A Missed Opportunity of Ultra-Cheap Money - #ZIRP @NYTimes

From 2009 through September of this year, United States companies issuing such bonds spent a mere 2 percent of the proceeds of those bonds on capital expenditures, or "capex"

Public investment spending as a share of overall economic activity has fallen to lows not seen since the 1940s

A Missed Opportunity of Ultra-Cheap Money

The Portal Bridge over the Hackensack River in New Jersey, built in 1910, is overdue for replacement. Fred R. Conrad for The New York Times

Years of ultralow interest rates engineered by the Federal Reserve may have breathed life back into the economy and buoyed Wall Street. But they have not managed to solve problems like the aging Portal Bridge.

The 105-year-old railway bridge in northern New Jersey has for decades caused delays for commuters in and out of New York. "We have long desired the bridge's replacement," said Stephen Gardner, an executive vice president for Amtrak, whose trains use the bridge. "It's time for it to retire."

A replacement bridge would cost an estimated $1 billion, the sort of sum that financial markets can raise for a private corporation in the blink of an eye. Yet even though the federal government and the state of New Jersey can borrow at rock-bottom rates, the overhaul remains unfunded.

There are many such infrastructure projects needed around the country, providing a stark reminder of the deeper problems in the economy that the Fed's easy-money policies have not been able to fix.

"We are not where we should be when it comes to investment, public or private," said William A. Galston, a former adviser to President Bill Clinton and now a senior fellow at the Brookings Institution.

Graphic

Why the Fed Raised Interest Rates

Officials said the economy was strong enough to keep growing with a little less help from the central bank. They said rates would rise slowly, but borrowing costs already have started to climb.

OPEN Graphic

Mr. Galston in particular lamented the failure to set up a government-backed infrastructure bank in recent years. "This will go down as one of the great missed opportunities," he said.

Public investment spending as a share of overall economic activity has fallen to lows not seen since the 1940s, according to an analysis by James W. Paulsen of Wells Capital Management.

Political impasses have, of course, restricted the flow of money into government projects aimed at improving aging roads, bridges and mass transit. But even in the private sector, many of the hoped-for benefits of low-cost borrowing have not occurred.

Corporations have tapped the markets for trillions of dollars in recent years, yet they plowed relatively little of the money into new operations. Such investments might have bolstered hiring and made American business more efficient and globally competitive.

In some ways, these are the wasted opportunities of the cheap-money years — and they may well remain squandered now that the cost of borrowing appears to be heading higher, even if the initial increases after the Fed's decision Wednesday to move its benchmark up from close to zero will remain modest.

The Fed's stimulus policies worked in many ways. They prompted banks and investors to lend, lifted stock prices and bolstered the confidence of consumers and chief executives. The economy eventually regained strength, causing unemployment to fall, auto sales to take off and house prices to rise somewhat.

But important indicators suggest that the money did not flow where some economists and analysts say it is needed to improve the long-term potential of the economy.

Corporations may not have made the most of the Fed's largess. In theory, low interest rates should spur companies to borrow money that they then invest in new machines and technology that will make their operations more efficient. These investments can improve profitability and make firms more competitive in global markets.

But business investment as a percentage of gross domestic product has remained below historical levels since the Great Recession. A surprising lack of investment also shows up in the recent borrowing habits of companies that issue junk bonds, a market that ballooned after the Fed cut interest rates.

From 2009 through September of this year, United States companies issuing such bonds spent a mere 2 percent of the proceeds of those bonds on capital expenditures, or "capex," according to an analysis of data provided by Bank of America Merrill Lynch. The capital expenditures figures may not capture all investment, the bank's analysts noted. Even so, the data shows that the lion's share of bond proceeds went to pay off other debt owed by the companies and to finance acquisitions and leveraged buyouts.

"Very little of it has been used for capex," said Michael Contopoulos, head of United States high-yield and leveraged loan strategy at Bank of America Merrill Lynch. "We think that's a big problem."

The lack of corporate investment may hold back the United States' growth rate in the future. Higher capital expenditures might have bolstered productivity, a crucial economic yardstick that measures how much an economy produces with resources like labor and capital. Growth in productivity has slowed in recent years, disturbing economists.

A History of Fed Leaders and Interest Rates

The chairwoman of the Federal Reserve is about to begin the process of raising interest rates, a move that her predecessors have taken in recent decades as they put their own distinctive stamp on the economy.

Paradoxically, it is possible that the low interest rates have held back forces that would have made companies more efficient. In an influential speech in 2014, Lawrence H. Summers, a former Treasury Secretary and now a professor at Harvard, cited the experience of Japan, where interest rates have been low for a long time.

"In a period of zero interest rates or very low interest rates, it is very easy to roll over loans," he said. "And therefore there is very little pressure to restructure inefficient or even zombie enterprises."

The Fed's higher interest rates may now usher in a period of upheaval in corporate America. Recent turmoil in the junk bond market suggests that investors expect bankruptcies, particularly in the energy sector. And the pain today may create the sort of longer-term changes that would make the economy stronger. Conversely, if banks and bond investors cut back too much on lending, the economy could suffer.

But even as interest rates appear to be heading higher, some economists say there is an optimistic, alternative possibility.

Under this theory, productivity was weak in the years after the crisis because high unemployment kept labor costs depressed, giving companies an easy way to maintain margins. "Employers can be pretty sloppy in terms of efficiency," said Jared Bernstein, a former member of President Obama's economic team and now a senior fellow at the Center on Budget and Policy Priorities. "It's not hard to squeeze the heck out of labor costs."

Now, as unemployment has fallen, companies may compete more for workers, potentially pushing up wages. Confronted with higher labor costs, companies will have no choice but to invest to become more efficient, the theory goes. "You want an economy and labor market where firms can't afford to be inefficient," Mr. Bernstein said.

Question marks, however, will most likely continue to hang over the country's roads and railways as interest rates rise.

If the economy continues to grow and fiscal pressures ease, the federal government, state and cities may find more to spend on infrastructure even if they face higher borrowing costs.

But the substantial investment that some Democrats are hoping for seems improbable. Many Republicans assert that the infrastructure needs are overstated and that the private sector, rather than the taxpayer, needs to play a much greater role.

Congress overcame ideological differences this month to pass a roughly $300 billion transportation bill that provides funding for roads and bridges.

The bill happens to contain measures that could make it easier to secure funding for replacing the Portal Bridge, as well as building new tunnels under the Hudson. The existing tunnels, damaged by Hurricane Sandy, were the cause of long delays in July that caused an outcry among commuters.

Any rebuilding will take longer and cost much more than earlier plans. But advocates for public works, while saying the transportation bill falls short of the overall needs, nonetheless see reason to be encouraged.

"I'm optimistic; there's been big strides made," Mr. Gardner, the Amtrak official, said. "Infrastructure is starting to creep back into people's minds as an issue."
http://www.nytimes.com/2015/12/18/business/dealbook/a-missed-opportunity-of-ultra-cheap-money.html?emc=dlbkpm&emc=edit_dlbkpm_20151217&nl=%3Fnl%3Ddlbk&nlid=10378144&_r=0