Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Rep. Schweikert: Significant Uncertainty and No Resolution in Sight

Jobs, incentivization, uncertainty—these are the three key words I hear from my contacts everyday. The uncertainty we all know stems from the regulation floating out there and the present regulation passed which has yet to be fully implemented (good old Dodd-Frank) which then we have all seen has all but paralyzed job creation.


Governors like Rick Scott (R-FL) tell me the most important day of the month for him is Jobs Friday because it is the one day where success or failure can be measured when it comes to getting Americans back to work. As the deficit super committee tries to break bread over spending and the President tours the country with the "if you love me you will pass this bill" plea, the fact is, businesses are spectators watching the circus known as DC politics. Right now, some Congressmen are going through the President's jobs plan with a fine tooth comb. Rep. David Schwikert (R-AZ) is one of them. I caught up with him on why he thinks the President's jobs plan and Basel III agreements is creating a "perfect storm for infrastructure funding".

Rep. Schweikert: Although these two are seemingly unrelated to one another, both could have a big impact on how much it costs to fund roads, bridges and other types of infrastructure projects. While the President’s so-called “jobs” bill is intended to focus largely on creating and fixing infrastructure, the President is also proposing a requirement that would make it harder to do just that. Currently, individuals who purchase tax exempt municipal bonds do not have to pay taxes on the interest from these bonds. This is a commonsense incentive and has long encouraged private financing of public projects. However, President Obama wants to take this incentive away and require individuals who earn more than $200,000 to pay taxes on interest received from these bonds. This coupled with the Basel III agreements, which will require banks to raise additional billions in capital, will make it much harder for states and localities to obtain project financing. We simply cannot create infrastructure jobs if it is cost prohibitive to fund these projects.

LL: Will the price tag of these proposals break the bank for states?

Rep. Schweikert: Unfortunately, yes. Though this proposal may be a windfall for the federal government, it will leave state and local governments with higher borrowing costs. Nearly sixty percent of investors in tax exempt bonds have incomes above $200,000. The tax exempt status of these bonds creates demand for investors and in turn lowers borrowing costs. By removing the economic incentive for these individuals to buy municipal bonds, states and localities will be forced to pay higher interest rates to attract investors, and ultimately see the costs of infrastructure projects skyrocket.

LL: How will these changes impact the muni market?

Rep. Schweikert: This is a very significant change for the muni market. What the President is doing in effect is removing the economic incentive for more than half of the current market participants to ever buy muni bonds again. Think about what would happen to the local diner or Laundromat if half of their customers stopped showing up. It's a very significant change.

LL: Let's talk Basel III requirements. What is your biggest concern?

Rep. Schweikert: For months I have been concerned with the progress on the Basel III agreements. The current proposal requiring a 7% common equity capital requirement and an additional surcharge of 1% to 2.5% will require banks to raise an staggering additional $725 billion in capital according to a recent report. No one is saying banks shouldn't hold more capital, but I think we need to be careful about how bluntly we implement these changes. The U.S. economy is still working through the aftermath of the 2008 crisis and everyone is worried about exposure to European sovereign debt. The Basel III requirements are like telling a runner to go do a marathon after he just had a double knee replacement. We'll get there in time, but we need to be smart about how we shore up the financial system.

In terms of Base III's impact on infrastructure funding, many of these projects employ traditional loan financing in addition to tax free municipal bonds. Unlike lending money on liquid assets like cars and homes, infrastructure loans require more precision because the underlying project is large, illiquid, and can last many years. Under the new requirements envisioned in Basel III, capital changes will not only take money out of the system that finances these infrastructure projects, but will also make it far more difficult for financial institutions to justify making large, long-term loans.

LL: in the end how many potential jobs are hanging in the balance?

Rep. Schweikert: It's less a question of how many jobs are hanging in the balance and more a question of how many jobs will never be created because these projects can't be financed. We constantly hear about how uncertainty hinders economic expansion. Right now we have significant uncertainty and no resolution in sight.

The bottom line is that these changes don't happen in a vacuum. When you remove the incentives for investors to participate in markets and make it more difficult for banks to lend money, there is a ripple effect throughout the economy. Ultimately, the President needs to stop meddling for short term gain and realize how damaging his proposal is, especially when combined with the Basel III agreements. Only then can we start providing the certainty needed to create jobs.

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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."