small-denomination bonds should be issued to local residents. As an incentive to buy the bonds, drivers would be given a lifetime free pass on the new road. This would fund more routes, build civic pride, and give investors downside protection. Even if the bond prices fell, bondholders would still get free passage.

Today’s infrastructure projects will not last forever, of course. In 1776, to keep the British redcoats at bay, George Washington’s troops burned down a little crossing in the Bronx called King’s Bridge, built in the 1600s. The bridge crumbled. But somehow the new country survived and thrived.

Todd G. Buchholz, a former White House director of economic policy and managing director of the Tiger Management hedge fund, was awarded Harvard University’s Allyn Young Teaching Prize in economics and is the author of New Ideas from Dead Economists and The Price of Prosperity.