A Mad Scramble for Infrastructure Dollars

Saturday, August 1, 2009
jim huffman, property rights task force member

During the 2008 presidential campaign, candidate Barack Obama made frequent reference to the need for investment in both maintenance and repair of existing infrastructure and the creation of new, twenty-first-century infrastructure adapted to a digital and green future. On both objectives, candidate Obama had widespread support.

The American Society of Civil Engineers estimates that it would take $2.2 trillion from all levels of government to bring America’s roads, bridges, and water-related infrastructure into a state of good repair. Other estimates of the nation’s infrastructure deficit range from $1.6 trillion to $3.5 trillion. With respect to new infrastructure, there is wide-ranging agreement on the need for constant improvement, along with widely varying cost estimates. Just for a “smart grid” that would increase efficiencies in electricity use and distribution, estimates range from $100 billion to $400 billion during the next decade.

Expectations were that half or more of the stimulus package would go for infrastructure. The reality is that less than 13 percent of the funds appropriated in the American Recovery and Reinvestment Act of 2009 (ARRA) is dedicated to infrastructure, even broadly defined. A more realistic accounting puts the infrastructure share at about 7 percent. President Obama has also signed the Omnibus Appropriations Act of 2009, which does nothing to change infrastructure spending priorities; indeed, much of the spending in that bill is in the form of thousands of “earmarks,” a special-interest budgeting tactic the new president had promised to end.

Less than 13 percent of the funds appropriated in the American Recovery and Reinvestment Act is dedicated to infrastructure.

President Obama’s proposed 2010 budget includes less than a 3 percent increase over 2009 and 2008 infrastructure spending, an amount that will barely dent the existing maintenance deficit, leaving little for new infrastructure. The president is proposing a five-year, $5 billion state grant program for high-speed rail, but that, too, barely dents the $40 billion estimated cost of high-speed rail in California alone.

The proposed 2010 Department of Energy budget includes an unspecified amount for the smart grid, but overall the department’s 2010 budget is unchanged from the projected 2009 budget, all of which is before the earmarkers in Congress get their hands on it.

The modest projected infrastructure spending in the 2010 budget is not surprising, given the massive increase in federal debt accumulated in just the opening three months of the Obama administration. For the same reason, we will see few significant increases in infrastructure funding in the next few budget cycles. Modest investments in digital and green projects are likely to be largely symbolic. Absent dramatic increases in funding, the biggest infrastructure issues for President Obama are how to prioritize and manage the existing resources.

The president’s total surrender on earmarks in the omnibus spending bill does not bode well for a new or better approach. On March 20, 2009, however, the president did issue directives on the expenditure of ARRA funds that focus on transparency and limiting the influence of registered lobbyists. But they do little to jump-start a system for prioritizing federal infrastructure spending. The president does call for “merit-based selection criteria” meant to assure that ARRA funding (1) achieves programmatic results, (2) provides economic stimulus, and (3) achieves long-term public benefits. But those criteria are to be applied by department and agency heads who remain free to define programs and operate independently.

Absent fundamental changes to the existing federal structure for funding, constructing, and maintaining infrastructure, the president’s directives will have little effect; future appropriations bills will continue to be loaded with funding for local projects having no necessary relationship to national infrastructure priorities.

After all the talk of $300 billion or $400 billion for infrastructure, the American Recovery and Reinvestment Act was a disappointment for infrastructure proponents. However the thousands of items in the 407-page bill are categorized, the total falls far short of projected needs. Using the broadest possible definition of infrastructure, ARRA contains approximately $100 billion of authorized spending. If all those funds were applied to reducing the existing infrastructure deficit (based on the most conservative estimate of $1.6 trillion), it would take sixteen years of annual appropriations at the same level to accomplish the task. But less than half of the $100 billion is destined for infrastructure of the type included in the deficit estimates, and a significant share of that will go for new facilities rather than maintaining existing infrastructure. In addition, the administration’s emphasis on shovel-ready projects means that much of the funding will go to already-funded projects, allowing state and local governments to divert those funds to deficit reduction or other uses.

In summary, the American Recovery and Reinvestment Act includes $30 billion for highways and bridges, including those on Indian and federal lands; nearly $7 billion for transit; $6 billion for clean water; $4 billion for the Army Corps of Engineers; $2.5 billion for airports, including $1 billion to the Transportation Security Administration for explosives-detection machines; more than $1 billion for rural utilities; and $1 billion for military facilities. The development of high-speed rail gets $8 billion, a fraction of the anticipated costs for a national system; the much-ballyhooed smart grid gets $4.5 billion, less than 5 percent of the most optimistic estimates of the cost.

But if it falls far short of actual infrastructure needs, ARRA does include something for just about everyone under the infrastructure heading. There is $50 million apiece for the Central Utah Project and the California Bay Delta; $375 million for Corps of Engineers projects on the Mississippi River; $1 billion each for veterans’ hospitals, community development, and the Bureau of Reclamation; $25 million for the Smithsonian Institution; $700 million for the National Park Service; $140 million for the Coast Guard; $1.5 billion for homelessness prevention and rehousing; $2 billion for redevelopment of abandoned and foreclosed homes; $300 million for diesel emission reduction; $50 million for the preservation and restoration of national cemeteries and monuments; $15 million for the preservation of historically black colleges and universities; and much, much more.

The enacted 2009 Omnibus Act contains even more of a spending grab bag.

Many of the nine thousand earmarks in the act are for infrastructure, with no pretense that these projects are part of a program of prioritized spending. The same is sure to be true of the 2010 spending bill, unless President Obama finds the political will to eliminate earmarks. On that campaign promise he has failed once and is likely to fail again. Despite Senator William Proxmire’s Golden Fleece Awards of the 1970s and 1980s, outrage in the 2008 presidential election over Alaska’s “bridge to nowhere,” and candidate Obama’s pledge to eliminate them, earmarks have increased from 10 in 1982 to 500 in 1991, 6,000 in 2005, and 9,000 in 2009.

Although President Obama’s proposed 2010 budget does contain funding for high-speed rail, the smart grid, and other infrastructure innovations, the amounts proposed are a fraction of what the systems are projected to cost. An even bigger problem is that they conform to the modal approach of earlier federal budgets, which funded infrastructure on the basis of various modes of transportation and other public goods and services, with separate budgets for highways, public transit, airports and air travel, ports and water navigation, and so on, and now budgets for the smart grid, health information services, and green infrastructure. That modal approach, combined with the rigid structure of the federal bureaucracy, ensures that integrated infrastructure planning and prioritization are impossible.

Finally, President Obama has embraced the concept of a National Infrastructure Reinvestment Bank, first suggested in 2007 by the Commission on Public Infrastructure at the Center for Strategic and International Studies.

According to the president, “repairs will be determined not by politics, but by what will maximize our safety and homeland security; what will keep our environment clean and economy strong.” In the commission’s vision, the bank would exist not to overcome inefficiencies in capital markets but to bring greater efficiency to the expenditure of federal funds and, critically, to raise additional funds from existing capital markets. In addition to drawing on private capital, the bank would circumvent the inefficient modal funding method. In the president’s vision, the bank would invest $60 billion over ten years, far short of what is needed, but at least the concept holds the promise of overcoming some of the existing failings of federal infrastructure investment.

A separate, but not independent, question is whether President Obama’s infrastructure initiatives will stimulate the economy in the short run and promote economic growth in the long run. Estimates of the effect of infrastructure spending on job creation vary widely. The Obama administration has suggested that as many as 47,000 jobs can result from investment of $1 billion. A study done for the Alliance for American Manufacturing (AAM) puts the number at 18,000 jobs per billion dollars invested. California governor Arnold Schwarzenegger reported that 11,000 jobs would result from an investment of $625 million in infrastructure, similar to the lower estimate of the AAM.

Estimates of second-order impacts (the external benefits that define particular goods as infrastructure) also vary widely. The work of David Ashuauer in the late 1980s for the Federal Reserve Bank of Chicago, which is widely relied on, forecasts dramatic returns on public investment in infrastructure. But other studies indicate that, in every decade since 1950, returns on public investment have been between a quarter to a half of those on private investment and that public investment in infrastructure can even have negative economic effects. The difficulty in forecasting the growth benefits from public infrastructure investment derives from the absence of reliable measures of demand, particularly where infrastructure is supplied free of charge. Public infrastructure investment can have negative impacts on growth because, absent reliable demand estimates, infrastructure can be oversupplied, thus diverting resources from more productive investments.

On behalf of the Obama administration, Christina Romer and Jared Bernstein projected 3.7 percent GDP growth and 3,675,000 new jobs as a result of the ARRA stimulus package. Nobel laureate economist Gary Becker expressed skepticism on two grounds: “The activities stimulated by the package to a large extent would draw labor and capital away from other productive activities. In addition, the government programs were unlikely to be as well planned as the displaced private uses of these resources.”

The first point is supported by an analysis by Forbes publications showing that most of the jobs created under ARRA will be for specialists with currently low rates of unemployment. The second point is underscored by the pressures to spend the infrastructure funding quickly during a time of intense political competition: politics, not planning, is almost certain to prevail. Becker also reminds us that sooner or later these expenditures must be paid for by increased taxes. Anticipating those taxes will counter much of whatever stimulus effect the short-term spending might provide.

Potential stimulus benefits of infrastructure spending are also undercut by competing objectives. An emphasis on green infrastructure, combined with existing regulatory constraints, means that costs per unit will be higher and benefit per dollar spent will be lower. Incurring similar effects are existing labor regulations such as the Davis-Bacon Act of 1931, which mandates prevailing wages on public works projects, and ARRA’s Buy America requirement, which requires U.S. production of all iron, steel, and manufactured goods used in public buildings and public works.

The Obama administration’s general policy statements exhibit an appreciation of the need to overcome the history of pork-barrel funding.

Although the Obama administration has clearly underestimated the magnitude of the nation’s infrastructure deficit and overestimated its capacity to rationalize the allocation of federal investments in infrastructure, its general policy statements exhibit an appreciation for the need to overcome the history of pork-barrel funding of the nation’s roads, bridges, water systems, and other basic infrastructure.

Aside from the large shortfall in funding just for maintaining existing public infrastructure, a failing unlikely to be remedied given the president’s other spending ambitions, the biggest failing of the Obama administration’s infrastructure policies is its presumption that private suppliers and market forces have only bit parts to play. The most viable solution to the funding challenge is private capital. The best way to assure that public and private capital is wisely invested is greater reliance on the efficiencies inherent in the market.