Tag: infrastructure

The Folly of Centralized Spending

I’ve argued that the centralization of government spending in Washington over the past century has severely undermined good governance. Citizens get worse outcomes when funding and decisionmaking for education, infrastructure, and other things are made by the central government rather than state and local governments and the private sector. The problem is the same in the European Union, as a new article in Bloomberg on the funding of Polish airports illustrates:

Local authorities are spending some 205 million zloty ($58 million), including more than $44 million in EU subsidies, to build runways and a new terminal that could accommodate more than 1 million passengers a year. The Olsztyn Mazury Airport is scheduled to open next January, but traffic and revenue forecasts developed by the project’s backers are “very far from reality,” says Jacek Krawczyk, a former chairman of LOT Polish airlines who advises the EU on aviation policy through its European Economic and Social Committee.

Szymany adds to a burgeoning supply of costly new airports across Poland. Since 2007, the EU has spent more than €600 million ($666 million) to build or renovate a dozen Polish airports.

… Mostly, though, Poland’s new airports have been a financial bust. A report in December by the European Court of Auditors found that EU-subsidized airport projects in Poland, as well as others in Estonia, Greece, Italy, and Spain, had “produced poor value for money.” Traffic at most airports fell far short of projections, and there was little evidence of broader economic benefits, such as job creation, the report found.  

With respect to U.S. infrastructure, there is ongoing pressure to increase federal investment, despite decades of experience on the inefficiency of it. Politicians and lobby groups constantly complain that America does not spend enough on infrastructure. But they rarely discuss how to ensure efficiency in spending, or cite any advantages of federal spending over state, local, and private spending.

I’ve discussed the many downsides to federal aid for infrastructure and other local activities here and here. But I was alerted to an additional argument against aid from this Regulation article by William Fischel and this book by James Bennett. Federal aid encourages local governments to expropriate private property, often for dubious purposes.

The article and book discuss the expropriation of Detroit homes for the benefit of General Motors in the 1980s. The “Poletown” project would not have happened without $200 million in federal and state loans and grants to the city. So Fischel makes the point that (abusive) government uses of eminent domain—such as the Kelo case in New London, Connecticut—are encouraged by the flow of federal and state funds to cities. That is, money for “economic development” and the like.

State and local governments would make better decisions if they were responsible for their own funding of programs and projects. The annual flow of more than $600 billion in federal aid to state and local governments should be phased out over time and eliminated.

Too Much Money Going to the Wrong Places

It appears that the Amtrak crash that killed seven people Tuesday resulted from speeding, but big-government advocates are already using this accident to make their case for more infrastructure spending. In fact, the problem is not too little money, but too much money going to the wrong places.

In 2008, President George Bush signed a law mandating that most railroads, including Amtrak, install positive train control (PTC) by December of 2015. PTC would force trains to slow or stop if the operator ignored signals or speed limits.

In 2009 and 2010, President Obama asked a Democratic Congress to give him $10 billion to spend on high-speed trains, and Congress agreed. Not one cent of that money went to installing PTC in Amtrak’s Northeast Corridor.

PTC would have prevented this accident. There was plenty of money available to install it, but the Obama administration, in its infinite wisdom, chose to spend it elsewhere. Two days ago, it would have been embarrassing to think that the government-run Amtrak hadn’t yet completed installation of PTC on its highest-speed corridor. Today, it’s a tragedy. But how is it the fault of fiscal conservatives?

This accident is just one more example of a political fact of life: Politicians are more likely to put dollars into new construction, such as high-speed rail, than to spend them on safety and maintenance of existing infrastructure. As John Nolte says on Breitbart, “Amtrak is not underfunded; it is criminally mismanaged.”

Transportation journalist Don Phillips presents one example of Amtrak mismanagement in the June issue of Trains magazine: instead of promoting a culture of safety, Amtrak has a culture of don’t care. Phillips points to a February report from Amtrak’s Inspector General that found that Amtrak has the least-safe working environment of any major railroad. Amtrak employees are more than three times as likely to be injured or killed on the job as employees of BNSF, CSX, Norfolk Southern, or Union Pacific.

This poor record, says the report, is a direct result of a lack of accountability “at all levels.” Employee injuries in 2013 were only one-twelfth as likely to result in disciplinary action as in 2009, resulting in employees who believe today that they “can ignore rules and safe practices with impunity.” Safety is of so little importance in the organization that three out of four of the employees interviewed by the inspector general believed that Amtrak’s safety record was better, not worse, than other railroads.

One reason why Amtrak has a poor safety culture may be that Congress has legally limited Amtrak’s liability for any single crash to $200 million. Imagine the outrage if Congress limited the liability of oil companies, pipeline companies, Monsanto, or other private corporations. Yet the progressives who wrote Amtrak legislation considered such a liability limit perfectly acceptable.

If Congress were to respond to this crash by increasing federal infrastructure spending, it is all too likely that much if not most of that money would go for useless new projects such as new high-speed rail lines, light rail, and bridges to nowhere. We don’t need intercity trains that cost several times as much but go less than half as fast as flying; we don’t need urban trains that cost 50 times as much but can’t carry as many people per hour as buses; we don’t need new bridges if bridge users themselves aren’t willing to pay for them.

As I’ve documented elsewhere, infrastructure that is funded out of user fees tends to be better maintained than infrastructure that is funded out of tax dollars. User fees also give transportation managers signals for where new infrastructure is really needed; if people won’t pay for it out of user fees, it probably isn’t necessary.

Before 1970, America’s transportation system was almost entirely funded out of user fees and it was the best in the world. Since then, funding decisions have increasingly been made by politicians who are more interested in getting their pictures taken cutting ribbons than in making sure our transportation systems run safely and smoothly.

This country doesn’t need more infrastructure that it can’t afford to maintain. Instead, it needs a more reliable system of transport funding, and that means one based on user fees and not tax subsidies or federal deficit spending.

Getting Returns from Infrastructure

While many interest groups are promoting increased federal spending on infrastructure on the grounds that it will spur economic growth, the Wall Street Journal reports that the “benefits of infrastructure spending [are] not so clear-cut.” Yet there is a simple way to determine whether a particular infrastructure project will generate economic benefits.

Spending on transportation infrastructure, for example, generates benefits when that new infrastructure increases total mobility of people or freight. New infrastructure will increase mobility if it provides transportation that is faster, cheaper, more convenient, and/or safer than before. 

In 1956, Congress created the Interstate Highway System and dedicated federal gas taxes and other highway taxes to that system. The result was the largest public works project in history and one of the most successful. Today, more than 20 percent of all passenger travel and around 15 percent of all freight in the United States is on the interstates.

Moreover, this is all new travel; the interstates didn’t substitute for some other form of travel, as other highway and airline travel) have also significantly increased in those years. (Rail passenger travel decreased, but that decrease was a lot smaller than increases in other travel.) The interstates were successful because they provided transportation that is faster, cheaper (because it saves fuel), more convenient, and safer than before. 

If an Interest Group Says We Need to Spend More Money, Check It Out

Young journalists are told, “If your mother says she loves you, check it out.” Every day journalists follow that advice, protecting us all from reading rumors and unconfirmed stories in the morning papers (though of course the increasing pressure to be first with the news is threatening this rule).

But journalists are still too quick to take the word of special interests without seeking other viewpoints, especially in stories about things the taxpayers need to spend money on. Take this morning’s story about water infrastructure on Marketplace Radio:

Following the expensive water-main break that flooded UCLA’s campus, Los Angeles officials say they’re trying to aggressively fix the city’s aging infrastructure. 

The costs are daunting. It’s going to take the city of Los Angeles billions of dollars to fix.

“They estimate some over 20 millions of gallons of water were lost and of course it wound up on that new floor at the Pauley Pavilion Basketball Arena,” says Greg DiLoreto, former president of the American Society of Civil Engineers. “We have some 240,000 water main breaks a year in this country. And the age of our water infrastructure continues to get older and older and older.”

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.