Infrastructure

Federal Infrastructure Spending Is a Bad Deal

Trump should choose privatization over nationalization.

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In his first address as president-elect, Donald Trump repeated his campaign promise to invest in America's infrastructure. "We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals," he said. "We're going to rebuild our infrastructure, which will become, by the way, second to none. And we will put millions of our people to work as we rebuild it."

His plan is for the federal government to entice private investors with $137 billion in tax credits. The idea is that this will unleash up to $1 trillion worth of infrastructure investment over 10 years, spur economic growth, and create countless American jobs.

Politicians' love affair with infrastructure spending isn't new. Hillary Clinton, Bernie Sanders, Barack Obama, George W. Bush, and many before them have paid their respects to the idea. Economists have long recognized that roads, bridges, airports, and canals are the conduits through which goods are exchanged, and as such, infrastructure can play a productive role in economic growth.

But not all infrastructure spending is equal. Ample literature shows, in fact, that it's a particularly bad vehicle for stimulus and does not, in practice, boost short-term jobs or economic growth. To work that way, government spending would have to be used quickly to put the unemployed to work on shovel-ready projects. But as Obama discovered in 2009 when he tried to spend $47 billion from the American Recovery and Reinvestment Act on infrastructure, there aren't that many shovel-ready projects lying around. And since job seekers rarely have the skills needed to start building a bridge or highway right away, employers are forced to poach workers from their existing jobs.

Publicly funded infrastructure projects often aren't good investments in the long term, either. Most spending orchestrated by the federal government suffers from terrible incentives that lead to malinvestment—resources wasted in inefficient ways and on low-priority efforts. Projects get approved for political reasons and are either totally unnecessary or harmed by cost overruns and corruption. For example, we know that infrastructure investment produces the highest returns when it supports already-expanding cities and regions. Yet politicians' tendency is to spend in declining areas, where dollars can't help as many people, such as Detroit and Cleveland.

Government statistics show that our infrastructure isn't actually crumbling. While conditions vary from state to state, the most recent data on highway quality (from 2012) classify 80 percent of urban highways as either good or acceptable. For rural highways, the figure is almost 97 percent. Meanwhile, the quality of bridges has improved as well. In 2004, 5.7 percent of bridges were classed as structurally deficient, meaning that the bridge isn't unsafe but that it could suffer from a reduction in its load-carrying activities. By 2014 that number had declined to 4.2 percent.

Still, our infrastructure could use some work. Recently, in a debate at the Aspen Ideas Festival with former National Economic Council Director Lawrence Summers, the economist Robert Barro noted that he was "glad that Larry and I can agree that fixing potholes is the most productive activity in government." Unfortunately, the political process is biased against dull but valuable projects, such as basic road maintenance, and biased in favor of flashy or grandiose projects, such as high-speed rail, the Big Dig, and the Bridge to Nowhere. The process also systematically overestimates the benefits and underestimates the price of infrastructure projects.

On the bright side, Trump wants to address the "mountain of red tape" that slows down construction projects. His plan would link spending to reforms that "streamline permitting and approvals, improve the project delivery system, and cut wasteful spending on boondoggles."

He shouldn't stop there. A new report by Michael Sargent at the Heritage Foundation encourages the president-elect to reduce the federal role in highway construction and mass transit. I would go further: He should put an end to the whole idea that infrastructure should be centrally planned, taxpayer-funded, and the responsibility of the federal (as opposed to state or local) government. The current system obliterates the discipline that comes from knowing a project needs to pay for itself to survive.

User fees should become our preferred option for funding infrastructure. That change kills two birds with one stone: It lessens the need for massive federal expenditures, and it gives the private sector an incentive to spend money on crucial but not exactly sexy maintenance tasks. As Aquamarine Investment Partners founder and CEO Joel Moser recently explained in Forbes, "No one will invest in the replacement of defective bridges that have no tolls, regardless of the tax abatement, unless a revenue stream is attached to those assets." Innovations can provide "many creative ways to link revenue streams to currently non-tolled assets," he adds. EZPass and cellphone technology could be used to pay for all roads. Alternatively, leasing contracts—such as the one between Australian investment consortium IFM Investors and the Indiana government covering the Indiana Toll Roads—would work well too.

If Trump wants the United States to have "world-class" infrastructure, the surest way is through market-based reforms that increase competition while reducing subsidies and regulations. Embrace real privatization, not federally directed private investments.

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47 responses to “Federal Infrastructure Spending Is a Bad Deal

  1. Build a bridge with capital taken from a factory that no longer has capital to maintain or retool it’s line. What’s the problem?

  2. Nice article.

    The issue i think is the pols pull nice numbers out of the air and then try to find projects to match funding. Instead prioritizing first. Which leads to these boondoggles

  3. “If Trump wants the United States to have “world-class” _______________, the surest way is through market-based reforms that increase competition while reducing subsidies and regulations. Embrace real privatization, not federally directed private investments.”

    Nice article, and based upon solid principle easily adapted to most any other ‘Federal’ issue. Would that more authors here recognized that.

  4. “we will put millions of our people to work as we rebuild it.”

    “Shovel-ready.”

  5. It’s like none of you have noticed all the bridges and overpasses collapsing on a daily basis.

    1. YOU WON’T BE SO SMUG WHEN A RED LISTED BRIDGE FALLS IN YOUR HEAD MISTER

      1. PS – It’s Ms. deRugy, mister!

    2. It’s like you didn’t read Vero’s article and her info that infrastructure ISN’T crumbling.

      Love to hear your source.

      1. I call comments like the one you’re responding to “jokes”.

        Granted, they’re usually not funny, but still.

  6. User fees should become our preferred option for funding infrastructure.

    I understand the argument that building infrastructure doesn’t stimulate the economy because the money has to come from somewhere. The problem is that argument is true of user fees as well.

    Infrastructure is an asset. Whether it helps the economy is not a function how it is paid for. It is a function of how much value it brings versus its cost. Something like a sports stadium is always a dead loser. What value does it provide? Extra entertainment services. Something like a bridge is often a huge winner because it provides enormous amounts of value in decreased transportation costs and time. Whether the bridge is paid for by tax money or user fees or taxes makes no difference to that calculation.

    DeRugy is not Dalmia bad. But she is not that interesting or particularly thoughtful either.

    1. Yeah, I think the point is, what infrastructure?

      A new port that opens up faster trade avenues is certainly a booster. Oil and gas pipelines that get product to refineries are a boost to the economy. A new highway that opens up an entire area of the state to commuters is a major boon.

      Or a new landfill. That could make a major difference. Or a new regional airport, or an airport expansion. Or maybe a new water treatment facility for a growing city.

      All of these things could be a major boost to the economy.

      High speed rail? So far… not so much. Like sports stadiums, most midsize cities have some downtown revitalization plan that keeps on coming back around where they subsidize turning an old rail station into a mall with restaurants and bars. They usually fail after about 3-5 years. Not a boon.

      1. High speed rail? So far… not so much.

        Well, yeah, not when the only prominent example is in the middle of the California desert.

        1. And the heavily subsidized Acela along the northeast corridor.

      2. “Or a new regional airport, or an airport expansion.”

        Was it here, or somewhere else that I recently read an article about the right way to run an airport, and the wrong way. In which, strangely enough, the right way was exemplified by the airports serving London, and the wrong way was the basic American model.

    2. I think it’s important to at least understand that user fees for major roads/bridges/tunnels etc. are all after-the-fact. The signals they send, while useful, only justify large-scale infrastructure once it’s already built. You can’t charge a user fee for a road that hasn’t been built yet in order to gauge demand for it. That having been said, Federal spending boondoggles are materially different from a citizen-led bond drive or something else more connected to actual demand.

      1. Excellent point. It is also helpful to consider how innovation requires risks – ie. the fax machine, which nobody initially had any use for and only became useful following widespread adoption.

        Modern governments have not exhibited great success at taking risks, mainly because they fear no consequences of failure. But also because they have the power to compel usage even at the cost of great inefficiency.

        If government had given us fax machines they’d probably still be the dominant means of transmitting data.

    3. Funding with user fees direct investment to infrastructure that will be used.

      Public funding directs investment to whatever helps politicians get reelected.

      Which provides more value, something that gets used, or something that helps politicians win elections?

      Incentives.

    4. My only issue regarding user fees (tolls) is often they are avoidable (alternate routes). So even if they improve a road, often times it then receives less traffic, while the alternate routes receive more traffic and therefore, more wear and tear. While I am against all taxation, I still believe that best way to pay for roads is by a mileage rate. The more you use the roads, the more you provide wear and tear, therefore you pay more in taxes. Where I live, the have always taxed via ad valorem (value added) in which the people with newer more expensive cars pay more in taxes, although they have recently switched to a one-time sales tax at point of sale.

    5. Unless you’re a socialist, it makes all the difference in the world. If I live in a log cabin out in the woods and never use the roads, why should I have to pay a tax to support them? Virtually all government services should be paid for with user fees. The exception being things like defense/border security where there aren’t clear chargeable actions.

      1. User fees should become our preferred option for funding infrastructure. That change kills two birds with one stone: It lessens the need for massive federal expenditures, and it gives the private sector an incentive to spend money on crucial but not exactly sexy maintenance tasks.

        The problem with users fees for overall government roles, like building roads, is that you end up with a bunch of fiefdoms and some roads that provide efficiency might not get the traffic to pay for it. Then you have person from other areas who are unwilling or unable to pay for the use of the road.These roads can also be used their use by undesirables by setting rats super high.

        Government services are just not as efficient as free market and that will always be. I am willing to listen to arguments that someone does not use roads so they should not pay for them but that person does not use any materials shipped by road? That person never goes anyway on a road?

        Plus, that argument can be used for the Coast Guard and many other agencies that needs smaller budgets but probably serve a good purpose federally.

        BTW: What is up with toll roads not accepting cash? Fucking BS and I never pay because every area has a different EZ-upyourasspass.

        1. but that person does not use any materials shipped by road?

          That should be incorporated into the price of the materials.

          BTW: What is up with toll roads not accepting cash?

          They take cash around here. I’m not getting a transponder until it is a requirement for using the highway.

      2. If I live in a log cabin out in the woods and never use the roads, why should I have to pay a tax to support them?

        Even the Unabomber and Thoreau wouldn’t have been able to survive without access to goods and services from nearby towns, which rely on road networks to deliver necessities. The examples of people who live like Jeremiah Johnson in this country are rare and realistically speaking they’re not going to be taken into account in a transportation network debate.

        1. Of all the stupid hills Libertarians choose to die on, Roads!! might be the dumbest.

          1. Really, john? This coming from the guy who has openly advocated for road and bridge protectionism in the name of ‘efficiency.’

        2. That is included in the cost of the good. Why should I have to pay any other tax to support infrastructure spending? Thus isn’t a hard concept to grasp, folks.

          1. Exactly. There are ways to pay for almost everything in a manner that is proportional to use (i.e. fair) and that does not require indiscriminate taxation followed by a layer of political dealing to divide the spoils.

        3. If the usage fees end up being incorporated into the cost of the good and services our hypothetical mountain man purchases then he will indeed contribute directly to those things that benefit him. And pretty much to the extent that those things benefit him.

  7. A new report by Michael Sargent at the Heritage Foundation encourages the president-elect to reduce the federal role in highway construction and mass transit. I would go further: He should put an end to the whole idea that infrastructure should be centrally planned, taxpayer-funded, and the responsibility of the federal (as opposed to state or local) government. The current system obliterates the discipline that comes from knowing a project needs to pay for itself to survive.

    That is the only good section of this article. The problem with paying for this stuff at the federal level is that states and localities see it as free money and end up overbuilding. That danger, however, is less acute when it comes to roads and highways. The green cult has spent decades reducing funding to roads and funding white elephant mass transit projects. You could spend a lot of money improving and maintaining the roads in this country before you reached the point of over improving them. The other problem is some blue states are too stupid to take care of themselves. If the feds don’t fund roads, those retards won’t as they build choo choos to nowhere instead. So, they should cut the mass transit budget to zero and spend the rest on roads for the next few years making up for decades of neglect and green insanity.

    1. One of the big problems with mass transit is that the operational costs are high and ridership is low. Largely because outside of a few very dense areas, the train doesn’t go where anyone wants to go.

      But there is a solution on the horizon. And the proggies are not going to like it. Self-driving vehicles are almost upon us. Within a few years, it will certainly be more economical to hire a ride in an autonomous Uber-style vehicle than it would be to ride an unsubsidized train. A gap that will only get worse as ridesharing takes off and scales. If they can beat cabs now, where will they be when they can offer a 24 seat mini-bus that doesn’t have to pay a driver and can build ad-hoc routes on demand?

      1. I’m not sure about the self-driving part, but the mini-bus concept in ride sharing will certainly grow. There are some metros, mine included, that have a form of it already for large employers. It’s built along the lines of a park-and-ride where commuters go to a designated spot and take the van the rest of the way. It even has provisions like a guaranteed ride back for someone who has to stay late for whatever reason and misses the scheduled return trip.

        1. If you’re going to have public transport (which I realize is not your point), then buses are generally a better option than trains.

          1. The situations where trains represent an advantage are few, far between, and often very specific.

      2. Proggies don’t care about whether it’s more economical to take a car. They’ll just argue that the train tickets “cost too much” and they need more subsidies because trains good, cars bad.

      3. And the proggies are not going to like it. Self-driving vehicles are almost upon us. Within a few years, it will certainly be more economical to hire a ride in an autonomous Uber-style vehicle than it would be to ride an unsubsidized train.

        Its is already cheaper to own and drive than it is to ride a subsidized train. The solution to that will be more subsidies. And the reasons why the fleets of driverless cars are not going to materialize have long been discussed on here. People still prefer to have their own car.

      4. One of the big problems with mass transit is that the operational costs are high and ridership is low.

        That’s not the problem at all. The problem is that FIXED and capital costs – the initial investment – are high and it is damn hard to split/recover that cost between a)users and b)property owners whose land value increases because of the mere existence of that infrastructure. Try to recover those costs from users and the price will kill off the service from the start – which is why privatization never starts. Try to recover those costs from nearby landowners (via the Georgist style tax), and there is the temptation and the pool of money to do too much – so the trough-swillers and free-riders come out in force.

        Operating/variable costs can often be pretty low.

        there is a solution on the horizon

        That solution is only a solution – if roads remain free to users.

    2. The problem with paying for this stuff at the federal level is that states and localities see it as free money and end up overbuilding.

      like that bridge to nowhere?

  8. My hubs, was a city manager and later a transportation planner. He says that when they had projects w feds, the fed representative contributed nothing to meetings or to the project.
    Every. Time.
    Leave roads & bridges to state and local governments.

  9. Wait till you find out who gets paid.

  10. I see Federal funding for infrastructure as a fundamental fairness issue. Why should a farmer in Peoria help pay for the Big Dig to help Boston commuters? Why should South Carolina residents help pay for Savannah port dredging which will draw business away from Charleston? Why should any of us pay for the stupid Bridge to Nowhere? If California wants high speed rail between almond farms, go for it. Just leave the good people of Montana alone.

  11. Oh for fucks sake. So the solution to actual infrastructure is cronyism. Privatization only exists when a public monopoly is transferred into private hands at a price that enables it to deliver privatized monopoly profits. It has NEVER occurred in any other way.

    I swear this strain of economic libertarianism is just simply bootlicking plutocrat crap.

  12. The problem with the user fees idea is that there is a long history of infrastructure that benefited the economy and society far more than users would pay for. The American railroads are a prime example; the fortunes made were almost always in real estate. The railroads themselves were often so-so profitable, and many lines lost money steadily (while feeding main trunks that were profitable…unless you counted the feeder lines). Yet few economists or historians (I’d say no, but my knowledge of the fields is hardly encyclopedic) dispute that the rail net was a major factor in the post civil war growth of the American economy to becoming world class. Rural electrification is another example that springs to mind. Once done, the rural farmers were happy to use electricity, and their quality of life jumped, but there was no way they were going to pay for the stringing of the wires.

    The issue isn’t that government infrastructure programs are bad as an idea. The problem is that, as with any other knd of spending, they CAN be a waste. Spending the money to shore up the decaying interstate highway system, and remediate dangerous bridges? Almost certainly worth doing (also hard to get politician to do; they hate to pay for upkeep, because it seldom involves good photo ops). Fancy new commuter light rail system for a city that is decaying as it stands? A waste that somebody should lose their office over.

    1. And don’t even get me started on Civic Centers.

    2. Municipal infrastructure is an example too. The historical experiences of places like Detroit and Cleveland in the 1870’s thru 1890’s – and earlier re canals/railroads – is rife with actual examples of privatized infrastructure (electric, water, streetcar, gas, etc) and the problems they create. In both those cases, they had (perceived by historians as excellent) mayors (Hazen Pingree and Tom Johnson) who wrestled with the problems and laid the foundations for 50 years of phenomenal growth/development.

      There are certainly examples of mayors who screwed things up and maybe even made the problems worse. With 100 years of hindsight, there is opportunity to improve the decision-making. There is no excuse – none whatsoever – for modern libertarians and ‘free market economists’ to simply stick their heads up their butts and parrot the same theories as were used back then by the people who were creating the problems back then. This is the very thing (failure to deal with empirical reality, effectively siding with corruption/cronyism) that killed ‘classical’ liberalism then. Failure to learn a damn thing is what rightly/hopefully condemns the modern version to the same fate.

  13. Another thought;

    One of the biggest problem with getting the government to pay for maintenance is that there is no legal mechanism whereby it can sequester money against expected future need. The Supreme Court has so ruled; that all the government’s income must be part of the general fund. That’s why the so-called Social Security Lockbox is empty. So, the politicians may SAY that the (for example) Gasoline Tax is slated to pay for maintenance of the Interstate system, but in actual fact they can’t do it that way.

    Any business could. It might not be the best way to handle their money, but it wouldn’t be illegal. The government can’t, without a major change in the laws, and if you think about it (how would the government run a savings account?) maybe it can’t at all.

    Please chew this one over. It occurred to me in a flash, and I have the feeling I’m missing something.

    1. Methinks thou art making a mountain out of a miniscule molehill. For example…

      Gasoline Tax is slated to pay for maintenance of the Interstate system, but in actual fact they can’t do it that way.

      If the government’s accountants–which government? I’m assuming the federal one here–are doing their job properly they ought to know how much in the general fund kitty came from the gas tax. It doesn’t matter which particular dollar then goes to pay for interstate system. Just as long as the RIGHT amount goes. That is, the amount spent on the interstate should equal the amount received from the gas tax.

      Furthermore, having to manage multiple funds would probably increase overhead costs. Just as the more bank accounts you have the more fees you will need to pay to maintain them.

      Therefore, when you claim:

      Any business could.

      The short answer is: sure they could. But why would they if doing so costs them more than doing it all through one account?

  14. If Trump wants the United States to have “world-class” infrastructure, the surest way is through market-based reforms that increase competition while reducing subsidies and regulations. Embrace real privatization, not federally directed private investments.

    Interesting idea. So instead of PUBLIC roads and PUBLIC bridges and PUBLIC footpaths you have PRIVATE ones instead.

    Meaning that every time you drive along that privatized road or over that privatized bride, or go for a walk along that privatized footpath, or your kids go to play on the privatised swings situated in that privatized park, you pay a fee.

    “Make America pay again” sounds like the next slogan for Donald Trump.

  15. “Recently, in a debate at the Aspen Ideas Festival with former National Economic Council Director Lawrence Summers, the economist Robert Barro noted that he was “glad that Larry and I can agree that fixing potholes is the most productive activity in government.” Unfortunately, the political process is biased against dull but valuable projects, such as basic road maintenance, and biased in favor of flashy or grandiose projects, such as high-speed rail, the Big Dig, and the Bridge to Nowhere.”

    You have the right diagnosis but the wrong solution. Decentralizing infrastructure decisions to the states doesn’t fix this disincentive either. Governors are the ones that want they grandiose projects that they can put their name on and cut the red tape at a ceremony. They have even less incentive to spend the money on a dam, fix pot holes, or replace tainted pipes. You can’t charge a toll on fixing the emergency spillway on the Oroville dam, for example. We need a massive influx of money on basic infrastructure. The only realistic way to address these significant issues adequately is with a boatload of federal dollars marked specifically for these types of projects (allocation determined by civil engineers and other professionals rather than politicians), and protected from being syphoned off into the flashy and less needed issues.

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