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 Washington Metro system is falling apart because the region is short $10 billion to maintain it. Yet Virginia was able to find enough money to build the Silver Line and Maryland to build the Purple Line; the costs of these two projects would have been enough to fix most of the existing Metro system.
The Boston rail transit network is also falling apart because the region can't find the $470 million a year needed to maintain it. Yet is was able to find $2.3 billion to build a 4.3-mile light-rail extension. In all of these cases, local politicians decided to spend money on new projects even though 50 to 80 percent of the money in each case could have been spent on maintenance.
The truth is that our infrastructure isn't in as bad shape as some claim. State highways are in good condition; local roads less so. Rail freight systems are in good condition; rail transit systems less so. In general, infrastructure paid for out of user fees are in good condition; infrastructure paid for out of tax dollars less so.
This means there is a simple way to take the politics out of infrastructure and make sure that managers maintain it: fund it out of user fees, not tax dollars. Managers of user-fee-funded infrastructure tend to do the best job of maintenance because they know users will stop paying to use their facility if it becomes unreliable.
To its credit, the White House program does make some token movements in the direction of more user fees. For example, it would allow states to charge tolls for all interstate highway, something that is now, for the most part, prescribed by Congressional edict. But even this depends on state politicians asking their constituents to pay tolls for something they have been getting for "free," which is unlikely to happen.
In the end, however, the major impact of the Trump plan is to drop $200 billion new dollars onto state and local governments on top of existing federal spending programs. This will merely provide more insulation for state and local politicians from having to ask users to pay for the infrastructure they build. The result will be that most, if not all, of that $200 billion will go to build new infrastructure that we probably don't need and can't afford to maintain rather than maintaining what we have.
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.
The bad kind of public-private partnership is more formally known as an availability payment partnership. As with the good kind, the public partner designs the project and the private partner builds and, usually, operates it. Unlike the good kind, the private partner takes no risk that the project might not pay its way. Instead, the public partner contracts to pay the private partner enough money over several decades to completely repay the private partner's costs regardless of whether anyone is actually using the infrastructure.
Availability payment partnerships might make sense in the case of infrastructure that no one expects to earn user fees, such as common schools. But in most cases, such partnerships are formed mainly to allow the public partner to sidestep legal debt limits. For example, euro nations are supposed to limit their debts to a fixed percentage of GDP. Some nations, such as Italy, have built high-speed rail and other infrastructure using availability payment partnerships so that the debts appear on the books of the private partners, not the government.
For the same reason, Denver's Regional Transit District (RTD) formed a public-private partnership to build a billion-dollar rail line to the airport. Voters had approved a sales tax increase for the rail line but set a debt limit. When cost overruns made it impossible to build the line without exceeding the debt limit, RTD entered into an availability payment partnership so the debt wouldn't appear on its books. Of course, it was still contracturally obligated to pay the private partner enough to repay its debt.
Demand risk partnerships are good because the need to cover costs out of user fees creates a discipline that insures that projects are worthwhile and costs do not get out of control. User-fee funded projects are also better maintained because managers know users will stop paying if the project becomes dangerous or unreliable.
Availability payment partnerships are bad because they offer little incentive to insure that projects are worthwhile or to control costs. Denver's airport rail line was originally projected to cost $315 million and ended up costing over a billion dollars. Nor did that billion dollars buy a quality product: more than a year after it opened, the builder still has not got the automatic grade crossing gates working, a technological problem that the private railroads solved more than 80 years ago.
Until the Trump administration releases its infrastructure plan, we won't know if it will make a distinction between demand risk and availability payment partnerships. But it should favor the former over the latter to protect taxpayers and insure that the infrastructure we build is both worth having and well maintained.
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.
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.
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.
For the past two decades or so, however, much of our transportation spending has focused on infrastructure that is slower, more expensive, less convenient, and often more dangerous than before. Too many cities have given up on trying to relieve congestion. Instead, they have allowed it to grow while they spend transportation dollars (nearly all paid by auto users) on other forms of travel such as rail transit. Such transportation is:
- Slower: Where highway speeds even in congested cities average 35 miles per hour or more, the rail transit lines built with federal dollars mostly average 15 to 20 mph.
- More expensive: In 2013, Americans auto users spent less than 45 cents per vehicle mile (which means, at average occupanies of 1.67 people per car, about 26 cents per passenger mile), and subsidies to roads average under a penny per passenger mile. By comparison, transit fares are also about 26 cents per passenger mile, but subsidies are 75 cents per passenger mile.
- Less convenient: Autos can go door to door, while transit requires people to walk or use other forms of travel, often at both ends of the transit trip.
- Less safe: For every billion passenger miles carried, urban auto accidents kill about 5 people, while light rail kills about 12 people and commuter trains kill 9. Only subways and elevateds are marginally safer than auto travel, at 4.5, but we haven't built many of those lately.
Not surprisingly, most transit projects lead to almost no new travel. Yet their backers claim this is a virtue. They have demonized the new travel generated by the interstates by calling it "induced demand." They have celebrated transportation projects that generate no new travel but merely get people to shift from one mode to another, usually more expensive, mode as "sustainable."
Even when cities spend money on roads, they often spent it making travel slower, less convenient, and more dangerous. Many cities are doing various forms of what planners euphemistically called "traffic calming," meaning narrowing streets, putting barriers in roads, and turning one-way streets into two-way streets. The overt goal is to slow down traffic, and it often has the side effect of making it more dangerous for both auto users and pedestrians.
A very simple test can determine whether any particular transportation project will be faster, cheaper, more convenient, and/or safer than before: Will the users themselves pay for it? Users will pay for real improvements in transportation; they won't pay for slower, more expensive, less convenient, and more dangerous transportation.
The Interstate Highway System was paid for exclusively out of user fees. Gas taxes aren't a very good user fee, as there was no guarantee that the users who paid the taxes were driving on the interstates their taxes were building. As it happened, the interstates mostly were paid for by users, but there is no guarantee of that for future road projects. That's one reason why it makes sense to shift from gas taxes to mileage-based user fees or tolls.
Yet there is a major push to increase gas taxes. A recent article in the Atlantic's CityLab argues that gas taxes should be increased by 70 cents a gallon because current taxes aren't paying the "true cost of driving." Yet the costs that the article says taxes aren't paying--things like congestion and auto accidents--are nearly all paid by road users in other ways, so there is no reason why gas taxes should be increased to cover those costs or any reason to think that higher taxes will reduce those costs.
Our gas taxes are "underpriced," CityLab argues, because taxes are higher in Europe. Yet the higher taxes in Europe aren't spent on roads; they mostly go for non-road activities, and not for reducing congestion and other road-related costs.
Infrastructure is important. But throwing federal dollars at it won't take care of the problems. Instead, infrastructure spending only makes sense if users are willing to pay for it. For the most part, that means infrastructure can and should be funded privately or by state and local governments out of user fees, rather than by the federal government.