Sustainable Accounting Practices for Durable Infrastructure

We are beginning to face the contradiction between the need for personal savings and investment on one hand, and a consumption based economy on the other. Increasing personal savings decreases disposable income; with less disposable income, people buy fewer consumer goods, and in our current measures of economic productivity, any decline in consumption decreases economic indicators. Without personal savings, we need to borrow to purchase consumer goods.

Borrowing is useful when the economic life of what you buy exceeds the period required to pay it off. Issuing bonds to build a road that lasts over 100 years, when the bonds are repaid in 20 years, is a pretty clear economic win; 80 years of benefit from the road. The benefit is not nearly as clear when the economic life of what you’ve purchased is less than the period of the loan. Everyone knows that cars depreciate as soon as you drive them out of the showroom. Who knew that homes could do the same thing, declining in value as Adjustable Rate Mortgages drove home payments through the roof?

The fault is not in the systemic risk we facilely blame for the current economic crisis, but in our accounting practices, and in our economic treatment of infrastructure. We make only hazy distinctions between economic activity with long term benefits, like building roads, schools, and sustainable energy infrastructure, and the consumption of candy bars and flat screen TVs.

Although the useful life of these expenditures are vastly different, we lump them together as economic activity primarily because the effort to categorize them has appeared to be too much work. Along with this is the limitation in practice of the useful life of infrastructure by current accounting standards, and public sector infrastructure does not get a treatment of depreciated value or beneficial use that it should. On the books of the public sector, the initial cost is all that is carried as the value, and no viable tools are available in GAAP to define the long terms benefits of infrastructure that lasts for decades.

This problem with our economic metrics leads to a failure to effectively distinguish long term, beneficial economic activity from short term, consumptive activity. The entire period of benefit of the goods purchased should be included not at cost, as they are now, but valued for the depreciated replacement cost over the entire period of benefit, less maintenance expenses.

With all of the efforts toward sustainable infrastructure of various types in the built environment, we need a mature accounting standard for the long term benefit and value of sustainable systems.

200 years might be a good start.