The true purpose of financial markets is to channel savings into productive uses. But today, our largest investors are locked up by the quarterly—even daily and hourly—time horizons of Wall Street financial models and are discouraged from longer-term investing in what our society and economy need the most: infrastructure to rebuild our nation, support job creation, and tackle climate change.
To solve this problem, we propose a new market-based investment policy called the Financial Infrastructure Exchange (FIX), which would channel capital flows away from short-term speculation and toward long-term value creation—with institutional investors, particularly pension funds and retirement accounts, which together make up our country’s non-Social Security retirement capital, as the beneficial intermediary.
Before we get to “how,” it is important to grasp the magnitude of America’s retirement capital: approximately $24.7 trillion as of the end of 2014, including $5.2 trillion in public pension assets. Combined with an estimated $137 billion a year in tax revenue that we forego because retirement plans are tax-exempt, this retirement capital represents a massive commitment of our common resources; the question is, can it better serve our common interests?
We believe the answer is “yes.” The FIX would impose a small financial transaction tax (FTT) on certain trades, including purchases and sales of stocks and bonds and execution of derivatives contracts. The funds raised from that tax would then be used to subsidize institutional investors to offset the perceived costs—mainly, less liquidity and slower returns—of long-term infrastructure investment. The subsidy mechanism could take several forms, but the most likely would be an interest-rate subsidy passed through to institutional investors through the bond markets. The results would be twofold: The infrastructures we need for economic and environmental sustainability would be built, and Wall Street short-termism would be discouraged.
Today, we have a misalignment of massive demand with misspent capital supply. The next-generation infrastructures we desperately need—renewable-energy installations and grids, clean transportation, water conservation systems, energy-efficiency projects—are languishing. How big is the demand? Even for the limited goal of achieving 20 percent clean power and 30 percent efficiency gains over the next two decades, we face an investment gap of at least $3 trillion, according to a recent estimate. The FIX could go a long way toward closing our sustainability investment gaps, while also putting us on track toward full employment, thus raising wages throughout the economy.
The managers of often-underfunded pension funds avoid making infrastructure investments, in part because such investments are less liquid and bring slower (and thus seemingly smaller) returns. Pension funds and retirement accounts are already tax-exempt, so they do not benefit from the primary government incentive toward infrastructure—the tax exemption of municipal bonds. The good news is that the financial crash has made stable, jobs-producing infrastructure investments more appealing in recent years. The bad news? Out of the roughly $6 billion that U.S. public pension funds have invested in infrastructure over the last five years, about $5 billion is invested in other countries, mainly in Europe and Asia. American workers’ savings, in other words, are being put to work by our economic competitors; we’re investing in their future while we shortchange our own and abdicate our responsibility to address climate change.
As America embarks on a much-needed energy transformation, the question of “who decides” is paramount. That’s why we are proposing a decentralized governance framework for decisions about FIX-qualified projects. Local is logical: Sustainability challenges and opportunities vary significantly in different parts of the country and often the best solutions will be highly localized. In addition, local can be more just: FIX boards can present an opportunity for participatory democracy, with meaningful stakeholder participation from grassroots communities. In particular, the convergence of a FIX with states’ compliance strategies with the Obama Administration’s Clean Power Plan could open a huge opportunity to advance environmental justice through community-owned distributed energy systems in low-wealth neighborhoods.
Even in today’s gridlocked environment, the FIX is strongly positioned politically. By channeling FTT revenue directly to public pension funds and other institutional investors, it would avoid budget politics and blunt claims that the FTT costs will be borne by the pensions of middle-class savers. So, too, the FIX could unite a uniquely powerful political coalition. Pursued separately, both a transaction tax and an ongoing, large-scale infrastructure investment program face formidable obstacles today. But if these objectives are combined and institutional investors are central, the battle formation against Wall Street becomes clear: Divide long-term investors against transient traders; combine the progressive constituencies on financial reform, the environment, and jobs; add in governors, mayors, and community leaders who both need financial help in reaching compliance with the new EPA carbon limits and want to deliver new infrastructure and jobs. This new coalition would be formidable, and the result would offer a needed example of the benefits of market capitalism in an era when its costs—human and environmental—have become all too clear.
This essay is adapted from a policy paper published by Demos.