Sunday, November 23, 2014

Bridges to Somewhere

BERKELEY – After another round of brinkmanship, a rancorous US Congress passed a last-minute bill to avert the bankruptcy of the Highway Trust Fund (HTF), the primary source of federal funding for America’s highway and transit infrastructure. The HTF finances about $50 billion of infrastructure spending a year, and its bankruptcy would have forced state and local governments to shelve thousands of projects, threatening tens of thousands of construction jobs.

The new legislation provides a temporary $11 billion fix that will postpone the HTF’s bankruptcy for about ten months. Through fiscal gimmickry, the bill’s funding costs are pushed beyond the arbitrary ten-year budget window behind which Congress hides to signal its fiscal responsibility. But there is nothing fiscally responsible about this legislation.

Investment in public infrastructure in the US has plunged to less than 2% of GDP, its lowest level since the federal government started tracking these data in 1992. The American Society of Civil Engineers (ASCE) gives a grade of D+ to infrastructure in the United States, reflecting both delayed maintenance and underinvestment. An estimated one out of every nine US bridges is structurally deficient, and 42% of urban roads are congested, costing the economy an estimated $101 billion a year in wasted time and fuel consumption. Deficient and deteriorating transit systems impose another $90 billion in annual economic costs.

The ASCE calculates that the US needs about $1.7 trillion of investment in surface-transportation infrastructure through 2020 to achieve a passing grade. It projects an investment shortfall of about 50% based on current funding levels.

Most economists agree that underinvesting in infrastructure is economically unwise and fiscally irresponsible. In a 2013 survey of economists by the University of Chicago, 75% of the respondents agreed that, “because the US has underspent on new projects, maintenance, or both, the federal government has an opportunity to increase average incomes by spending more on roads, bridges, railways, and airports.”

From a macroeconomic perspective, investing in infrastructure is a “twofer”: It strengthens productivity and competitiveness in the long run and boosts demand and creates jobs in the short run. According to the Congressional Budget Office, infrastructure spending is one of the most cost-effective forms of federal government spending in terms of the number of jobs created per dollar allocated.

The HTF is funded by the federal gasoline tax, which is the federal government’s single most important source of transportation funding. The tax has been stuck at 18.4 cents per gallon in nominal terms since 1993. Meanwhile, the costs of building and maintaining highway and transit systems have increased significantly, and rising fuel efficiency has reduced gasoline tax revenues per mile driven. As a result, the purchasing power of the federal gas tax declined by about 30% from 1997 to 2011.

Since 2008, Congress has been filling the yawning HTF gap by providing $54 billion from general revenues. But makeshift solutions have become more contentious and harder to find, culminating in this year’s gimmick-ridden ten-month patch. The CBO recently estimated that the HTF gap will widen to $172 billion over the next decade.

An increase in the federal gasoline tax, with a built-in inflation adjustment, would be the easiest and most effective way to increase revenues for federally funded investment in transport infrastructure. Even Thomas Donohue, President of the anti-tax US Chamber of Commerce, calls an increase in the gas tax the simplest and most straightforward way to finance a long-term highway transportation bill. In a recent survey, more than half of the respondents expressed a willingness to pay more for gasoline to finance improvements in roads, bridges, and mass transit.

The CBO estimates that an increase of ten cents a gallon would be required in 2015 simply to offset the last 16 years of inflation and fuel-efficiency gains and to maintain current (inadequate) funding levels. A considerably larger hike would be needed to prevent the underinvestment predicted by the ACSE.

But, with a mid-term congressional election in November, there is strong opposition to such an increase, both in Congress and President Barack Obama’s administration. That is entirely understandable. I was Chair of the Council of Economic Advisers in 1994, when President Bill Clinton successfully championed the last gas-tax increase, of just 4.3 cents per gallon. Some of his “politically naive” economic advisers, including me, advocated a much larger increase, phased in gradually over five years, on both fiscal and environmental grounds.

Clinton’s Republican opponents characterized the increase as the “largest ever increase in taxes on the middle class.” That misleading claim contributed to the Democrats’ deep mid-term election losses that year.

In lieu of raising the gas tax, Obama has proposed a four-year $302 billion plan to close the existing HTF funding gap, and boost HTF spending by $20 billion a year above current levels. His plan, which relies on using transitional corporate tax revenues raised in conjunction with corporate tax reform, has virtually no chance of becoming law this year. Nor does his oft-repeated proposal for a federal infrastructure bank to attract more private funds for infrastructure projects.

Confronted with implacable Republican opposition, Obama is relying on what the administration calls a “pen and phone” strategy – combining the bully pulpit and executive orders – to move forward on several fronts, including infrastructure. At the urging of his 2011-2012 Council on Jobs and Competitiveness, he signed several executive orders to modernize and expedite the interagency review-and-permitting processes for high-priority federal infrastructure projects.

Moreover, Obama recently announced the creation of the Build America Transportation Investment Center to provide technical assistance to state and local officials seeking private-sector partners to support transport infrastructure. With similar offices, Canada and the United Kingdom have far surpassed the US in attracting private capital for such projects.

A pen-and-phone strategy may be the only way to make any progress on addressing America’s infrastructure needs in a mid-term election year. But Obama alone does not have the power to stanch the HTF’s bleeding or to reverse years of underinvestment. That will require congressional action and additional revenues.

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    1. CommentedThornton Hall

      Essays like this represent one of the greatest threats to humanity we face at the beginning of the 21st Century. Why? Because they ultimately serve to justify the Neoclassical Error that produces Reaganism and Thacherism as a necessary result.

      Little tweaks won't change the paradigm.

    2. CommentedDouglas Costello

      There appears to be a general failure to recognise the positive impact upon the overall economy of investment in infrastructure. Requiring people to pay to use limits the contribution that those infrastructures will contribute whereas a levy on fuels used by transportation means to fund this infrastructure means no discrimination or limitation on potential.

      Populism in the form of no more taxes and or small government and its resultant squeeze on infrastructure investment indicates an ability to grow the economy and strengthen its base. This article points out the issues and the shortfalls that are occuring from such approaches.

        CommentedLawrence Kramer

        It's time people understood that the money to pay for needed infrastructure improvements need only be raised from taxes if the resources involved would otherwise be needed by the private sector. In that case, the taxes resolve the conflict by taking the money to pay for those resources out of the private sector's hands. But if there is no competition for resources - as there is none now - there is no reason to take people's money just because the government needs to build something for us all to use. The government should issue 30-year (or longer) infrastructure bonds, and the Fed should buy them if the public won't.

        In economic terms, taxation never "funds" anything; it just prevents inflation when government and the private sector are competing for resources. When that competition is not occurring, there is no need to tax.

    3. CommentedProcyon Mukherjee

      An excellent analysis, which would be complete if we could figure out from where the investment would come or to put it differently what would the Americans have to forego to make this investment happen. It is rather simple, $1.7 Trillion cannot come from "somewhere", unless we forego "something". And if we are taking aside small Billions from the tax revenues to bail out small bankruptcies, we have not small problems to tackle in the near term as well.

    4. CommentedNathan Weatherdon

      Would the Republicans truly favour continued decay of vital infrastructure in order to make cheap shots at the Democrats for trying to implement sorely needed revenue measures to pay for this infrastructure?