February 17, 2017 4:13PM

Condition of Highway Bridges

Mainstream media reporting on infrastructure seems to be driven by the lobby groups that are pushing for more federal spending. A Washington Post article today reflects two popular lobbyist themes: “the bridges are falling down” and “the federal government needs to solve the problem.” For today’s story, the Post could have saved the reporter’s salary and simply asked the press office at the American Road and Transportation Builders Association (ARTBA) to write it.  

The headline, “More than 55,000 bridges need repair or replacement,” captures the bridges-falling-down theme. That figure is the number of “structurally deficient” bridges, which the Post sources from the ARTBA. But the story does not mention that these bridges (56,007 according to federal data) are 9.1 percent of the nation’s 614,387 bridges, which is the lowest such percentage in 24 years. The chart below shows that the share of bridges in this category fell from 21.7 percent in 1992 to just 9.1 percent in 2016.

That positive trend undermines the scary scenario that most articles want to convene, so it is not mentioned. By the way, “structurally deficient” does not mean unsafe.

The other lobbyist theme is captured by the Post in a quote from Rep. Bill Shuster, “We at the national level have to figure out how we’re going to make these investments.”

No we don’t. Of the 600,000 bridges, 99 percent are owned by state and local governments. Responsibility lies with the owner. The states have a powerful ability to tax, and about half of them have raised their gas taxes in just the past five years to fund highways and bridges. The states can also borrow or privatize to steer additional funds to infrastructure.

The Post story notes the large differences in bridge maintenance across the states. Apparently, 23 percent of bridges in Rhode Island are structurally deficient, but just 2 percent are in Texas. That does not suggest a need for federal intervention, but rather that Rhode Island’s leaders have been negligent.

It also suggests that a new federal spending effort to reduce the number of structurally deficit bridges would be unfair. It would reward irresponsible states such as Rhode Island, and penalize states such as Texas that have already prioritized bridge maintenance.

Media Name: bridges.png

    

January 26, 2017 9:21AM

Confusion over Infrastructure

The Christian Science Monitor thinks that the Democrats wrote their infrastructure plan as a "political bridge to President Trump." Fox News thinks that Trump might "get on board" the Democrats' plan. Statements like these show that many reporters--and by extension members of the public--haven't yet figured out the real issues behind the infrastructure debate.

As Business Insider points out, there's a bigger difference between the two sides over "how it's paid for" than "what gets built." The Democrats want the federal government to spend a trillion dollars, money it would have to borrow. Trump wants private investors to spend their own money. Never the twain shall meet. 

But Business Insider doesn't understand how Trump's idea will work. If Trump is going to rely on the private sector, it says, then only projects that generate revenue will be built because "projects that don't generate revenue for the private sector generally don't get financed." But there are two kinds of public-private partnerships. The kind that Business Insider is writing about is called demand risk because the private partner takes the risk that tolls, fares, or other user fees won't repay the cost.

The second kind is called availability payments because the government agrees to pay the private partner the cost of the project over time, whether or not anyone pays user fees or even uses it at all. In this kind, the public takes the risk. While I much prefer the demand-risk form because I think nearly all infrastructure ought to be paid for out of user fees, Trump may be happy to go with availability payments so long as state or local governments are making the payments, not the feds. Democrats in Congress don't like either one because they short-circuit their ability to appear to give gifts to their constituents.

The third issue that many people don't understand is the difference between Trump and the Democrats over jobs. The Democrats' plan estimates that number of jobs that will be created by spending money on construction and maintenance. They used a simple formula: each billion dollars of spending generates 13,000 jobs (about $76,000 per job). Of course, they really mean job-years, and that formula works as well for digging holes and filling them up as for building roads or water lines.

Trump is less concerned about the immediate jobs than whether projects generate long-term benefits for the economy. Digging a hole and filling it up creates short-term jobs, but if there are no jobs after the project is done, it wasn't worth it. A transportation improvement that generates new travel will generate jobs in the long term. A transportation project that merely substitutes one form of travel for another will generate few, if any, long-term jobs.

So there are three irreconcilable differences between Trump and the Democrats: where the money comes from in the short run (public vs. private); how it is financed in the long run (feds vs. state & local); and what kind of jobs they should shoot for (short-term vs. long-term). In short, while both sides talk about "trillion-dollar plans," they mean very different things.

January 25, 2017 9:50AM

Trump and Democrats Issue Competing Infrastructure Plans

Senate Democrats have proposed an infrastructure plan that calls for $1 trillion in federal deficit spending. In detail, the plan calls for:

  • $100 billion for reconstructing roads and bridges;
  • $100 billion to "revitalize Main Street," that is, subsidies to New Urbanism and affordable housing;
  • $10 billion for TIGER stimulus projects;
  • $110 billion for reconstructing water and sewer;
  • $50 billion for modernizing rail (Amtrak and freight railroad) infrastructure;
  • $130 billion to repair and expand transit;
  • $75 billion for rebuilding public schools;
  • $30 billion to improve airports;
  • $10 billion for ports and waterways;
  • $25 billion to improve communities' resistance to natural disasters;
  • $100 billion for a next-generation electrical grid;
  • $20 billion for broadband;
  • $20 billion for public lands and tribal infrastructure;
  • $10 billion for VA hospitals;
  • $10 billion for an infrastructure bank;
  • $200 billion for "vital projects" that "think big," such as building "the world's fastest trains."

In response, someone has leaked what is supposedly the Trump administration's own list of 50 infrastructure priority projects. It includes such boondoggles as a Dallas-Houston passenger rail line, the congestion-inducing Maryland Purple Line, the $14 billion Hudson River tunnels, and completion of the $2.2-billion-per-mile Second Avenue Subway. Except for the Dallas-Houston line, most of the passenger rail projects were already pretty well decided, but they are still foolish investments that will cost a lot and return little to the economy. There are supposedly more than 250 other projects on a priority list, but it isn't absolutely certain that this list was endorsed by Trump or merely proposed to him.

Update: While I am now certain that the supposed Trump priority list was really "fake"—that is, not really from the administration—it appears that the reason why the Dallas-Houston line was on the list is that it is supposed to be entirely privately financed. While I am skeptical that private funders could profitably build and operate such a line, if they could, it would be appropriate (though unnecessary) to have it on such a priority list.

What most people have been calling Trump's infrastructure plan calls for giving tax credits to private investors who spend money on these kind of infrastructure projects. This has some virtues over the Democratic proposal of direct federal spending:

  1. While the Democrats take a top-down approach dictating where the money will go, Trump leaves the setting of priorities to state and local governments, which have already approved most of the projects on his top-50 list;
  2. Where Democrats would commit the federal government to spend an arbitrary amount of money whether it needs to be spent or not, Trump lets state and local governments decide how much to spend and how they will pay for it;
  3. Where Democrats would add $1 trillion to the deficit, Trump relies on a tax credit program that will cost the feds no more than $167 billion per trillion in spending (less, obviously, if less than $1 trillion is spent);
  4. Where a lot of the Democrats' money would go down a rat hole, at least some of federal tax credits that Trump's plan would issue will be offset by the reduced use of tax-free municipal bonds and taxes paid by companies and workers earning the money.

Typical of central planners, the dollar figures in the Democrats' plan are completely arbitrary.

  • Why should trains and transit, which carry 1 percent as many passenger miles as roads, get roughly as much money as roads and bridges (and probably more considering much of the $200 billion "vital infrastructure" fund would go for high-speed rail)?
  • Why spend $40 billion expanding transit and no money expanding highways when highway use is growing faster than transit in most places and most years?
  • Why no money for upgrading the air traffic control system (which is on Trump's top-50 list)? I don't support the use of tax dollars for such things, but it is a huge oversight from a plan predicated on the idea that federal central planners know the best places to spend your money.
  • Why $110 billion on water and sewer, and not $100 billion or $120 billion? It seems the point of these numbers is to add up to a nice round $1 trillion while divvying up the money to special-interest groups.
  • For that matter, why any at all on water, sewer, and the electrical grid when these should already be adequately funded through user fees?
  • Why is education even on the list when the federal government has never spent more than token amounts of money for school infrastructure?

My complaints about the Trump plan have been:

  1. It's not really a plan—it's just one funding tool;
  2. It doesn't prevent state and local governments from spending the money on completely looney projects such as the aforementioned Dallas–Houston high-speed rail; and
  3. The private-partnership aspect has confused many people into believing that it will only fund projects that can be paid for out of user fees when in fact most projects would require state and local taxpayers to ultimately repay the private contractors out of tax dollars.

While these are valid complaints, the Trump plan is more bottom-up than top-down, as most if not all of the projects on the possibly fake priority list are supported by state and local officials. And while Trump brought a new idea to the table, the Democrats' plan is the same old borrow-and-spend formula that they have used in the past. This is actually worse than tax-and-spend because taxing and spending doesn't leave huge debt problems and interest payments for the future.

While we can hope that Trump's projects will rely more on user fees more than taxes, at the moment the score has to be Trump 1/2, Democrats minus 1.

January 20, 2017 4:31PM

The False Promise of “Buy American”

If patriotism is the last refuge of scoundrels, where will President Trump turn when his “America First” policies lay waste to the very people he professes to be helping?

The ideas conjured by “Buy American” may appeal to many of President Trump’s supporters, but the phrase is merely a euphemism for doling political spoils, featherbedding, and protectionism. The president may score points with union bosses, import-competing producers, and some workers, but at great expense to taxpayers, workers and businesses more broadly.

Cordoning off the estimated $1.7 trillion U.S. government procurement market to U.S. suppliers would mean higher price tags, fewer projects funded, and fewer people hired. In today’s globalized economy, where supply chains are transnational and direct investment crosses borders, finding products that meet the U.S.-made definition is no easy task, as many consist of components made in multiple countries. And by precluding foreign suppliers from bidding, any short-term increases in U.S. economic activity and jobs likely would be offset by lost export sales – and the jobs that go with them – on account of copycat protectionism abroad.

Buy American laws have been used to limit competition for government procurement to domestic firms and workers since 1933. General Buy American restrictions already apply to all government procurement of supplies and materials for use within the United States. Those provisions require that all “unmanufactured” products (essentially, raw materials) procured be mined or produced in the United States and that all “manufactured” articles procured fit the definition of a “domestic end product,” which is an article manufactured in the United States from components, which are at least 50 percent (by value) U.S.-produced.

Those Buy American restrictions can be waived if any one of three conditions applies: (1) a waiver would be in the public interest; (2) the products are not available from domestic sources in sufficient quantity or of satisfactory quality, or; (3) the cost of using US-made products is deemed “unreasonable.” Under the Federal Acquisition Regulations, “unreasonable cost” is defined as a situation where foreign supplies and materials are offered at a price that is six percent or more below the price of domestic supplies and materials.

But there are even more restrictive Buy American provisions governing Transportation Department procurement rules for highway and related projects. These rules require that all of the iron, steel, and manufactured products used in these projects be produced in the United States. The definition of U.S.-manufactured products is the same here as under the general Buy American provision, and the same thresholds for public interest and short supply waivers also apply. However, the unreasonable cost waiver is considerably different. Under this provision waiving the restriction on the basis of unreasonable cost requires that the total project cost (not the input cost) be at least 25 percent higher. That is an enormous cushion for domestic suppliers, which accords them license to tender their bids at exorbitant prices.

There is another set of waivers that are supposed to ensure some competition in the U.S. government procurement market. Under the Trade Agreements Act of 1979, the president is authorized to invoke the public interest waiver of the Buy American rules and exempt countries which reciprocally waive their own buy-local restrictions for U.S. firms. Those countries include signatories to the World Trade Organization’s Government Procurement Agreement or parties to U.S. free trade agreements (like the North American Free Trade Agreement) that contain full government procurement chapters.

Whether these waivers would be invoked by President Trump seems highly unlikely – it would at least contradict his inaugural rhetoric.  Moreover, Senator Sherrod Brown (D-OH) plans to introduce new legislation next week to broaden the scope (and limit the potential for exemptions) of government spending that is subject to Buy American rules, to effectively ensure that the $1 trillion or more of infrastructure spending likely to be authorized by Congress is off limits to foreign companies and workers.

With low-cost suppliers of crucial materials and some of the world’s most experienced and efficient civil engineering firms (think dredging America’s too shallow harbors to accommodate the large Post-Panamax container ships) effectively excluded from the infrastructure spending bonanza, U.S. suppliers will be less restrained in their cost proposals, which means fewer, more expensive public projects.

As individuals spending their own money, most Americans seek to maximize value. That often means shopping for groceries at a big supermarket chain instead of the gourmet market or patronizing Home Depot instead of the hardware store on Main Street. Shouldn’t we expect Washington to spend our tax dollars with a similar eye toward prudence and value?

The instinct to want to insulate “our” markets, protect “our” businesses, and prevent “our” resources from leaking into other jurisdictions at “our” expense is easy to grasp.  But the idea that restricting government procurement spending to American goods, services, and workers will produce that outcome is misguided, nonetheless.

When we artificially reduce the pool of qualified suppliers or the variety of eligible supplies that can satisfy procurement requirements, projects cost more, take longer to complete, and suffer from lower quality. Only a basic understanding of supply and demand is required to see that limiting competition for procurement projects ensures one outcome: taxpayers get a smaller bang for their buck.

Sure, some U.S. companies will win bids, hire new workers, and generate local economic activity. What will be less visible — but every bit as real — are the contracts denied numerous other U.S. businesses and workers because the resources have been stretched and depleted to satisfy restrictive procurement rules. Some U.S. companies and some U.S. workers may benefit, but the real value of public spending  — the actual products and services procured — will decline.

While President Trump seems to be prioritizing U.S. companies and workers, he must know that well over 6 million Americans work for foreign-headquartered companies here in the United States.  He must know that over $1.2 trillion of foreign direct investment is parked in the U.S. manufacturing, undergirding valued added activity, and supporting jobs and the tax base.  Tightening Buy American rules will hurt these firms and possibly chase them and their investments offshore.

It is the responsibility of elected officials who tax, borrow, and spend to be prudent stewards of the public’s finances. Yet the temptation to breach that implicit contract to advance self-serving ends often proves irresistible – especially when the action finds refuge in patriotism.

December 2, 2016 2:45PM

Trump’s $10 Trillion Infrastructure Plan

President-elect Donald Trump has promised large increases in infrastructure investment. He has not proposed a detailed plan yet, but $1 trillion in new investment is being discussed as a target.

Actually, Trump has already made a specific proposal that would increase investment by far more than $1 trillion: his tax cut plan. His proposed corporate tax rate cut from 35 percent to 15 percent would increase the net returns to a vast range of infrastructure, including pipelines, broadband, refineries, power stations, factories, cell towers, and other hard assets. With higher net returns, there would be more capital investment across many industries.

How much more? The Tax Foundation estimated that the overall Trump tax cut would expand the U.S. capital stock by 20 percent above what it would otherwise be within 10 years. TF economists tell me that private capital stock is about 189 percent of gross domestic product under the baseline, which would be about $35 trillion this year and more than $50 trillion in 2026. If the Trump tax cut was enacted and the capital stock grew as TF projects, the capital stock would be $10 trillion or more higher than otherwise by 2026.

Other economic models have produced different estimates of the Trump plan’s effects. However, if the tax cut produced anywhere near the benefits projected by TF, then it would amount to a huge multi-trillion-dollar “infrastructure plan.”

Some models show that the Trump plan would not have such large positive effects. They typically hinge on the assumption that “higher budget deficits will crowd out private investment and slow the economy,” as the Wall Street Journal noted. There is disagreement about the size of the crowd-out effect, but the way to avoid it is to match the Trump tax cuts with spending cuts. Both tax cuts and government spending cuts are good for the economy, so such a plan would spur the most growth.

I have focused on private infrastructure here, which is a much larger part of the economy than is government infrastructure. Nonetheless, we need cost-efficient and high-quality government infrastructure as well, and I discuss here how to get it.

For more information on Trump and infrastructure, see here, here, here, and here.

November 23, 2016 3:47PM

Donald Trump, Stephen Bannon, Andrew Jackson, and Infrastructure

On his radio show last night, Mark Levin asked his audience whether they thought President-elect Donald Trump would turn out to be a big-government Richard Nixon or a small-government Ronald Reagan. On the infrastructure issue, I fear that we may be headed in a big government direction.

Trump, of course, is a “populist,” not a small-government conservative. His advisor, Stephen Bannon, indicated the other day what that means:

Like [Andrew] Jackson’s populism, we’re going to build an entirely new political movement,” Stephen K. Bannon told the Hollywood Reporter. “The conservatives are going to go crazy. I’m the guy pushing a trillion-dollar infrastructure plan.

Bannon should know that on fiscal policy, Jackson’s populism was anti-debt and small government. Echoing Thomas Jefferson’s views, Jackson thought that federal debt undermined liberty, and he pushed to eradicate it. Jackson’s views were in tune with the public, which strongly supported frugality in the federal government.

Jackson and his allies were dubious of federal investments in infrastructure (“internal improvements”). His vice president, Martin Van Buren, thought that “Congress had no power to construct roads and canals within the states.” He said that spending on such projects “was sure in the end to impoverish the National Treasury by improvident grants to private companies and State works, and to corrupt Federal legislation by the opportunities it would present for favoritism.”

On assuming office, Jackson made a list of his priorities, including “the Public debt paid off, the Tariff modified and no power usurped over internal improvements.” In his first inaugural address, he promised “extinguishment of the national debt, the unnecessary duration of which is incompatible with real independence.” Jackson famously vetoed funding of Kentucky’s Maysville Road in 1830, citing constitutional objections and his goal of debt elimination.

Jackson was also skeptical of federal investments for practical reasons. In his 1830 message to Congress, he said, “Positive experience, and a more thorough consideration of the subject, have convinced me of the impropriety as well as inexpediency of such investments.” One practical concern was what we now call “crony capitalism.” Jackson noted that when the government gave some initial subsidies to companies, they tended to get hooked on the hand-outs and kept coming back for more.

In his book about the Jackson era, Carl Lane concluded that federal debt elimination, “Americans in the Jacksonian era believed, would improve the material quality of life in the United States. It would reduce taxes, increase disposable income, reduce the privileges of the creditor class, and, in general, generate greater equality as well as liberty.”

Back then, the belief was that a frugal federal government that balanced its books and did not interfere in state and local matters would secure liberty and benefit average citizens. That is the type of Jacksonian populism that Bannon and Trump should pursue.

November 15, 2016 10:16AM

Trump’s Trillion‐​Dollar Infrastructure Plan

On the campaign trail, Donald Trump promised to spend twice as much on infrastructure as whatever Hillary Clinton was proposing, which at the time was $275 billion. Doubling down again in a speech after winning the election, Trump now proposes to spend a trillion dollars on infrastructure over the next ten years.

President Obama had proposed to fix infrastructure with an infrastructure bank, though just where the bank would get its money was never clear (actually, it was perfectly clear: the taxpayers). Trump's alternative plan is for the private sector, not taxpayers, to spend the money, and to encourage them he proposes to offer tax credits for infrastructure projects. He says this would be "revenue neutral" because the taxes paid by people working on the infrastructure would offset the tax breaks. In short, Trump is proposing tax credits in lieu of an infrastructure bank as a form of economic stimulus.

America's infrastructure needs are not nearly as serious as Trump thinks. Throwing a trillion dollars at infrastructure, no matter how it is funded, guarantees that a lot will be spent on unnecessary things. As Harvard economist Edward Glaeser recently pointed out in an article that should be required reading for Trump's transition team, just calling something "infrastructure" doesn't mean it is worth doing or that it will stimulate economic growth.

Infrastructure more or less falls into three categories, and Trump's one-size-fits-all plan doesn't work very well for any of them. First is infrastructure that pays for itself, such as the electrical grid. Private companies and public agencies are already taking care of this kind, so if Trump's plan applied to them, they would get tax credits for spending money they would have spent anyway. That's not revenue neutral.

The second kind of infrastructure doesn't pay for itself. Rail transit is a good example, and this tends to be the infrastructure that is in the worst shape. It won't suddenly become profitable just because someone gets a tax credit, so under Trump's plan it will continue to crumble.

The third kind of infrastructure consists of facilities that could pay for themselves but don't because they are government owned and politicians are too afraid of asking users to pay. Local roads fit into this category. Simply creating tax credits doesn't solve that problem either.

Trump may think that local governments and transportation agencies will jump at the chance to borrow money from private investors to fix infrastructure, and then repay that money out of whatever tax sources they use to fund that infrastructure. But those government agencies can already sell tax-free bonds at very low interest rates. It isn't clear how taxable bonds issued by private investors who get tax credits are going to be any more economical.

Most public-private partnerships for projects that have no revenue stream are entered into by the public party to get around some borrowing limitation. If the infrastructure spending is really necessary, it makes more sense to simply raise that borrowing limit than to create a byzantine financial structure that, Trump imagines, will have the same effect.

In short, whether funded by municipal tax-free bonds or taxable private bonds, those bonds will ultimately have to be repaid by taxpayers. We know from long experience that politicians are more likely to ask taxpayers to pay for new projects than maintenance of existing projects, and Trump's plan will do nothing to change that.

The problem with a top-down solution such as Trump's proposal is that one size doesn't fit all. Different kinds of infrastructure have different kinds of needs, and the financial solution will be different for each one. Trump's plan is more likely to result in new construction of pointless projects than whatever maintenance is needed for existing infrastructure.

Fortunately, a lot of people know this, so there is already criticism of Trump's plan, including from conservatives in Congress. No doubt Trump's plans will get refined between now and when he actually takes office. The question is whether Trump will realize that bottom-up solutions work better than ones that are top down.