Tag: roads

Trump Plan Probably Won’t Repair Crumbling Infrastructure

The White House released President Trump’s infrastructure plan today, which calls for spending $200 billion federal dollars as seed money to stimulate a total of $1.5 trillion on “gleaming new infrastructure.” Almost lost in the dozens of pages of documents issued by the administration is that the reason why the federal government supposedly needs a new infrastructure program is that our existing infrastructure is crumbling, and the reason it is crumbling is that politicians would rather spend money on gleaming new projects than on maintaining the old ones.

The White House proposes several new funding programs. The administration could have dedicated one or more of these programs to maintenance and repair of worn-out infrastructure. Instead, all $200 billion can be spent on new projects, and knowing politicians, most of it will be. To make matters worse, funds for most of the programs would be distributed in the form of competitive grants, but experience has proven that competitive grants are highly politicized. 

“In the past, the Federal Government politically allocated funds for projects, leading to waste, mismanagement, and misplaced priorities,” agrees White House economic advisor Gary Cohn. The administration’s solution, Cohn continues, is to “stimulate State, local, and private investment.” In other words, instead of most decisions being made by Washington politicians, they will be made by local politicians. But if local politicians were any better at maintaining infrastructure, then we wouldn’t have tens of thousands of local bridges classed as “structurally deficient” and the New York, Washington, Boston, and other subway systems wouldn’t be falling apart.

The White House says that the federal funds it proposes to allocate to infrastructure may be spent on either new construction or maintenance, which is an advantage over some existing federal programs that can only be spent on new construction. But just because they can be spent on maintenance, doesn’t mean they will be.

The New York subway system is falling apart because the city doesn’t have enough money to maintain it. Yet it has enough money to spend $10 billion on a tunnel between Penn Station and Grand Central Terminal for Long Island Railroad trains, which the New York Times has called “the most expensive subway in the world.” It also has enough money to build the eight-mile Second Avenue subway, which at $2.1 billion a mile must be the second-most expensive subway in the world.

The Good and the Bad of Public-Private Partnerships

President Trump has reportedly expressed reservations about public-private partnerships, but White House economic advisor Gary Cohn is still enthusiastic about building the administration’s fabled infrastructure plan around them. Not everyone realizes, however, that there are two very distinct kinds of public-private partnerships, which I call the good kind and the bad kind. I’d like to believe that it is the bad kind that worries Trump while it is the good kind that encourages Cohn.

The good kind of public-private partnership is more formally known as a demand risk partnership. In this case, the public partner essentially gives the private partner a franchise to build a road or some other infrastructure. The private partner is allowed to collect tolls or other revenues from the infrastructure for a fixed period of time, usually three or four decades, after which ownership and management of the infrastructure is turned over to the public partner (who may contract it out again). The key is that private partner accepts all of the risk that the revenues may not cover the costs. The I-495 Capital Beltway express lanes are a demand risk partnership.

Trump’s Bad Economic Reasoning on Infrastructure

Last night’s address to Congress by President Trump was devoid of detail on infrastructure investment. But in justifying his desire to harness $1 trillion of public and private funds for “new roads, bridges, tunnels, airports and railways”, the President used two lines of bad economic reasoning sadly all too prevalent in public debate on this issue.

First was to invoke the building of the interstate highway system. “The time has come,” Trump declared, “for a new program of national rebuilding.” The implication: the interstate highway system was good for the economy, so we should invest more in roads today - a common rhetorical technique, but one which confuses average with marginal.

Previous economic research has indeed found that the construction of the interstate highway system substantially boosted productivity for industries associated with road use. But the same research finds those benefits to be largely one-offs, meaning this analysis does nothing to inform us about new decisions. In fact, more recent work has found that too many new highways have been built between 1983 and 2003, and that marginal extensions to the highway system tend not to increase social welfare, because the cost savings of reducing travel times are small relative to incomes and prices.

In other words, building a highway system can boost growth. Building a second highway system? Not so much. Rather than appealing to grand projects based on historical experience, all new government projects should stand up on their own merits – ideally having high benefit to cost ratios and being things that would not be undertaken by the private sector.

The second mistake was to highlight “creating millions of new jobs” as an aim or positive of any infrastructure spending. When the government is investing to build something, it should aim to do so most efficiently. “Jobs” in this sense are a cost, not a benefit, and ones “created” only come through the diversion of resources and opportunities in other parts of the economy.

Upon visiting an Asian country in the 1960s, Milton Friedman is frequently quoted as reacting to the absence of heavy machinery in a canal build by asking why the project was being undertaken by men with shovels. Upon being told it was a “jobs program,” he is said to have remarked: “Oh, I see. I thought you were trying to build a canal. If you really want to create jobs, then by all means give these men spoons, not shovels.”

If one is concerned with improving the economic growth potential of the economy, then you would base both the selection of projects and the means of undertaking them according to that objective. Sadly, when governments are involved, other ambitions (be it stimulating particular regions, appeasing certain interests, obtaining political prestige or facilitating observable jobs) tend to interfere with the stated aim. The constant talk of the benefits of wise, productive investment is an ambition, rather than something we should expect.

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.

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.