Tag: infrastructure

The Old Infrastructure Excuse for Bigger Deficits

Washington Post columnist/blogger Ezra Klein recently echoed the latest White House rationale for additional “stimulus” spending for 2013-15 and postponing spending restraint (including sequestration) until after the 2014 elections. Klein argues for “a 10- or 12-year deficit reduction plan that includes a substantial infrastructure investment in the next two or three years.” In other words, a “deficit-reduction plan” that increases deficits until the next presidential election year.

Citing Larry Summers (who similarly promoted Obama’s 2009 stimulus plan while head of the National Economic Council) Klein says, “There’s a far better case right now for being an infrastructure hawk than a deficit hawk.”

“Deficit hawks tend to [worry that] … too much government borrowing can, in a healthy economy, begin to “crowd out” private borrowing. That means interest rates rise and the economy slows… That’s not happening right now. In real terms — which means after accounting for inflation — the U.S. government can borrow for five, seven or 10 years at less than nothing… . That’s extraordinary. It means markets are so nervous that they will literally pay us to keep their money safe for them.”

If low yields on Treasury and agency bonds simply reflected investor anxiety (unlike stock prices),  rather than quantitative easing, then why has the Federal Reserve been spending $85 billion a month buying Treasury and agency bonds? Despite those Fed efforts, Treasury bond yields have lately been moving up rather smartly – even on TIPS (inflation-protected securities). The yield on 10-year bonds rose by a half percentage point since early May. It is not credible to assume, as Summers does in a paper with Brad DeLong, that today’s yields would remain as low as they have been even in the face of substantially more federal borrowing for infrastructure. Even the Fed’s appetite for Treasury IOUs has limits. 

A second worry of deficit hawks, according to Klein and Summers, “is a moral concern about forcing our children to pay the bill for the things we bought… .These are real, worthwhile concerns. But in this economy, both make a stronger case for investing in infrastructure than paying down debt.”  Paying down debt?!  Nobody is talking about paying debt. That would require a budget surplus.  The debate is only about borrowing slightly less (sequestration) or substantially more (Obama).

The Summers-Klein argument for larger deficits is that interest rates are very low, so why not borrow billions more for a “substantial investment” in highways, bridges and airports?  Summers says, “just as you burden future generations when you accumulate debt, you also burden future generations when you defer maintenance.”  This might make sense if there was any link between government tangible assets and federal liabilities.  In reality, though, this smells like a red herring. Politicians always say they want to borrow more to build or rebuild highways and bridges.  But this is not how borrowed money is spent, particularly when it’s federal borrowing.

Accumulation of federal debt since 2008 − including the 2009 stimulus plan − had virtually nothing to do with investment. Nearly 90 percent of the  2009 “stimulus” was devoted to consumption – $430.7 billion in transfer payments to individuals, more than $300 billion in refundable tax credits, $18.4 billion in subsidies (e.g., solar and electric car lobbies), more pay and perks for government workers, etc. Stanford’s John Taylor shows that even the capital grants to states − ostensibly intended for infrastructure projects − were used to reduce state borrowing and increase transfer payments such as Medicaid.

In the National Income and Product Accounts (NIPA), the closest thing we have to a measure of “infrastructure” is government investment in structures.  Federal borrowing in the NIPA accounts rose from $493.5 billion in 2008 to $1,177.8  in 2010, yet total federal, state and local investment in structures was unchanged − $310.1 billion in 2008 and $309.3 billion in 2010. Such investment was lower by 2012, but not because federal borrowing was “only” $932.8 billion that year.  

NIPA accounts show only a $12.9 billion federal investment in nondefense structures in 2012 and $8.5 billion for defense structures. By contrast, transfer payments accounted for 61.7 percent of federal spending in 2012, consumption for 28.2 percent, interest 8.5 percent and subsidies 1.6 percent.   Consumption is mostly salaries and benefits. Transfer payments did include more than $607 billion in grants to states and localities in 2011, according to a new CBO study, but 81.7 percent of such grants were for health, income security and education, leaving only 10 percent for transportation. Transportation accounted only 3.2 percent of total federal spending in 2012 and nine percent of “discretionary” spending.

In short, direct federal infrastructure investment plus grants to states add up to only a little over $80 billion out of a budget that exceeds $3.5 trillion. If federal borrowing had anything to do with $80 billion a year in federal infrastructure spending, then we wouldn’t have been borrowing about a trillion a year for the past four years. 

Klein’s rephrasing of Summers’ rerun of the 2009 “infrastructure” excuse is not a plausible argument for increased federal debt. It is, at best, an argument for ending the chronic misuse of borrowed money to pay for transfer payments and government consumption so that we could prudently reallocate a greater share to transportation infrastructure.  

 

Infrastructure Is Not the Problem

The sudden collapse of a 58-year-old bridge across the Skagit River in Washington state has led to renewed calls to spend more money on American infrastructure. But if that spending comes out of tax dollars rather than user fees and is dedicated to replacing bridges, it will be seriously misplaced.

The usual media hysteria followed the collapse. “Thousands of bridges around the U.S. may be one freak accident or mistake away from collapse,” screamed CBS News. “If just one of [New York’s Tappan Zee Bridge’s] structural elements gives way, the whole bridge could fall and send” hundreds of cars “tumbling into the Hudson River,” warned Business Week.

About 18,000 highway bridges (less than 3 percent of the total) built in the 1950s and early 1960s have what is now considered to be a design flaw that makes them “fracture critical.” This means that at least one major element does not have redundent support, so if that element gives way, the entire bridge could collapse. The Skagit River Bridge failed when an oversized truck that should not have been on the bridge hit a cross beam that lacked redundent support. “This does not mean the bridge is inherently unsafe, only that there is a lack of redundancy in its design,” says the American Association of State Highway and Transportation Officials (AASHTO).

To listen to the hype, you would think that bridges are failing on almost a daily basis. But put this into perspective: In 2012, more than 34,000 people died in traffic accidents. Virtually none of them died due to a fracture-critical bridge failure. We can do lots of things to make highways safer and reduce that 34,000. A crash program to replace thousands of bridges isn’t one of them and is likely to divert funds away from programs that are far more important.

Many of the stories about America’s infrastructure focus on the number of “structurally deficient” bridges, which (says AASHTO) doesn’t mean the bridges are unsafe but only that they require “significant maintenance and repair to remain in service.” What the stories rarely mention is that in the last two decades the number of structurally deficient bridges has declined by 44 percent, from more than 118,000 in 1992 to fewer than 67,000 in 2012, even as the total number of highway bridges increased from 572,000 to 607,000. The number of fracture-critical bridges has declined from 22,000 in the last four years alone. In other words, the problem is going away without the help of a giant new federal program.

Highway user fees, including federal and state gas taxes and tolls, fund nearly all construction and maintenance of state highways and bridges. The Skagit River Bridge notwithstanding, these roads and bridges tend to be in better shape than those that are locally owned, which need about $30 billion a year from property, sales, or other local taxes. User fees work better than taxes because the fees give highway managers signals about where to spend the money.

Speaker of the House John Boehner wants to dedicate oil and gas royalties to highway infrastructure. But that’s the wrong source of money and it will almost certainly be spent in the wrong places as as much if not most spending will be on glitzy projects that glorify the elected officials who appropriate the money rather than where it is really needed. For example, one sector hungry for more “infrastructure spending” is the rail transit industry, which since 1982 has automatically received a large share of all new transportation dollars. Yet rail transit does virtually nothing to relieve congestion or make our highways safer. Moreover, transit suffers from its own infrastructure crisis, mainly because it is funded mostly out of tax dollars that get spent on glamorous new rail lines rather than user fees that would be spent on maintenance.

Recent highway safety data reveal a striking 20 percent decline in fatalities between 2007 and 2010. This decline was associated with a mere 2.2 percent decline in driving, suggesting that–in the absence of the recession–a 2.2 percent increase in highway capacity and other congestion relief could have produced a similar decline in fatalities. Of the 41,259 fatalities in 2007, 13 were due to a bridge failure; there have been virtually none since then.

In short, the key to sound infrastructure is funding that infrastructure out of user fees rather than tax dollars. Since that’s true, one way to improve highway safety would be to develop a new system of user fees that local governments can tap into so that local as well as state highway engineers receive sufficient funds and the appropriate signals about where to spend money.

It’s Plane Pork

The Washington Post’s David Fahrenthold has identified another budget zombie. This time it’s an obscure grant program administered by the Federal Aviation Administration that dumps money on tiny airports with scant activity. 

From the article: 

Along a country road in southern Oklahoma, there is a place that doesn’t make sense. It is an airport without passengers. 

Or, for that matter, planes. 

This is Lake Murray State Park Airport, one of the least busy of the nation’s 3,300-plus public airfields. In an entire week here, there might be one landing and one takeoff — often so pilots can use the bathroom. Or none at all. Visiting pilots are warned to watch out for deer on the runway. 

So why is it still open? Mostly, because the U.S. government insists on sending it money. 

Every year, Oklahoma is allotted $150,000 in federal funding because of this place, the result of a grant program established 13 years ago, in Congress’s golden age of pork. The same amount goes to hundreds of other tiny airfields across the country — including more than 80 like this one, with no paying customers and no planes based at the field. 

And why does the federal government insist on sending Lake Murray—and other seldom used airports—money? 

In the years since 2000, pork has gone far out of fashion in American politics. But this program has remained strikingly difficult for anyone — from Washington to Oklahoma City — to kill. 

President George W. Bush, more than once, proposed budget cuts that would have ended the program. In 2011, Coburn suggested making states share more of the costs. Instead, last February, Congress kept the program in place when it reauthorized the FAA. 

Budget watchdog groups say these airport entitlements are in a league with the Essential Air Service program — which subsidizes commercial flights to small places — and Amtrak. Their services are spread wide enough to give them a strong base in Congress. 

One constantly hears the cries that the federal government (i.e., taxpayers) isn’t “investing” enough money on “our crumbling infrastructure.” Yet this is precisely what happens when you put politicians in charge of allocating resources: decisions are largely made on the basis of political and parochial concerns rather than sound economic and financial considerations. 

(See this Cato essay for more on federal involvement in airports and air traffic control.)  

Addendum: Fahrenthold notes that former House Transportation and Infrastructure Committee chairman Bud Shuster (R-PA) engineered the “carpet-bombing” of money from this program to congressional districts far and wide. His son, Bill Shuster, now heads the same committee and the apple didn’t fall far from the tree. So don’t expect this zombie to finally be put down anytime soon. 

Obama’s Stimulus: A Bit of Pork, a Lot of Opportunism

A study [$] published in the winter edition of Political Science Quarterly considers two possible reasons for why the 2009 American Recovery and Reinvestment Act (ARRA) failed to sprinkle Uncle Sam’s magic dust onto those areas of the country that were being hardest hit by the recession. 

Was it because well-positioned politicians were successful in delivering the pork? 

Or was it because the recession created a “window of opportunity” for politicians to quickly spend a bunch of additional money on pet causes, which had the effect of benefitting certain areas of the country? 

I’m going to skip right to the answer: the uneven geographic distribution of stimulus funds had only a little to do with traditional pork barreling and much to do with Obama’s then chief of staff Rahm Emmanuel’s famous quip that “You never want a serious crisis to go to waste.” 

On the possibility of traditional pork-barreling, the authors found no statistically significant relationship between the distribution of funds and whether a county was represented by a politician serving on a congressional committee relevant to stimulus funding. Nor was a relationship found between funding and counties that were represented by a Democrat in the House or Senate. However, a relationship was found between funding and those counties that overwhelmingly voted for the president: 

There does, however, appear to be a distinct tilt toward counties that were stronger for the Democratic Party in 2008. All else equal, counties at the 90th percentile of Democratic share presidential vote ’08 received between $35 and $36 more per capita in both total funding and infrastructure projects than did counties at the 10th percentile (p ≤ .001)…The effect of presidential politics may be especially relevant for the distribution of ARRA funds because most of the grants, loans, and contracts funded by the stimulus were in discretionary programs overseen by administrative agencies, over which presidents and their political appointees exercise influence. 

On the other hand, the authors found that a county possessing attributes that synched with the policies funded in ARRA were more likely to receive money. For example, a county with a lot of interstate highway mileage made out better than a county that did not. Another example is counties that had a larger share of state and local government workers received a larger share of funds. 

While it’s not surprising that legislation that funds highway infrastructure projects would benefit areas with more highway mileage, let’s remember that the stimulus was sold by many politicians as being necessary to help those with the greatest need. Indeed, as the authors point out, the text of the legislation stated that a main goal was “to assist those most impacted by the recession.” 

The bottom line is that the Obama administration used the economic downturn to spend a bunch of money it otherwise would not have been able to on a stack of its pet policies. In the process, the counties that did the most to put Obama in the White House received a taxpayer-funded thank you in return.  

This Week in Government Failure

Over at Downsizing the Federal Government, we focused on the following issues this past week:

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Why More Money Hasn’t, and Won’t, Fix the Nation’s Public School Buildings

Adam Schaeffer has just blogged about the massive increase in public school facilities spending of the past two decades, and about President Obama’s likely call to throw even more money at the problem of decrepit schools (in his address on the economy, next week).

Adam argues that money hasn’t fixed the problem, but it isn’t hard to imagine that a true believer in the status quo (paging Matt Damon…) might conclude that we simply haven’t increased facilities spending enough.

I addressed this counterargument a few years ago, using federal government data on the condition of U.S. public schools and data from a survey of Arizona private schools. What I found is that public schools were four times more likely than AZ private schools to have a building in “less than adequate” condition, despite the fact that public schools  spent one-and-a-half times as much per pupil. [And, yes, I’m talking total spending here, not just tuition].

So if private schools can and do maintain their buildings in far better shape than public schools, at far less cost, what exactly are public schools doing wrong? The answer comes from one of the federal government’s own assessments of school facilities nationwide. According to that report,

a decisive cause of the deterioration of public school buildings was public school districts’ decisions to defer maintenance and repair expenditures from year to year. However, maintenance can only be deferred for a short period of time before school facilities begin to deteriorate in noticeable ways. Without regular maintenance, equipment begins to break down, indoor air problems multiply, and buildings fall into greater disrepair… Additionally, deferred maintenance increases the cost of maintaining school facilities; it speeds up the deterioration of buildings and the need to replace equipment.

This routine deferral of necessary maintenance is not, as the spending data show, the result of a funding shortage; it is the result of mismanagement. Allowing a public school to decay has no inevitable consequences for management because public schools have a monopoly on k-12 funding. Private schools, by contrast, would lose students if their facilities crumbled, and so they make a greater (and more effective) effort to maintain them.

The solution to America’s public school repair problems is not to spend more, it is to unleash the freedoms and incentives of the free enterprise system on our creaking, calcified, government school monopoly.

We Don’t Need No Art in Kansas

At POLITICO this morning we find a long opinion piece by Matt Stoller, “Public Pays Price for Privatization,” summarized as “The real infrastructure trend in America today is privatizing what is left.” If that weren’t enough to give you the flavor of the piece, the bio line tells us that “Stoller worked on the Dodd-Frank financial reform law and Federal Reserve transparency issues as a staffer for Rep. Alan Grayson (D-Fla.). He is currently a fellow at the Roosevelt Institute.” Say no more – except, there’s more to say.

Stoller notes, among much else, that Kansas Gov. Sam Brownback just turned over arts funding to the private sector, making Kansas the only state without a publicly funded arts agency.” Don’t reel in horror; the cited Los Angeles Times article has already done it for you: “The governor erased state funding for arts programs, leaving the Kansas Arts Commission with no budget, no staff and no offices.” One imagines there will now be no art at all in Kansas.

Not surprisingly, Stoller extols the giant public works of the New Deal and after, which petered out in the 1970s, he says, after which “international competitiveness and environmental costs drove the logic of cost reductions into our political order. Today, we are still living in the Ronald Reagan-Paul Volcker era of low taxes, low regulations, low pay, low spending and high finance.” It seems not to have occurred to Stoller that perhaps the prior absence of “the logic of cost reductions” in our political order might have contributed to why, as he says, “the New Deal coalition melted in the 1970s.”

Art aside – that’s an easy case for defunding – Stoller does go on to criticize much of the “privatization” that’s taken place since – starting with Fannie Mae and Freddie Mac. He’s right there: These “private-public partnerships” are fraught with peril, not least by giving privatization a bad name, something he doesn’t consider. The idea of “public goods” is not meaningless, but the definition has to be strict, as economists know, and the means for privatizing ersatz “public goods” have to be clean. Given the vast public sector before us, we’ve got years of privatization ahead. Let’s hope it’s done right.