Posted January 13, 2009, 9:00am
Good morning and welcome to the NewTalk online forum, Infrastructure: What and How?
I'd like to thank NewTalk for gathering this group of experts to participate in an important and timely discussion of something that will affect both the immediate economic progress of the U.S. and our economic viability for generations to come. My role as moderator over the next few days is to direct the conversation and hopefully arrive at some consensus that can contribute to the ongoing national debate.
In 2009, infrastructure finance is at the center of plans for national economic stimulus. How quickly Congress acts and what projects are selected will affect this field for decades to come.
And this is also the year in which critical federal legislation authorizing long-term funding for road and transit infrastructure, along with airport funding, are due to be renewed. It will be key to see how, or if, the funding of the stimulus impacts the urgency with which Congress addresses the long-term programs.
Due to the enormity of infrastructure funding needs, the debate on the role of private investment in public assets, efforts to encourage non-traditional investors – like pension funds – to expand their role in funding such assets, will also be critical this year. Other debates will include: What should be the source of federal funds for infrastructure investment? Should there be changes to the kinds of credit enhancement available to state and local borrowers for these kinds of projects? And how could changes to the federal tax code facilitate investments?
I'd like to use a broad definition of infrastructure in the discussion here, including not just transportation, but also water, sewer, and power generation, and transmission assets.
To get things rolling, I'll pose some broad questions to the group: How much federal infrastructure investment should be part of the stimulus package? What form should this funding take and how should it be distributed? Tomorrow, I'd like us to focus the conversation on ideas for long-term changes to the ways in which infrastructure investments are prioritized and funded. On Thursday, we’ll conclude with a discussion on how to make those ideas a reality.
Thanks again for your participation.
Posted January 13, 2009, 9:37am
The trick that the new Administration must accomplish is getting enough stimulus into the economy to be effective, fast enough to stem the tide in mounting unemployment, and sufficiently durable to continue into 2010 to help assure a self-sustaining economic recovery in the private sector. That suggests big numbers in the order of magnitude of $300-500 billion in 2009 and early 2010.
As I explained in my recent column in Governing magazine, a federal requirement for a state/local matching share would help prevent bridges to nowhere and also would leverage the federal dollars. For example, if a 33% state/local match were required on average, then $400 billion of federal spending would result in $600 billion of total federal, state and local spending.
States and localities must borrow in the public markets to raise their share of this capital, so Congress must also help open up the muni bond market. In a follow-on commentary, I will share some ideas on that theme, including federal guarantees of privately insured muni bonds, one-year waivers of the AMT and bank-qualified bond limits, and even a taxable bond option that would get public pension money into the infrastructure market.
Posted January 13, 2009, 10:00am
One of the challenging aspects of the stimulus package is that it had two goals from the outset – stimulating the economy in the very short-term and making investments that strengthen America's long-term competitiveness – and finding initiatives that address both at once has not proved easy. The goal of creating jobs now for those most in need of help calls for spending on projects that require relatively little advance planning, use low- and moderately-skilled workers, do not involve substantial spill-over of American dollars overseas, and are not subject to numerous and complex federal and state rules and regulations. Of course, virtually none of these are attributes of the kind of transformative infrastructure projects that would make the economy stronger for the next century – they would argue for road paving and roof repairs, not power grids and train tunnels.
States have offered up big infrastructure projects that appear to meet these goals by being "shovel-ready" but of course the vast bulk of these only reached that stage because they were already planned and funded in state budgets (few states or cities design projects for which there is no identified funding). This would make the stimulus money serve simply as indirect state aid, substituting national money for state and local – a laudable objective perhaps, but not one we explicitly defined as a goal for the program. And if the states used the money for less than stimulative purposes – tax cuts or increasing employee wages – the whole program would have been for naught (hence the need for the maintenance-of-effort requirements on the states and localities receiving the new money).
In terms of scale, given the size of total US infrastructure spending at all levels of government – on the order of $400 billion a year according to the CBO – a package that looks like about $200 billion a year over the next two years seems substantial and manageable. It is unlikely to be transformative, for some of the reason cited above, but potentially stimulative if directed effectively.
Posted January 13, 2009, 10:12am
Infrastructure investment will be the longest lasting legacy of the stimulus plan, benefitting citizens long after this fiscal crisis has passed. But we need to embrace a broad definition of infrastructure to include not just roads, rails, and bridges, but look to next generation energy infrastructure, such as developing and deploying a digital smart grid for electricity. Hardening potential terrorist targets or weak-links in areas prone to natural disasters should fall under infrastructure as well – there is a Homeland Security dimension to this investment. This broader definition would mean that a larger percentage of the overall stimulus package is devoted to infrastructure. But a strong word of caution: the infrastructure plan runs the risk of quickly becoming a national punch-line if the local pork is not cut out of the Mayors' "shovel-ready" wish-list plan. Politics is perception, and if the American people start to perceive that their money is going to pay for water-slides in Miami, public support will erode quickly. There needs to be national-interest standards applied to investments, not just open-ended local control. And to ensure greater transparency the delivery of the funds should be track-able online – providing the "who, what, where and why" of infrastructure investment to the American people. It's their money, after all.
Posted January 13, 2009, 11:21am
It appears that we have made some progress in advancing a more transparent and accountable infrastructure policy in the economic stimulus bill, but it’s likely that we will not do much to achieve what should be our ultimate goal – resolving the more fundamental question of what we are trying to accomplish with our federal investments and targeting the funds accordingly.
For example, President-elect Obama has called for a “green energy” approach to economic recovery, which will focus on projects that reduce energy consumption. However, if you survey the potential list of transportation projects proposed by a number of State Departments of Transportation, it appears likely this legislation will fund billions of dollars in new highway capacity in suburban and exurban areas. These projects will exacerbate auto-dependent development and increase fossil fuel consumption.
Clearly, this challenge goes far beyond the immediate economic crisis.
We will not be able to resolve how much the federal government should invest in infrastructure until we can align spending with national goals such as job creation and economic competitiveness, bringing our existing infrastructure into a state of good repair, achieving energy independence, and reducing carbon emissions.
Posted January 13, 2009, 11:24am
A standard problem set question in economics is: suppose the government wants to increase employment, is the most efficient way to accomplish its goal to subsidize (or reduce taxes) on labor, capital, or output? Under reasonable assumptions, the conventional answer is to subsidize (or reduce taxes on) labor. But these are not conventional times, so the government’s stimulus package includes subsidies for capital (aka infrastructure investment) and tax reductions.
Of course, the U.S. government has made infrastructure investments for centuries. All levels of government are currently spending some $250 billion on transportation alone. The fundamental change that the government must make in the stimulus package is to make efficient infrastructure expenditures that are not compromised by inefficient pricing and regulatory policies. Details of those inefficiencies are explained in my recent Wall Street Journal op-ed.
If the government focuses on improving the efficiency of its infrastructure spending, it will set in motion a process that will help increase employment efficiently in the short run and eliminate hundreds of billions of dollars of waste in the long run. The key measures of its performance will be the rates of return on its expenditures. Unfortunately, government’s recent performance on this score has been abysmal.
Posted January 13, 2009, 11:37am
Applying "national interest" standards to a large infrastructure program is virtually impossible, if for no other reason than the structure of Congress generated by the Constitution and the Congress's internal institutions. A certain amount of pork is inevitable. I don't believe Congress will deal itself out of influencing how we spend $x00 billion. If we are going to be realistic, we need to accept that a portion of the money spent will be spent on projects that are not worthwhile and that a certain percent of those will be so egregious that they will create negative publicity. Even without our system, the Japanese managed to waste a large proportion of their 1990s stimulus on useless public works. So the questions become: "which projects are least likely to be wasteful?", "what can we do to induce transparency?", "how can we keep public support when the inevitable howler occurs?"
A problem is that many of the things we might do to answer these questions in the right way will take time and everyone agrees that time is of the essence here.
As a process matter, I agree that we should require a state/local share, but I don't think they can afford 30% in the current environment. It would probably be useful to start with projects that have already been screened by existing agencies but not appropriated or funded. In the meantime, we might set up a base-closing commission type mechanism in which projects proposed by a Congressional committee staffed by relevant agencies would be approved in non-amendable tranches every few months. There will inevitably be some logrolling and bureaucratic empire-building, but this should minimize holdup problems and earmarks.
Posted January 13, 2009, 11:42am
I’m impressed by the thoughtfulness of my fellow panelists' views on how to focus the infrastructure spending for broader national purposes. One of the great challenges that must be addressed is the time-lag that results from bureaucratic application and review processes. If we learned one thing from the Carter years’ countercyclical stimulus programs, it was that the administrative process required months and months, and many projects were still underway when the economy had clearly recovered. Getting timelines for rapid startup and timely completion will be essential from a macroeconomic perspective. As to the prioritization process, the issue is whether the Obama Administration will provide sufficient guidance to Congress to establish clear priorities to be determined at the state level. As previously noted in this dialogue, one person’s job-creating transportation stimulus is another person’s pollution problem. Perhaps it will be necessary to fast-track some of the money with clear qualifications and priorities (e.g., green technology, world-competitive technology infrastructure, etc.) so that they get underway immediately, and require more reviews of conventional public works projects through a filter that will unfortunately delay implementation.
I remain convinced that the fastest way to get traditional state and local government infrastructure projects moving is by federal actions to un-freeze the muni bond market and backstop the credits of state and local issuers. There are hundreds of backlogged projects, already approved, that local taxpayers would be willing to fund if their jurisdictions could simply gain access to the bond market at rates closer to the yields on U.S. Treasuries. Let state and local governments do what they already are empowered and equipped to do, and focus the federal money on incentivizing and enabling that activity, leaving more federal dollars available for the long-term investments that some of you are suggesting as meritorious.
Posted January 13, 2009, 11:48am
I wonder if there is a criteria beyond “shovel-ready” that could be added to screen projects. Perhaps making them multi-state or regional projects could increase the effectiveness of the spending? Or would a national-scope project like the FAA’s air-traffic control system, replacement of which would impact the economic efficiency of air travel nationwide and impact technology spending as well as bricks and mortar, be a good addition to the stimulus plan?
Posted January 13, 2009, 12:03pm
To Amy’s last question, one way to deal with the national vs. local benefits issue is to require different local matching shares on these projects depending on their scope and who’s the ultimate user/beneficiary. For example, the Interstate Highway system was largely funded on a 90/10% ratio on the basis that interstate commerce was a federal function and local use was secondary. I’m not convinced that ratio needs to apply for road and bridge reconstruction when there is significant local usage, but would still see a larger federal share than a local street project. Likewise, it’s not obvious that federal or interstate taxpayers have an economic interest in building local bike paths, even though that will create jobs. So a larger local matching share is appropriate. Of course, we’d all like to see the ‘bridge to nowhere’ be funded with a 99+% local match.
Posted January 13, 2009, 12:13pm
I don't think there is a rule. Filling holes in the highway and painting bridges is local, but it puts people to work, can happen fast and is almost certainly cost-effective. A new ATC system or power grid management system would be very worthwhile, but will take a lot of time. Upgrading sewage and water treatment systems as part of a multi-state cleanup is probably somewhere in between. The big issue that "shovel-ready" is supposed to address is that a project that takes three years to plan before implementation can start is probably not a good candidate as a stimulus, even if it puts engineers to work. I'd rather see them working on projects that are not shovel-ready, but could be started within a year.
Posted January 13, 2009, 12:33pm
We should try to think just a bit about how these projects and the process we use for them will overcome the barriers that have prevented the US from creating the kind of transformational infrastructure we so envy in our global competitors. As I have argued elsewhere, there are at least four such barriers: spatial (benefits from major projects often cross multiple governmental jurisdictions, demanding cooperation at best and leading to log-rolling at worst), temporal (big projects take a long time to plan and build even as our demand grows for short-term benefits), political (interest groups are organized around discrete funding mechanisms which prevents us from making rational tradeoffs among projects), and sectoral (cash-strapped states and localities are too often forced to turn public functions over to private interests). Rather than simply dumping money into existing funding mechanisms, maybe we can think about some alternative approaches: projects with major regional impacts should be funded through inter-state mechanisms (regional power grids through the entities like TVA, regional transportation through places like the Port Authority of New York and New Jersey), appropriations processes should be revised to force comparison among different types of projects (so we can test whether an expanded airport makes more sense than a new rail connection), revolving funds can be created and dedicated to the support of longer-term projects that won't garner quick headlines for politicians.
Of course, if we're in such a rush that we can't even imagine doing the big things differently, there are a few smaller matters we can change right now: make sure that states and localities don't use new Federal money simply to substitute for their own funds (maintenance-of-effort requirements), don't reward low-tax jurisdictions with the same funding increments as highly-taxed communities that have been contributing for so long, and don't fund any major new projects until they have passed some level of serious, third-party review (as opposed to the weak and self interested "alternatives analysis" now required under federal law).
Posted January 13, 2009, 1:50pm
I would add another barrier to Tony Shorris’s list: conceptual. By which I mean that we do not at present have a clear framework of what national goals our infrastructure investments should try to meet or what is the appropriate federal role in achieving those goals.
Let’s take some of the previous examples. If it is a national goal, as President-elect Obama has stated, to achieve energy independence and reduce carbon emissions, then local bike paths are potentially a more logical use of federal dollars than new highway capacity in exurban areas. And many are now arguing that preserving our infrastructure system is generally a higher national priority than new construction, given the U.S. political propensity to build new facilities while failing to maintain the old. I can envision a notably different reimbursement scale – with “fix it first” projects reimbursed at 80/20 Federal/State, and local and new capacity at 50/50.
Likewise, just as we need to reach agreement on the federal interest in a given project, we shouldn’t leave out the evaluation of private sector interests in projects, a key question in projects like the air traffic control system or new transit stations.
Whatever you might think should be our national goals – from creating jobs, to moving goods efficiently, to reducing carbon emissions – we can probably all agree that we do not currently have a system that is designed to ensure achieving such goals.
Posted January 13, 2009, 2:03pm
Private sector infrastructure firms will attest to the fact that most projects are “shovel-ready” – if the government wants to proceed expeditiously with the work.
Historically, large waste has been associated with efforts to upgrade air traffic control as well as with regional projects. The stimulus plan provides an opportunity for the Administration to take a close look at all the inefficiencies associated with public investment and decide whether it wants to make fundamental changes. Piecemeal changes will not be sufficient to generate large returns. In retrospect, I expect that a careful assessment of the actual expenditures and effects of the stimulus package will make this point very clear and will hopefully indicate the urgency of considering a fundamental alternative to public investment – namely, privatization.
Posted January 13, 2009, 2:10pm
These two goals – stimulus and infrastructure repair – should be explicitly treated as separate. Both goals are important and attainable but to some extent inconsistent. The risk here is that focus on the stimulus could lead to ameliorating economic conditions while papering over the serious infrastructure deficit which will require more planning and longer lead times to resolve.
Cities and states could advance planned projects as soon as they know that funding will follow. They can accelerate work for the year and redeploy budgeted funds once they know for sure that federal allocations will replenish their infrastructure budgets. Much of that money may indeed be spent in areas that look more like maintenance than capital investments. The federal government, in this instance, must find a way to ensure that new net capital spending is occurring in localities across the country.
Bold ways to resolve the infrastructure deficit are critically needed that allow governors and mayors to distinguish themselves by leveraging federal funds with private equity and other state match possibilities. The very best way to address both objectives – rapid infrastructure repair – would be to change the private activity rules allowing more private participation coupled with tax-exempt borrowing. These changes would increase speed and leverage more private funds for design, build, and finance.
Posted January 13, 2009, 2:17pm
As someone who doubts that bicycles are a major part of the solution to global warming, I think we need to distinguish among what can best be done by creating the correct incentives for private investment and activity (like a revenue-neutral carbon tax), what public investments can complement private incentives (funding parallel research programs directed toward improving energy efficiency, with adoption expected to be private in response to correct incentives) and what infrastructure projects must be funded publicly, either because they won't happen soon enough otherwise to affect the current economic situation or because transaction and coordination barriers to private investment are overwhelming (like reworking and upgrading transmission lines to create a national grid with central management). I fear using these funds to make long-term bets on particular solutions to our perceived challenges, because politics shapes the perception of what's needed and because "expert" perception changes and technology changes faster than government processes can react. I also would prefer to limit the number of long-term projects that government actually runs to those it must run. I'm for using these funds to maintain what we have and know we need, build faster what we've already decided to build, and invest in information capital that can be put to a variety of uses.
Cliff and I seem to be on the same page. Many publicly-valuable large projects with known demand can be built privately. In this environment, government can help ensure demand in the short term. If there are credit market problems that can be dealt with without prohibitive moral hazard, government money or guarantees can be very helpful.
Posted January 13, 2009, 2:34pm
We're missing the point – and the opportunity – if we're going to turn the challenge presented by the need for an economic stimulus program into yet another effort to privatize even more of the nation's infrastructure. If there's anything the recent economic collapse has taught us, it is that the tired market fundamentalism of the past is the cause of as many problems as it is the cure. The very point of creating public goods – of which infrastructure is one of the best examples – is to address market failures. Bankers and other Wall Street wizards have been peddling their fee-rich wares to under-funded state and local leaders for years, promising magic benefits for everyone involved, but the plain truth is that government has a role that must be played to maximize national productivity and achieve some measure of equity in distribution. This is a chance to do just that – there will be plenty of opportunity for profiteering later.
Posted January 13, 2009, 2:50pm
Mayor Goldsmith and Tony Shorris raise valid concerns about staying on point. But what would be the most valuable contributions from the private sector (both institutional and individual) in shaping successful economic and infrastructure policy? Many of you have pointed out the obstacles to real change in how Washington goes about making and executing spending and infrastructure policies. What's lacking-leadership, time, consensus?
Posted January 13, 2009, 3:03pm
I don't think comments designed to parse out what we should be talking about miss the point. The "challenge" should not simply be to find new ways for the government to spend money that would be spent by the private sector if it were given the chance. The challenge is to find government expenditures or guarantees that will perform tasks that private markets can't perform as well, like resolving holdout problems, coordination problems and capturing positive externalities, or that will speed up worthwhile projects that should be built but won't be started in the current economic environment. Defining new public monopolies for activities that can be performed privately is not a constructive role for government (calling them a "public good" because they are useful doesn't change anything) and nothing in the existing mortgage meltdown and resulting financial crisis teaches the opposite. If anything, it teaches us that government should be very wary of facilitating financial activity that cannot be self-sustaining. Sometimes it's necessary; most of the time it's not.
Stimulus comes from expenditure, public or private. Infrastructure planning can be done at the private, local, state, or federal level. It's fair to ask what roles we expect both government and private sector to play and I and others have been trying to do that.
Posted January 13, 2009, 3:08pm
Consideration of privatization in transportation is motivated by the fact that the government, not the private sector, needs a bailout. Urban transit systems run large and growing deficits, the highway trust fund is running a deficit, air traffic control spending is greatly over budget, and airports must count on monopoly vendors to keep flush.
The deficits are a powerful symptom that public sector management and operation of transportation infrastructure and services are highly inefficient – in particular, public sector regulations, procedures, and the like greatly inflate the cost of those services and stifle innovation. Private sector contractors have repeatedly offered new ways to cut project costs only to be told by a Department of Transportation official that their approach “violates procedures.” The rigidity, inflexibility, and lack of vision in Washington and beyond can be overcome by the private sector if it is given a chance.
Posted January 13, 2009, 3:23pm
Of course there are significant public sector inefficiencies, although we are currently bailing out the private sector with hundreds of billions of taxpayer dollars. So perhaps private firms don't always get it right either.
There is another way to look at why so many of our transportation systems are running out of money – we have a profound mismatch between the public's desire for government services and their willingness to pay for those services. Another part of the equation has been a lack of political courage on the part of public officials to level with their constituents.
Case in point, SAFETEA-LU committed the U.S. to spending more on highways and transit than could be supported by a 18.4 cents/gallon gas tax. Efficiency gains would not change that underlying fact.
Posted January 13, 2009, 3:40pm
Amy, I think you asked two questions.
I’ll answer the second one first. Executive leadership is the only way that a semi-rational set of priorities can make it into law and into actual practice when the money is spent. Legislatures are inherently reactive bodies, and seldom have a timely way to establish sensible priorities as others have suggested we ought. The burden is on the new Administration to step forward with clear, concise objectives, guidelines and ground rules. Otherwise, we will be debating these issues academically the rest of the year while Rome burns (or unemployment tops 10%, which is the net result).
On the first question, private sector involvement can clearly make a difference if the stimulus plan makes smart moves to provide capital incentives in public finance. I mentioned a few in my opening comment.
On the issue of public goods, in this context, it is useful to return to the classic definitions we all studied in our Musgrave textbooks in grad school: non-exclusive use, externalities, inability to price, etc. Toll roads can be privatized especially once the eminent domain issues are resolved by public action. There is a wide spectrum of activities across the range of what we would call privatization, however, so we need to be careful what gets painted with a single brush when that term is used. In deflationary times like these, the guarantee powers of the U.S. government may be the best tool for leveraging private capital.
Posted January 13, 2009, 7:00pm
The debate nationally (not here) in my opinion often focuses on the wrong issue – public ownership – while ignoring the real issue: public value. The privatization debate is consumed by political rhetoric taking the place of careful analysis. The choice is not one sector versus the other but how they relate in order to deliver public goods. The infrastructure process is now riddled by inefficiencies, slow handoffs, and multiple levels of review. Yet just turning the private sector loose without public accountability obviously will not work. Government should set policy and ensure quality and access.
The tax-exempt financing market in part distorts efficiency. Why not look to whether the asset is a public good or private good, and not to the nature of its ownership, as the driving force in the decision about tax-exempt financing (i.e., revise private activity rules). Finance, build and operate (with or without transfer provisions) can greatly increase efficiency and speed, but it does not reduce governmental involvement. Rather, it changes the nature of the involvement.
Posted January 13, 2009, 4:09pm
Apologies for my delay in weighing in. A few questions and observations:
1. What infrastructure should we invest in? I like the idea of a base-closing commission to review and try to coordinate projects. It seems unwise to me to invest in projects of marginal utility in the name of stimulus. It might be more effective to give every American a rebate check (which I also think unwise).
2. One opportunity with perhaps the highest green multiplier would be to invest in user-charge technology across the country, particularly on interstate highways. The ability to influence driver behavior and minimize congestion would be radically more beneficial to the environment than better CAFE (Corporate Average Fuel Economy) standards.
3. I think the debate on private-public is largely academic in this context. This is public money, and will be spent through private contractors. What is not academic is the scandalous waste generated by federal and local procurement laws. (Steve Kelman should weigh in on that.) If Plan A would generate 1 million jobs, a Plan A without Davis-Bacon and other wasteful procurement laws might generate 1.25 million jobs with the same money. And build more at the same time. Here as well, I think a base-closing commission could be given authority to alter and waive procurement requirements.
Posted January 13, 2009, 4:50pm
Coordination of public policies, public investment and private investment can be very useful. For example, it would be hard to imagine extensive private investment in electric recharging facilities at public or private parking locations because as of now it is difficult to project the demand for electric cars, which depends in large part on the price of fuel. If a carbon tax were enacted, it might help resolve the chicken/egg problem by assuring future demand. Then, to the extent credit markets were frozen or investment was slow, the government might direct credit toward activities complementary to the use of plug-in electric cars. The problem is knowing whether plug-ins (depends on battery technology), or diesel, or sophisticated gasoline hybrids (depends on battery and emission technology) are the "solution," or (even more speculative) whether fuel cells are the "solution." It would be incredibly wasteful to install a network of plug-in sources if we are going to use existing fuels much more sparingly instead of centrally generated power, even more wasteful to build out a hydrogen infrastructure before we knew whether fuel cells were going to be practical (doubtful, considering hydrogen's energy density, but maybe possible with natural gas which does emit some CO2 when burned). I don't know how quickly we can move on this, but without a carbon or gas tax, we won't get anywhere. Is this an infrastructure problem?
Posted January 13, 2009, 5:13pm
Michael, I appreciate your final point. We have strayed a little away from infrastructure investment.
I’d like to go back to points made earlier today by Philip, Girard, and Polly. Philip, your point that private-public is academic is well taken. I still think it is ultimately important, but in the context of the stimulus, could at least in part be addressed with the authorization of more private activity bonds that are not subject to the AMT, or with increased funding for the oversubscribed Transportation Infrastructure Finance and Innovation Act (TIFIA) program that uses federal funds to provide loans and loan guarantees to projects with both public sector and private sector roots.
I also think stimulus money could be distributed on a weighted basis from 90/10 federal funding for projects that meet a commission’s standards for the most national benefit, to 10/90 federal contribution for projects with the most local benefit, as both Polly and Girard offered.
I do think that in the context of federal stimulus, where most of the money is being borrowed by the federal government, the issues of transportation-related taxes would take too long to resolve.
But the issue of federal stimulus grant-making brings another question to mind. Does the low cost of borrowing currently available at the federal level in any way undermine ongoing federal support for the tax-exempt municipal bond market? Why should states and localities offer investors higher, tax-free returns when the federal government can make grants or loans funded with a cheaper cost of capital?
Posted January 13, 2009, 5:32pm
Amy I would agree with you and Philip that with respect to public-private and “private activity bonds” for the sole purpose of this immediate economic stimulus, it would make sense to waive the AMT rules for a year to permit many of the mixed public-private purpose activities to be issued without AMT. Airports and hospitals especially come to mind. I’m less sure about football stadia, if the primary beneficiaries are the team owners who gain a franchise capital windfall.
As to financing costs you cited in the second half of your questions, I would first suggest that with a proper “TARP-like” federal re-guarantee on privately insured muni bonds, their interest costs would quickly drop to the Treasury rate or below, so that eliminates half of your concern. And it’s important to remember that muni bonds are paid by the local taxpayers and not Uncle Sam’s taxpayers, so the matching of costs and benefits is more accurate and efficient.
Posted January 13, 2009, 6:00pm
A few thoughts. What's been clear in Obama's policy since the campaign is the intention to put funds in a National Infrastructure Bank and to use the public funds – initially pegged at a now-modest-sounding $60 billion over 10 years – to leverage private sector investment as a long-term force multiplier (Steve Goldsmith is really an authority on the mechanics of this generally).
And while a plan that suspended or exempted David-Bacon (as mentioned by Philip Howard) would lead to better value for taxpayers and broader short-term economic stimulus, there's a snowball's chance this would meet the Democratic Congress' approval.
If we're going to spend the unprecedented sum being suggested in this Keynesian splurge, it's vital that it is directed at projects bigger than the private sector can contemplate or justify with near-term P&L. If there is not a filtering and focusing of the projects – whether through a BRAC or otherwise – to meet some larger-than-local-interest standard it will be money largely wasted. And there is every indication, thankfully, that the Obama administration wants to tie this effort to the national goal of moving toward energy independence.
That's thinking with a sense of national interest and a sense of generational responsibility – something that's been missing from our domestic politics for too long.
Posted January 13, 2009, 6:02pm
Does anyone have quantitative estimates of the cost savings from improved methods of financing infrastructure? And if the potential cost savings are large, why hasn’t the government pursued these approaches? I suspect these matters are second-order to the ultimate efficiency of the stimulus package, but I would be happy to be proved wrong.
Posted January 13, 2009, 7:00pm
As you all know, various state and local governments have pursued alternative methods to financing infrastructure, with mixed success politically. You can't get something for nothing — private sector involvement generally requires a revenue stream — from user fees or straight public dollars or tax incentives. New user fees are not easy to sell to a public not accustomed to paying the full costs for infrastructure.
Building America's Future has fleshed out a proposal for an infrastructure bank pilot project for the economic recovery bill that would use merit-based selection (which we envision as being potentially BRAC-like), ideally insulated from political pressure, and a variety of financing mechanisms, but its most important feature is a set of criteria by which to judge projects: enhancing economic competitiveness, bringing the system to a state of good repair, and environmental sustainability. Of course the bank will also consider the extent to which a project also leverages additional public and/or private investment, but that is not a sufficient criteria in and of itself.
Unfortunately it appears that several key Members of Congress oppose the concept of an infrastructure bank and that the Obama Administration is unlikely to put up a fight for it.
Posted January 13, 2009, 7:09pm
Clifford, I tried to take a stab at this with respect to the leverage of state and local matching, which effectively multiplies the stimulus impact of a federal tax dollar by 1.2x to 3x and simultaneously puts enough local skin in the game to ensure we don’t undertake wasteful projects that local politicians would never undertake with their own constituents’ money. That’s mathematically obvious unless you want to get into the nuances of “crowding-out effects.”
On a more interesting level and to your point, but much harder to clear the state and local constituencies in Congress, would be the taxable bond option (TBO). A TBO would give the states and locals (or require them as part of their match) to issue taxable bonds instead of tax-exempts. Instead of subsidizing wealthy investors who buy municipals at today’s rates above taxable Treasurys, a taxable bond option could provide direct up-front federal payments (to get the projects started) and reduce the dead-weight burden on the federal taxpayer much more than the value to the state/municipality. TBOs also would have a market internationally and with pension funds that tax-exempt paper lacks. That idea from the 1970s could be resurrected and it’s been well quantified. But again, I’d agree that it’s second-order to the bigger picture of half-trillion in infrastructure spending.
To do anything quickly that saves money, the results will be marginal. If we want to talk about major cost savings, that will take us to the longer-term dialogue Amy suggested we undertake later.
Posted January 13, 2009, 7:56pm
Infrastructure banks were never really the answer – they were a strategy employed by states and others desperate to garner some support from a federal government that was on track to abandoning one of its core responsibilities, the creation and maintenance of critical national infrastructure (as a share of GDP, it fell from nearly two percent in 1960 to barely more than half that by 2004). As direct appropriations dwindled compared to the need, some argued for a bank – a one-time infusion that could revolve over time, providing modest subsidies for future projects and looking more business-like than the messy democracy – in lieu of a serious on-going commitment. Luckily, today we are directly debating the more essential issues of the appropriate federal goals and mechanisms in the context of a real federal commitment to participate. States and cities don't need any more bankers, they just need the cash.
Posted January 14, 2009, 9:06am
Anthony, thanks for kicking things off this morning.
I'd like to move the dialogue today to the considerations necessary to move to a new long-term system to prioritize and fund infrastructure on a national basis.
Posted January 14, 2009, 9:18am
Let me take it up a notch and ask, given all the questions raised yesterday and the clear challenges to federal revenues in the coming years, how should infrastructure be funded? What changes are necessary to get us there?
Posted January 14, 2009, 9:24am
Yesterday's discussion was fascinating and I'm sorry I was never able to stop long enough to join in. Financing issues aside, it seems to me from the historical perspective that as Obama moves toward some kind of mechanism for spending billions of dollars, the WPA provides some lessons. WPA projects bubbled up from the local level, with obvious prospects for duplication and redundancy, but those prospects were largely solved in the screening process at the national level with a committee of government and private sector representatives. Obama needs something similar.
I also think he needs a Harry Hopkins, someone who is passionate and articulate about the transformational opportunities available with infrastructure investment as well as the value of employment to individuals as well as to the nation. It was Hopkins who, along with Roosevelt, also invited Americans to look at the WPA projects going on around the country and report questionable practices and fraud and abuse. He maintained a high profile internal investigations unit, and there was never much public money wasted. With a 21st century Hopkins to take some of heat the huge infrastructure spending will clearly generate, Obama is likely to be more effective at attacking the many other problems left to him by the outgoing administration.
Posted January 14, 2009, 9:27am
There has been a lot of discussion about financing infrastructure. Isn't the threshold question what we should build? Or how we can evaluate proposals?
That's what the new administration has to face up to first. I agree with Cliff that financing issues are a second order problem.
Posted January 14, 2009, 9:58am
I totally agree with Nick Taylor (and enjoyed his book very much). We also proposed to the Obama Administration that they create a National Recovery and Renewal Council, somewhat along the lines of the New Deal’s National Resources Planning Board (NRPB), with a professional staff and the ability to screen projects. Unfortunately, it sounds like it was considered too high a political hurdle to jump over to expect such a board to be screening projects for the purposes of an economic recovery bill.
However I am sure you all have seen the press reports that the Administration is considering creating an “Economic Recovery Accountability and Transparency Board,” which will not screen projects up front, but will hold public meetings and issue financial reports to Congress on how the money is being used as well as "flash reports" on urgent issues that arise. The Board will reportedly include Administration officials from Transportation, Defense, Energy, Education and Health and Human Services. There are also supposedly outside appointees with expertise in economics, public finance, contracting, accounting, auditing, and other areas to advise the board as well. This board, particularly if it is run by the next Harry Hopkins, is potentially a nascent version of an NRPB-type entity.
And, Tony, agreed that infrastructure banks can’t make themselves perpetually self-supporting in the ways previously envisioned – they require regular infusions of public funding. I think the interest in them now is more because they seem to be the best way to foster merit-based, competitive, politically-insulated project selection, as opposed to the current model of earmarking and block granting.
Posted January 14, 2009, 10:06am
The question about what to build, when and how is clearly fundamental. But current policy approaches distort decision making. The recent conversation and your question actually raise several issues. The absence of capital budgets in many city and state governments, and the federal government, distorts policy making and “balance sheets.” That a private, efficient, performance-managed road might actually require more expensive financing is perverse. Regulatory approaches often needlessly drive up expenses – most local mayors know that federal regulations force costs much higher for roads touched by federal dollars.
In addition, we should look at different financing approaches for different priorities. Any system where one level of government finances another level of government produces inefficiencies and waste and needless earmarks. A national infrastructure investment strategy needs to be funded by the federal government with its sources not so dependent on the current gas tax formula.
States should be encouraged to be creative in finding more funding for their local and state roads. Both funding streams should be designed in a way that leverages additional private investment and local match.
Finally, more funding for innovative efforts – congestion pricing for example – would be helpful as we focus more on policy priorities – safety, relieving congesting, moving freight and the like.
Posted January 14, 2009, 10:27am
Thanks Philip. I think your proposal yesterday for a BRAC-like organization to quickly evaluate stimulative projects is an interesting one. In the longer term, it will be critical to review the process for, as you say, deciding what kinds of investments need to be made to move the country forward toward national goals.
Nick, I appreciate your mention of the WPA. What do you think needs to go into a national process to decide what gets built?
Posted January 14, 2009, 10:35am
The entrenched inefficiencies and strong political interests that shape infrastructure policy are too powerful to enable the public sector to reform itself with a WPA, BRAC-like organization, or any other model.
Some 30 years ago, we faced serious problems with the intercity transportation system that regulators could not fix: airline and trucking fares were very high; the railroad industry was experiencing a severe financial crisis; and the overall system exhibited little technological advance. The solution was partial deregulation and to a significant extent it produced a win-win outcome – consumers gained and firms became more efficient.
Deregulation required experiments to prove to policymakers that it would work – most notably, Mike Levine’s classic demonstration that unregulated California intrastate airline fares were lower than regulated intercity airline fares on the east coast.
In the long run, privatization is our only chance to significantly improve the efficiency of our urban transportation system and public infrastructure. But a persuasive case that privatization will work has yet to be made. It is therefore critical for government to think about carefully designed privatization experiments that would shed light on the policy’s likely outcome and the role, if any, that the public sector should play. The bus “privatization” experiment pioneered by Steve Goldsmith in Indianapolis is an example of what I have in mind.
Posted January 14, 2009, 10:43am
It seems to me that we need to separate short-term and emergency stimulus actions from the long-term planning process. In normal times, states and localities will do their own thing, and I’m not too confident that federal intervention in their locally funded activities will get too far. So that takes us to the infrastructure planning which is inherently interstate and thus inherently federal – transportation and other areas where the economics require multi-state planning. I’m not terribly confident it’s possible to load all the functional categories of federal-level infrastructure planning into a single decision-making process.
If the WPA is to be a model for 2009-10, then I think we’re looking at a prolonged protracted depression outlook for the economy and not a garden variety recession in order for the governance process to fit the situation. Thus far nobody’s been willing to think of this stimulus package in those terms.
Posted January 14, 2009, 11:14am
Perhaps the core problem here is a political one. It seems as if the many problems we have had planning, financing and building infrastructure have led many of us to identify the villain here as democracy itself, at least as practiced today in America. That would not be that surprising a conclusion – after all, many of the Progressive-era reforms were designed to reduce the influence of the democratic forces of that day (Boss Tweed and his ilk) and substitute "non-political" bodies like boards and commissions that are at least once, and often twice, removed from the electorate. And many of the great infrastructure builders of our time – China, oil-rich nations of the Middle East – are hardly models of democracy. One answer then may be to remove decision-making from elected officials and place it in the hands of BRAC-like commissions, or appointed bodies, or even to let them be made by the private marketplace rather than by the public sector at all.
Pessimists may be right that infrastructure development – with its long timeframes, its spill-over among multiple jurisdictions, its easy manipulation by interest groups – is incompatible with democracy, but I prefer to hope that we can find ways to improve the democracy itself instead. Limiting the power of corporate and other interests (and their lobbyist henchmen) over our elected officials through public financing of campaigns might be a start, as would other reforms that have allowed some Western European democracies to function with somewhat less corruption than ours. But more germane to our topic here, there are improvements to our democracy that might help on this specific issue. The federal executive lacks any kind of planning mechanism – not a heavy-handed communistic one, of course, but something that would allow the President and his team to define what they are trying to accomplish, to weigh competing approaches, and to organize the legislative and administrative apparatus to reflect those choices. If reduced dependence on foreign oil is the new President's goal, does it seem right to leave it to the handful of young people on the White House staff to press for an alignment of federal, state and local spending, regulatory and legislative actions to advance this goal? Who is trying to understand the interaction between federal home mortgage deductibility, state transportation plans, and local land use decisions to reduce the ex-urban sprawl that drives so much of our consumption of oil? And how should the Congress be organized to have such a discussion – using the same committee structure we have had in place for decades?
Before we call it a day on the mess and chaos of democracy because it cannot provide the decisions we need on infrastructure, maybe we owe it ourselves to try making it work better.
Posted January 14, 2009, 11:36am
Democracy (especially in our separated-powers, geographically-biased form) is a problem – a problem we are grateful for having, but a problem nevertheless. I am not quite as pessimistic as Cliff. When I suggested the base-closing model yesterday, I suggested it in a form that involved congressional participation to a degree perhaps greater than we have been discussing. I think that any BRAC-type mechanism should be a joint responsibility of the relevant congressional committees and the administration. It should include public members. It could be staffed from agencies having jurisdiction over the sorts of projects being proposed. The advantage of this approach is that it incorporates interest-group and branch-of-government politics in one bargain relatively immune to holdouts, and provides accountability for impeding progress (the BRAC or members of Congress who oppose its proposals or the President). The national sense of urgency would have a focus. I am not looking for a perfect solution here, just a pretty good one, and I think this should reduce the chance of grotesque wastes of resources in special-interest projects at the cost of not providing heroic opportunities to a Harry Hopkins (who didn't do all that well anyway).
Posted January 14, 2009, 12:30pm
It would be helpful to identify significant examples where government improved its regulations and expenditures – in infrastructure or anywhere else. The few that come to mind, such as deregulation, involve government withdrawing its intervention in markets. The Base Closure and Realignment Commission that has been noted reduced expenses by closing military bases. I believe government does learn – after all it didn’t impose price controls when gasoline prices exceeded $4/gallon – but it learns very slowly and rarely makes fundamental changes. In the meantime, the cost of its interventions grows and most importantly impedes innovations by the private sector. Scholarly evidence of the cost of government interventions to correct market failures is available in my book.
Posted January 14, 2009, 1:03pm
There are so many important and disparate issues we are addressing. Let me try to advance the conversation with a few mayoral confessions. The issue in each is how the public and private relate, not whether one can do this without the other. When I tried the partial bus privatization the goal was better service to disadvantaged communities—smaller buses, more service, less cost. The public transportation agency still needed to configure mobility but not run all the buses—yet federal rules—13c, rules concerning the cost of disposing of obsolete buses and the like—greatly impeded progress and the ability to leverage private participation. When I used federal dollars for bridge repair it escalated costs way above what my local engineers thought was necessary for bridges repaired with local dollars. When I had a chance for an earmark we used a different standard because, after all, it was not our money. When we hired a private operator we needed to make sure under tax-exempt financing rules it was not paid on performance. When we spent (or saved) money at the airport federal laws precluded municipal benefit, or penalty.
I suggest we consider operating efficiencies as part of the capital structure. When we contracted the private management of waste water, we were able to bond against the operating efficiencies and produce close to 200 million dollars of water investment without penalizing local rate payers.
Posted January 14, 2009, 3:48pm
I agree that we’re rolling a bunch of disparate problems together and perhaps each takes its own approach to solve.
There are a set of federal and state legacy requirements that may drive up project costs and inefficiencies, but also express social goals – prevailing wages, minority set-asides, environmental review, restrictions on tax-exempt financing, barriers to privatizing government functions. You can love them or hate them, and many can be improved, but to fundamentally change or eliminate them requires winning over political majorities to your cause.
Then there are many costs and inefficiencies resulting from the natural accretion of bureaucracy – excessive layers of review, over-engineering, rigid contract requirements. Some are legislatively mandated, but many are administrative and can be reformed by any administration or agency that has the will and the bandwidth to reform them. Unfortunately when presidential administrations attempt to tackle these types of bureaucratic reforms, the political payoffs seem to be pretty slight – i.e., Vice President Gore’s “reinventing government” program. But at the local level, as Mayor Goldsmith and others have demonstrated, these types of reforms can have a much better payoff as taxpayers more directly experience improved services and lower costs at the local level than they do at the federal level. I think all of us in this discussion probably share a strong desire to pursue these reforms.
Then there are the important process issues for public infrastructure investment – lack of national goals or consensus on the appropriate federal role, lack of a data-driven and merit- and outcome-based approach to project selection, lack of benefit-cost analysis and leveraging of private capital, congressional earmarking of projects with little or no merit, lack of transparency and accountability. Tackling these will in many cases require dramatic reform in the way our political system, particularly Congress, has addressed infrastructure. And beyond that are the most difficult political issues that ultimately Congress and the new Administration will have to grapple with – what is our nation trying to accomplish with its infrastructure policy? How much public money should we invest in infrastructure? How do we raise those funds – gas taxes, other user fees, better pricing mechanisms, public/private partnerships, etc.? How do we fairly distribute those funds? How do we pursue social goals like achieving energy independence or creating livable cities in U.S. infrastructure policy?
A large, diverse and well-funded coalition of elected officials, business, environmental and transportation groups are all mobilizing for the reform effort. Given how unpopular the last surface transportation bill, SAFETEA-LU, has turned out to be, I am cautiously optimistic that the time is ripe for major reform.
Posted January 14, 2009, 4:05pm
One enormous service a group like Polly's could provide would be to educate the public about how much more could be built – and how many more people employed – if an infrastructure czar were liberated from the layers of legal concrete surrounding government contracts.
When FDR built his programs, he did so with all-new agencies. He knew he had to circumvent existing bureaucracy.
Posted January 14, 2009, 4:25pm
Polly and Philip raise interesting issues about political will and public education. How do others feel about these issues? Can greater public awareness of the costs and consequences of "legal concrete" help mobilize the political majorities that Polly notes are required for fundamental changes in federal and state laws, which result in gross cost overruns and inefficiencies?
Posted January 14, 2009, 5:29pm
Just to get back to Philip’s comment, I am not sure such a thing could ever be quantified, but the elected officials in my group have taken an operational pledge of sorts – they are committed to accountability and transparency at the state level and doing what they can to streamline unnecessary bureaucratic and regulatory hurdles to project delivery. And they have each tried to bring the private sector and pricing mechanisms into infrastructure delivery, including implementing congestion pricing in New York City and leasing the Pennsylvania Turnpike to a private operator. And although both of those efforts were unsuccessful, they were beneficial in terms of public education. In the case of congestion pricing, I give USDOT Secretary Mary Peters credit for undertaking the experiment, which was opposed by some members of Congress from her own party. Her program provided financial incentives for a number of U.S. cities to develop congestion pricing plans and then try to sell those plans to the media and the public. Even if they were not all successful, it forced many people for the first time to seriously consider the concept of congestion pricing, which is still pretty exotic in the U.S. And I think it is clearly only a matter of time before congestion pricing is a commonly accepted demand management and revenue raising strategy.
Experiments like that often produce great opportunities for public education, so perhaps we can envision something similar to help with the “legal concrete.”
Posted January 14, 2009, 5:50pm
Amy, sorry to be so late replying to your question of 10:27 this morning, but I've been buried at the Nat'l Archives all day. I think that with some alteration or expansion of its functions, the Economic Recovery Accountability and Transparency Board (what a clunky title trying to be all things to all people) that Polly referred to could work to highlight redundancies. The main thrust obviously is not only eliminating earmarks but duplication. Local and state requests need some vetting with national priorities in mind, and there needs to be some entity that would do that. Of course, there needs to be agreement at some level, with fingers on the funding triggers (whatever they are) and with veto power over projects on grounds that they don't rise to the level of future national assets.
Posted January 15, 2009, 8:58am
To Amy’s question, I think Polly hit the nail on the head with her perspectives of the “embedded values” of current law and regulations that drive costs higher. Long-term, we need to fix that. I for one have vivid memories of the ridiculous waste of many of the embedded federal requirements that were all put there for a reason at some time in the past. These legacy inefficiencies have to be dealt with, but it will be nearly impossible to achieve that in the emergency stimulus bill. Especially in light of the heavy role of labor groups in the Obama election and Democratic landslide, we’re kidding ourselves if we think there will be reforms built into this bill on that front – just being realistic.
I credit our President-elect for his valiant effort to urge sanity and accountability in this process, and continue to believe that our only hope is strong executive leadership in the crafting of core legislative and administrative provisions to minimize the waste. His inaugural address can set that tone. At the end of the day, however, the macroeconomic considerations (i.e., preventing a depression by quick action to inject fiscal stimulus and put people back to work in the midst of an asset meltdown that could worsen) will outweigh these concerns about efficiency. If the cost of efficiency is a three or four month delay in getting projects underway, the White House advisors must urge speed with transparency as the prophylactic against waste, not pinpoint accuracy in writing the rules .
Posted January 15, 2009, 8:59am
Sorry I’ve been unable to join sooner but my recent travels are relevant. There seem to be two issues – how to implement those projects we should undertake in a better way and how to avoid projects that should never be implemented at all. No amount of process efficiency will make a bridge to nowhere a good investment. I was in a rural area of a state that I won’t name to avoid getting into specifics that miss the point. There were huge well-maintained highways with almost no one on them; six lanes for miles between small towns. Meanwhile roads carrying a tremendous amount of commercial traffic are going unrepaired, increasing costs to all involved. There were large bridges over small streams, clearly part of the highway system, leading to only one company’s factory. It’s hard to see how these projects would meet any objective standards for public benefit. Taking just roads as an example, given the national effort to reduce global warming, reduce our “oil addiction,” and simulate the economy over the long-term, can there be clear criteria for infrastructure projects ensuring they meet objective greenhouse gas and oil reduction targets? And transparency in the process? This would not solve all the problems, but ensuring that federally funded infrastructure projects actually advance federal goals could help.
Posted January 15, 2009, 10:31am
1. I'm glad to see Peter Lehner's points, which complement Cliff Winston's. We can't just talk about the need for wise investment — there must be some authority structure with that goal, and other organizations with the goal of holding their feet to the fire. Lonely voices coming out of this or that think tank are not enough. What should those structures look like?
2. Boy, do I disagree with Girard's realpolitik view of accepting the massive waste in government contracting. If not now, when? What it takes is a waiver for this special program, not endless debates over permanent reform.
Posted January 15, 2009, 10:45am
Federal transportation funding is inherently a political process which almost by definition occurs when one level of government is funding projects at other levels. I think Peter’s observations are accurate and are best addressed through different methods for raising and distributing transportation dollars. Obviously, earmarks are often wasteful. Federal dollars should fund federal priorities and otherwise be distributed entirely by formula or block grant to the state. A more efficient system might involve the states raising and distributing a higher percentage of the total gas tax. Governing.com carried yesterday a few principles about the role of private capital in these discussions.
Posted January 15, 2009, 11:35am
A draft of the House bill on the stimulus package that is circulating in the blogosphere does contain a few of the protections that have been discussed here and clearly does not address others. From what I have read...
- In many instances, funds are distributed through existing formulas to programs with track records and some accountability measures already in place.
- All announcements of contract and grant competitions and awards, and formula grant allocations must be posted on a special website created by the President. Program managers will also be listed so the public knows who to hold accountable.
- Public notification of funding must include a description of the investment funded, the purpose, the total cost, and why the activity should be funded with recovery dollars. Governors, mayors, or others making funding decisions must personally certify that the investment has been fully vetted and is an appropriate use of taxpayer dollars. This will also be placed on the recovery website.
- A Recovery Act Accountability and Transparency Board will be created to review management of recovery dollars and provide early warning of problems. The seven member board includes Inspectors General and Deputy Cabinet secretaries.
- The Government Accountability Office and the Inspectors General are provided additional funding and access for special review of recovery funding.
- Federal and state whistleblowers who report fraud and abuse are protected.
- There are no earmarks in this package.
Not sure this goes as far as some have discussed in terms of accountability, but given the urgency for action, this is probably about as far as can be expected. The country apparently was not ready to take on the issue of imposing any real national control over the projects that will use of most of these dollars – that has essentially been left to the states again, with the Federal government simply establishing categories of investment. Probably a missed opportunity, but with the actual share of the stimulus going to infrastructure being relatively small (looks like less than $150 billion out of over $825 billion), the risks here may be more modest than we had thought.
Posted January 15, 2009, 12:52pm
It looks like everybody is scrambling to see what’s actually in the bill. Based on the preliminary news reports, the infrastructure portion of the overall package looks pretty anemic to me, from a countercyclical stimulus standpoint. I’m frankly shocked that the number as reported most widely is under $100 billion (or $150B as Anthony surmises, perhaps he has better information). Looks like many of the controls and allocation decisions will be left to the governors, as Anthony reported before. From a pure magnitude standpoint, it’s not obvious to me macro-economically that the reported level of infrastructure spending will be sufficient to offset private-sector labor market contraction. Hardly the “jolt” that the President-elect had earlier suggested. Obviously we all await more details.
Posted January 15, 2009, 1:00pm
I am preparing to leave for a long trip, so this is my final comment. Please excuse its length.
Despite overwhelming evidence to the contrary, many participants in this discussion appear to believe that government can be a constructive force for positive change in infrastructure policy provided certain institutional changes are made and if the public is more aware of the relevant cost-benefit considerations.
Secretary Mary Peters and Assistant Secretary Tyler Duvall made herculean efforts to educate the public and introduce rational road pricing and slot auctions at airports but found the political and legal barriers (which are correlated) to be insurmountable. Secretary-designate LaHood is extremely unlikely to pursue the Peters/Duvall efficient pricing and investment agenda. The two congressionally mandated commissions on highway pricing and finance had little visibility or effect.
Not to worry. When it comes to microeconomic policies, the public generally gets what it wants. If it wants congestion pricing, it will get congestion pricing. If it wants convenient minibuses, it will get convenient minibuses. Of course, most people employ “rational ignorance.” Amtrak commuters don’t care about farm subsidies or textile trade protection as long as they get their subsidy. Thus, we have a status quo bias, which perpetuates small deadweight losses.
How do we ever get efficient microeconomic policy reforms? The few that occur emerge during a time of crisis and are accompanied by some demonstrable evidence that they will “work.” Then the public will come around. I envision that privatization will emerge as a viable policy when government must “sell off” some of its assets to cover its enormous debt and meet its entitlement obligations. Scholarly research and experiments will provide valuable evidence when the opportunity for change arises. That is what I will be working on over the next several years.
Until that time...
Posted January 15, 2009, 2:39pm
Cliff, in light of the shocking gap between the rhetoric and the reality of the infrastructure components of the just-released stimulus, your pessimism about the government's ability to be a constructive force for positive change seems timely.
How do others feel about the "What" of the bill? $6 billion to weatherize modest-income homes; $13 billion to help disadvantaged kids; a whopping $79 billion purely for state fiscal relief. Is this really stimulus or simply revenue transfers to states and disadvantaged populations?
Posted January 15, 2009, 2:56pm
I have not studied the bill but I’ll note two small things. One is that money to states so they can keep functioning is a form of stimulus. If state environmental agencies cannot issue permits, for example, nothing can be built and we sure don’t want to let factories be built without pollution limits. I need not add that state and local governments also do provide, however imperfectly, essential services that we really don’t want to cut. Second, NRDC, EEI and several others urged that $30 billion of the stimulus be spent on energy efficiency measures including weatherization. Weatherization means jobs (read: stimulus) in insulating etc homes. It means paying less for oil, gas, coal or electricity to heat one’s home, leaving more money for other things (read: stimulus, like a tax break). Clean and efficient energy is the future for the US and the world; the US is now far behind other industrial countries in making clean energy technologies. Kick starting that is stimulus, I’d offer.
Posted January 15, 2009, 3:03pm
As I noted in my very first comment, there have always been two objectives for this package – getting the economy started and creating transformative investments in public assets that will make America a more competitive nation. As everyone started to look more closely, it turned out that few projects met both of these goals – important infrastructure projects by definition take a long time to plan and build, and the more important they are, the longer they usually take – so we ended up with a package that focused on the first of these two goals: jump-starting the economy. To do that, the Congress wanted to put money into the pockets of the individuals who we can sure will spend it – mostly poor and working people – and into the hands of states which were otherwise about make huge reductions in their own programs as a result of the economic collapse, cuts that would throw still more people out of work. The bulk of the dollars in the program fall into these two categories since there is a sense in Congress that they are most likely to quickly lead to increased economic activity (and the avoidance of further downsizing). Infrastructure got some of the money – depending on what you count as infrastructure it looks at first glance like $100-150 billion – but that's clearly not the essence of the program. The reality is that there were not enough projects of great value sitting around waiting to start work in the street in the next few months that were not already funded. Now, even at $100 billion, that's still a 20-25% increase in national investment in these kinds of projects – not a trivial commitment and certainly an amount many of us would have been celebrating a year ago – but the overall package reflects the fact that major construction projects were simply not the answer to the question of what would get the economy moving quickly. As to making the longer-term investments the nation needs to change its competitive position and become a more just society, that will have to wait for another day – and given the profound questions about what those investments should be, maybe that's not such a bad idea.
Posted January 15, 2009, 3:18pm
Peter's comment is well-taken – these things do amount not only to stimulus but improvements to the national balance sheet in terms of energy efficiency, less imported oil, and so forth.
To sort of address Amy's question, I think the emerging details demonstrate how little the new administration knows about what will actually work. Roosevelt created the Federal Emergency Relief Administration to provide straight relief upon taking office. It provided jobs later, as did the Civil Works Administration. But it wasn't until almost two years into his first term that FDR determined that a more-or-less permanent jobs program was needed – thus the WPA. I for one would like to see bigger infrastructure plans up front, provided an effective mechanism for screening projects. Stimulus is one thing, and long-term improvements that will pay benefits for years to come are something else, but they're both important.
Posted January 15, 2009, 3:48pm
The broad funding categories listed represent a politically-expedient punt to the states, and, while the bill does include some online accountability measures (and apparently no earmarks, as promised), the categories are so broad as to make meaningful transparency unlikely. $13 billion to help disadvantaged kids will sail through Congress, but nailing down the logic of actual allocations and imposing accountability will be even more difficult because of these broad categories. Cliff raises the point that in "a time of crisis" we are occasionally able to get breakthroughs on more efficient micro-economic reforms, and while a crisis mentality certainly exists, it does not appear that this bill is written to identify or implement such reforms. And on the other side of the spectrum, as Girard writes, the amounts (and allocations) may be insufficient to provide the promised stimulus jolt. This bill represents much of the political (and monetary) capital that the new administration has to work with to achieve its overarching national goals – such as moving toward energy independence – and a missed opportunity could prove costly on several levels.
Posted January 15, 2009, 4:06pm
Just to be clear, the bill does not lack for detail – indeed, just the summary of it on the Appropriations Committee website is 13 pages long. Programs like the $13 billion for disadvantaged children are quite easily identified and tracked since the money runs through the existing Title I program which prescribes both the allocation mechanism for the funds and the uses allowed (as a former manager of schools, I can assure you the process is more than detailed).
Clearly, there has been a decision not to make this a bill about process – it reflects a choice not to engage in complex debates about the administration of the government (which would engage a whole different set of interest groups, making prompt passage even more difficult) when the failing economy demands immediate action. The amounts involved may seem smaller than expected by some – though $100 billion for infrastructure and over $50 billon for energy efficiency are hardly trivial gestures – but they are designed to focus on the people who need the help the most and on those who are most likely to spend the money.
Posted January 15, 2009, 6:00pm
Regrettably, our discussion will have to end here. The range of issues we have explored and diverse viewpoints expressed show the complexity of crafting infrastructure solutions in a stimulus bill. Thank you all for taking the time out of your busy schedules to contribute thoughtful comments to the discussion. It’s been a pleasure to be your moderator.