Chapter 13

BUFFERS

Not a day goes by that does not reveal deterioration in some aspect of our nation’s public infrastructure, followed by a call for immediate action. The average age of highways and streets, as estimated by the Bureau of Economic Analysis, has increased from sixteen years to twenty-five years since the early 1970s. To those of us who have to drive over our increasingly pockmarked streets, numbers shouldn’t be necessary. Sewer systems and public hospital buildings have aged similarly. Even our national parks are falling behind in maintenance.

But the most visible aging of government assets, and possibly the most consequential, is that of our military. Had we not had excess manufacturing capacity and infrastructure as we entered World War II, we could not have countered our enemies with overwhelming capacity to produce. The size of budget deficits that prevailed during the war was a measure of the extent to which we marshaled the savings of the private sector to help fund the purchase of war materials. But in order to get consumption down and savings up, rationing proved necessary.

Since the end of the war, the average age of military buildings and other facilities has tripled. If there is such a thing as a poster child of aged military equipment, it surely must be the fleet of B-52s, the long-range strategic bomber. It has a long distinguished history. As I wrote in 1952, “The long-range intercontinental bomber tasks will be in the hands of a new swept-wing eight-jet bomber now undergoing test—the B-52.” Its latest version, the B-52H, whose final production run ended in 1964, did yeoman service as recently as 2003 in Iraq. It is scheduled to remain in service beyond 2040. I am certain that there are innumerable current B-52 pilots whose fathers, and conceivably grandfathers, flew earlier models of this renowned aircraft. There are still eighty-five H models, fitted with modern avionics, in our active inventory.

The aging of naval ships has gained even greater prominence in the press. Our aircraft carriers are expected to have a fifty-year service life, and many of them are well up in nautical adulthood. I hesitate to include the USS Constitution (“Old Ironsides”), the oldest commissioned warship afloat, a wooden-hulled frigate celebrated for its exploits in the War of 1812. It is in a class of its own. It was first deployed in October 1797 and most assuredly is the most renowned piece of military equipment still in our inventory. Its propulsion system is identified by the navy with mock seriousness as 42,710 square feet of sail on three masts.

If “Old Ironsides” is the oldest naval vessel in our arsenal, the newest, scheduled to be delivered in 2015, is the aircraft carrier Gerald R. Ford, the first in the Ford class of carriers that are being added to the aging Nimitz and Enterprise class carriers. I can think of no more appropriate tribute to my old boss, President Ford, than to have a leading edge of our military power named after him.

The Abrams tank, the main battle tank of the army, is more than thirty years old, as is the Bradley armored infantry carrier. Much of the army’s equipment, however, is new, fashioned largely for its operations in Iraq and Afghanistan. Some of it, such as the large special trucks engineered to meet the devastation of roadside mines in many sensitive combat areas, may not be relevant in the future.

It is not quite clear, however, how important the aging is to our national security. It all depends on a forecast of who our enemies are going to be five to fifteen years from today. Most analysts believe that the probability of head-to-head superpower confrontations like those that dominated the first four decades following World War II is very small, but no one seems sure. Our military structure cannot significantly change quickly—the very long delivery lead times preclude it. But the type of military hardware we procure in the years immediately ahead will depend very much on our longer-term balance of power perspectives.

The issue of equipment aging divides military and political tacticians and will likely continue to do so for the intermediate future. I would hope that this debate is not resolved by another conflict in which American military capabilities are sorely tested.

SO, TOO, THE PRIVATE SECTOR

The private sector has not been immune from the aging of infrastructure. Since the 1970s, the average age of manufacturing industry assets, for example, has increased from under eleven years to more than sixteen years. Similar aging is evident in wholesale trade, utilities, and air transport.

The share of private nonresidential buildings in real GDP has been in long-term decline since 1981, and those buildings are not being replaced, probably reflecting the slowdown in growth of the working-age population (fewer workers, fewer buildings), as well as the recent increased discounting since 2008 of expected incomes from very long-lived assets.

THE TASK AHEAD

There can be little doubt that a major modernization of our infrastructure is long overdue. It is easy to demonstrate the time and motor fuel wasted in traffic jams owing to failure to keep road capacity growing in line with the number of vehicles on the road. But fixing the public infrastructure is no easy task. Funding is the major obstacle. Our fiscal position is daunting. To balance the budget, we need to raise revenue by a fourth or cut outlays by a fifth, or some combination of the two. We are unlikely to get close to balancing the budget even within ten years. Increasing federal outlays on infrastructure will increase the deficit (negative savings) and must be matched, ex post, by a comparable rise in savings less capital investment by households and private business or by increasing our rate of borrowing from abroad. To the extent that increased deficit spending curtails capital investment in other sectors, it is a depressant to economic growth in the short term and productivity in the long term. But unaddressed is the question of the effect of infrastructure on productivity. Rising outlays on infrastructure will, of course, increase nominal GDP, which, in turn, should increase the level of gross domestic private savings, but not nearly enough to be significant.

We are no longer the nation that we were coming out of World War II, which built a visible public (and private) infrastructure while still diverting a large part of our GDP to Cold War defense. We did it then by maintaining a savings rate out of household income of 10 percent. Today, as I’ve noted, that rate is in low single digits.

THE LARGER ISSUE

Our infrastructure deficiencies are part of a larger problem confronting the United States—the amount of our resources we set aside for contingencies. There are some inventories that sit unused for years—the Strategic Petroleum Reserves, for one. Some resources we produce stand idle for protracted periods and may in fact never be used: vaccine stockpiles for epidemics that never happen and dykes along rivers that never reach flood levels. By far our largest standby asset is, of course, our military.

Such assets serve as guarantees against, for example, foreign invasion, flu epidemics, tsunamis, and hurricanes, none of which are predictable and may never happen. They nonetheless require the building up of buffers of idle resources that are not otherwise engaged in the production of consumable goods and services. They are employed only if and when a crisis emerges. Such buffers address contingencies that range from uncertain but repetitive to rare and unpredictable. The former are insurable because they offer a reasonably steady rate of return to insurers. The latter are not.

Individual fires cannot be predicted, but they happen often enough for almost all cities to create and fund fire departments, whose cost is tantamount to insurance premiums. Health emergencies are not predictable but are also sufficiently repetitive to create health insurance, hospitals, and ambulances. The buffer may encompass expensive building materials (for example, special steels) whose earthquake flexibility is needed for only a minute or two every half century, or lightning rods that could be struck every month, or every decade.

The most visible insurables are life and property. I suspect that the higher the standard of living, the larger the share of GDP that originates in private insurance. Long-term uncertain risks have indeterminate probability distributions and are hence not insurable. Only risks on which actuaries can put a numerical probability are insurable. Risks that are highly variable imply too unstable a rate of return.

The choice of funding buffers is one of the most important decisions that societies must make, whether by conscious policy or by default. If policy makers, private and public, choose to buffer their populations against every conceivable risk, the nation’s current standards of living would, of necessity, decline. Funding such “investments” requires an increase in savings and, accordingly, a decline in immediate consumption. Resources can be put to active use or on contingency standby status, but not both at the same time. Buffers are a dormant investment that may lie idle and seemingly unproductive for most of their lives. But they are included in our total real fixed assets (and real net worth) statistics. It is no accident that earthquake protection of the extent employed in Japan, for example, has not been chosen by less prosperous countries at similar risk of a serious earthquake. Those countries have either explicitly or implicitly chosen not to divert current consumption to fund such an eventuality. Haiti, a very poor country, has not yet fully recovered from its 2010 earthquake. It had neither built a protective infrastructure like Japan’s nor has it had resources to recover on its own. Buffers are largely a luxury of rich nations. Only rich nations have the resources to protect their populations against events with extremely low probabilities of occurrence.

How much of its ongoing output should a society wish to devote to fending off once-in fifty or one-hundred-year crises? How is such a decision reached, and by whom? While the decisions of what risks to take remain predominantly with private decision makers, the responses to low-probability events such as the Japanese earthquake and tsunami of 2011 have been largely government scripted. Although formal data are not available to gauge the depth and quality of our standby buffers, the aging and deterioration of our fixed capital stock, both public and private, is ample evidence that a subclass of those assets, standby buffers, is also in a state of decline.