Once again, Fred Thompson makes a timely contribution to the blog:
Noah Smith, one of my favorite economic bloggers, recently posted about the
need to fix our infrastructure and proposed that one way to do this is by separating the capital budget
from the regular budget:
We need to rebuild
our infrastructure, and now is the perfect time to do it. Interest rates are at
historic lows, but they are unlikely to stay there forever...
But infrastructure
budgets have been cut, not expanded. Why? One reason is that in the race to cut
the deficit, infrastructure spending has been lumped in with other types of
spending. That is a tragic mistake. Unlike government “transfers,” which simply
take money from person A and give it to person B, infrastructure leaves us with
something that helps the private sector do business, and thus boosts our GDP
growth. Infrastructure is a small percentage of overall federal spending, but
tends to be a politically easy target.
One idea to boost
infrastructure spending, therefore, is to treat government investments
differently from other kinds of government spending by having a separate
capital budget.
This
grabbed my attention. We all have our manias. Mine is infrastructure
investment, especially our inability to make large-scale infrastructure
investments, which reduces economic growth and, based on studies by Duflo and Pande and Lipscomb et al., may increase poverty. For me the issue isn’t limited
to public investment. We strangle all sorts of large-scale infrastructure
investments. Here, the poster child is Keystone XL. Recently, the U.S. State Department’s final
environmental review of the proposed Keystone XL pipeline was released for
comment. It concludes that Keystone XL would have little or no effect on the
rate of extraction of oil sands or on the consumption of oil, that its main
effect would be to increase the safety with which that oil is moved about (a
little) and its efficiency (a lot), and implies that the opposition to this
good thing is largely symbolic. The report’s basic economic argument is that,
even if the oil from the tar sands were shipped by rail, its cost would still
be less than the current or expected future prices. Consequently, building the
pipeline won’t affect the marginal price/cost of oil and, therefore, final
supply or demand.
As
I see it. The main thing that is strangling large-scale infrastructure
investment is that we have politicized these decisions in a system of
governance that is highly biased in favor of the status quo. So far as public
investment is concerned, the big problem seems to be an inability to manage IT
and ICT investments. Even so, granting those claims, wouldn’t it make sense “to
treat government investments differently from other kinds of government
spending by having a separate capital budget”? Of course it would and, for the
most part, we do. More than 80 percent of the US’ nonmilitary public
infrastructure is owned by state and local governments. This means that, if we
have insufficient public infrastructure, it’s primarily a state and local matter.
Most state and local governments already
have separate capital budgets.
(Parenthetically,
it might be mentioned that the Feds offset the presumed budgetary bias against
investment projects by annualizing capital costs in authorizing ‘bricks and
mortar’ projects and in appropriating funds for them.)
Therefore,
let’s come down to the level where it matters, Oregon, and to an infrastructure
issue I know something about, highways. Analysts at the Department of
Transportation (DOT – and more disinterested bodies, like the Oregon Transportation Research and Education
Consortium –
OTREC) are quite concerned about the sustainability of our highway
transportation network. They believe that the social returns on certain kinds
of highway investments are quite high: maintenance, > 35 percent; projects
oriented to reducing urban congestion, > 15 percent, etc. In contrast,
ignoring effects on aggregate demand, most other highway projects produce
relatively low or negative returns. Because the lion’s share of state money
goes to maintenance, this evidence is entirely consistent with the conclusion
that we ought to be investing more and that now is a very good time to make
such investments (in addition to low borrowing costs, the state doesn’t have to
bid fully employed resources away from the private sector). Moreover, the
relatively high payoff to the maintenance portion of the DOT budget tends to
reinforce Noah Smith’s argument: maintenance seems to be where we are
under-spending the most and maintenance spending is usually charged to the
current account rather than to the capital account.
Nevertheless, there are a couple
of policy issues that are probably more salient than is budget format to fixing
infrastructure problems. In the first place, maintenance investment is far less
risky and seems to have higher expected rates of return than other highway
investments, but gets little or no federal matching, while new construction
projects get treated pretty generously by the Feds: about 80 percent of the
cost of a project (up to some predetermined limit, then none of the costs, so
that the state bears most of the risk of cost overruns, which tend to be high
for investments that break new ground, whether literally or figuratively). The
solution seems obvious, shift federal transportation subsidies to a
formula-based grant, which is how most states allocate motor fuel taxes to
local jurisdictions. At the very least, federal matching shares should probably
be lowered for new construction and raised for highway maintenance.
Second, highway engineers tell us that road wear is a cubic function of
axle weight and a quadratic function of road speed. Oregon’s weight-use-mile
tax, imposed on commercial vehicles, approximates the damage they do to the
highways (and also provides a very real incentive to reduce axle weight and to
comply with the 55 mph speed limit on trucks, thereby, also reducing highway
maintenance costs). The gas tax once did pretty much the same thing for private
vehicles, insofar as speed and vehicle weight were the principal determinants
of fuel consumption. However, the legislature’s consistent failure to raise motor
fuel taxes in tandem with construction costs, together with reduced private
driving and the shift to more fuel-efficient cars, has depleted the state’s
highway fund (it has also increased uncertainty about the benefits of new
highway construction and, therefore, the riskiness of these projects, which was
already high on the cost side). The solution to this problem lies in increasing
revenue.
Currently, Oregon’s DOT is
experimenting with GPS systems that would monitor how and when vehicles use the
highways and allow the state to bill their owners directly for the road damage
their vehicles cause. This would permit revenue from highway x to be devoted to
maintaining highway x, and give DOT a better guide to allocating funds for new
construction. Furthermore, these charges could be varied by time of day or
week, thereby lessening congestion, further reducing the need for new
construction. It might make sense to delay most new, large-scale highway
construction projects in the state, especially those justified by high
congestion costs, until we see how these experiments play out – technically and
politically. A moratorium on new construction would also free up a little more
money for maintenance projects.
Finally,
there is one other point that should be borne in mind: most of the benefits to
infrastructure investments accrue directly to users or indirectly to their
customers (or their customer’s customers). Insofar as highways are concerned,
these benefits accrue about equally to private automobile operators and
commercial freight handlers (and/or their customers). If public investment really does produce returns of 20-30
percent, one would expect producers of primary products, manufacturers and
freight handlers to be clamoring for the state to impose taxes or float bonds
to upgrade roads and highways. The effect on business profits would be high and
the cost to business low. They are not or, at least, I don’t hear the clamor.
What I hear the business lobby saying is that tax rates (and regulatory burdens)
are too high, not that public investment is too low. If that’s what business
owners and their employees truly believe, perhaps, it might be wise to treat
claims about high payoffs to infrastructure investments (especially risky, big
new projects) with a modicum of skepticism.
6 comments:
Based on my experience working with local governments in Oregon, I have to say that your point about prioritizing maintenance investment is spot on. I like to imagine a world in which "project cost" is not limited to initial construction, but rather includes the present cost of construction, maintenance, and perpetual replacement. Whenever you construct an asset, you have to make a deposit in a fund that can be used only for the maintenance and replacement of that asset. If such a requirement existed, we would never be tempted by the illusion that sprawl is affordable.
Doug, Thanks for your comment. Do you (or anyone out there) know of any hard evidence of skimping on maintenance? What I have are a lifetime of anecdotes, which as I remind my students, isn't a plural form of data.
That's funny, I use the plural of anecdote is data all the time (thinks to Krugman) - but do so ironically most of the time.
Data on deferred maintenance is difficult to get unless you stumble across some internal condition assessment. It's much easier to quantify deferred replacement. With a budget document or capital improvement plan, you can see planned expenditures by type of infrastructure. Then, with the help of a CAFR, you can compare the planned expenditures with the actual depreciation booked for that category of asset. If spending is less then depreciation, you are losing ground. The City of Salem, for example, will spend $9.5 million per year for water and sewer infrastructure over the next five years. Meanwhile, annual depreciation for those assets is $16.2 million. Of course, if your population is growing, you might be losing ground even if your spending is greater than depreciation.
E.A. Littrell and I actually wrote a piece on how to improve the CAFR to generate this sort of info: "Fixed Assets Reporting" and "Reply", Public Budgeting & Finance. 18/1 (Spring 1998) 94-98; 124-127.
See http://www.governing.com/topics/transportation-infrastructure/gov-report-states-neglect-road-repairs.html
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