Can Green Banks and Infrastructure Banks Save the U.S.?

Sec. Tim Geithner said it's not the government's job to pick winners in the economy, but rather to guide choices. I wondered: How do you nudge the private sector without nudging in a certain direction? One answer from the White House might be: More banks.

No, not Wall Street banks. Public-private banks to foster investment in infrastructure and green energy projects, which leverage the government's low borrowing rates to finance companies looking to take a risk and build. To understand more about these banks, I spoke with the Brookings Institution's Martin Baily, author of a wonderful and clear-eyed paper, The Next Economy and the Growth Challenge for the United States. Our interview, conducted via email, is reprinted below:

Geithner said it's not government's job to pick winners, but rather guide choices. Do you see a difference, and what specific government interventions/rules/laws do you want to see that help US companies grow, add jobs and innovate? 

What is the difference? An example would be the R&D tax credit. It guides the private sector to do more R&D but does not specify which company or what project. What would I do? The U.S. is very good at innovation. To help it keep going, I would ease restrictions on H1B visas and green cards for skilled people; step up funding for basic and intermediate research, as Obama has proposed; reform the corporate tax code to broaden the base and lower the tax rate; develop a credible plan to reduce the budget deficit to no more than 2 percent of GDP over the next 15 years.

For the long run, we need to improve our K-12 education system. A McKinsey study of education looked at many countries and concluded that this involves measures to increase the quality of teachers -- first, by recruiting them from the upper half of college graduating classes, and second, by having programs to mentor and train teachers on the job, and third by firing bad teachers.

One idea that seems to be cropping up is the concept of new governments "banks." A green bank. An infrastructure bank. Can you explain in the simplest terms how a bank like this would work and why you think it's a smart or bad idea?

Two goals with these banks. First goal is to remove the decisions about federal infrastructure spending from the hand of Congress to avoid the problem that every congressman or woman has to have stuff in their district. Second goal is to increase spending on infrastructure or green tech by allowing the Bank to borrow at the Treasury interest rate, making it much cheaper to finance projects.

I am against that in the current fiscal situation because the federal government is already borrowing trillions and has a gazillion dollars of liabilities to Social Security, Medicare, pensions, and everything else. I am also skeptical about the benefits of some of the proposed spending projects. Why do we need to spend billions of taxpayer dollars on high speed rail?

Let's use the infrastructure we have better. Congestion charges, tolls. Get the private sector to build stuff and charge for it -- revamp regulation to encourage nuclear power and discourage coal burning. We need to make sure that we fix and maintain the bridges and interstates.

What problem are we trying to solve? It is already easy and cheap to ship people and goods around the US. I can fly to California for a business meeting and be back home the same day. US freight rail system is very good and productive. The biggest problem is urban congestion (same as in Beijing and Paris). There is a lack of willingness to take the steps needed to solve the problem. City governments in Washington and New York could make it much easier to get around if they really wanted to with parking enforcement, computerized phased stop lights; fixed potholes; and congestion charges, which are working well in London and Singapore.

How worried are you about the prospect of a Chinese housing bubble or food inflation causing a rapid slowdown of the Chinese economy, and hurting growth for the US and other countries in China's economic orbit? 

This is a complex issue. By the end of 2011, I expect the US recovery to be pretty strong and more robust to external shocks such as a slowdown in China. The Chinese seem to be pretty good and managing their economy, so the chances are good they will avoid a deep downturn. If that is not correct, and they were to have a severe downturn, this would really rattle the global economy and the US would be affected. China cannot stop buying US dollar assets without killing their own export growth, so I expect them to continue at least for some time.