A New Kind of Public Works

It’s hard to imagine a more urgent national priority than modernizing America’s decrepit transportation and water systems and updating our energy-wasting electrical grid.

By Will Marshall

Tagged GovernanceInfrastructure

Barack Obama is thinking big as his presidency enters the final stretch. The centerpiece of his last budget, unveiled this week, is a $300 billion plan for a “clean transportation system”—the biggest federal infrastructure push since President Eisenhower launched the interstate highway system. Here at last is a fix that’s equal to the magnitude of America’s immobility crisis. In polarized Washington, however, it’s going nowhere.

Obama’s proposal would effectively double U.S. transportation spending, paying for it with a $10-per-barrel oil tax. There’s no way a Republican-dominated Congress will vote for a new energy tax, even with oil prices down to around $30 a barrel. House Speaker Paul Ryan already has dismissed the plan as “an election-year distraction.” Nor can the White House expect many Democratic candidates to rally around what is essentially a middle-class tax hike.

Obama, the arch realist, knows all this. But he seems determined to ensure that two issues on which he’s made frustratingly little headway—clean energy and infrastructure investment—stay high on the nation’s political agenda. And if his visionary proposal injects these issues into campaign 2016, so much the better.

It’s hard to imagine a more urgent national priority than modernizing America’s decrepit transportation and water systems and updating our energy-wasting electrical grid.

With our economy stuck in low gear six years into “recovery,” making such investments now should be a no-brainer. It’s a proven way to create good middle-class jobs, boost the productivity of U.S. businesses and workers, and lay new foundations for future growth.

The deterioration of our country’s economic infrastructure has long been glaringly obvious, but U.S. political leaders have failed to coalesce behind policies for reversing it. A big reason is that Congress is controlled by a new breed of Republicans who regard all federal spending with kneejerk hostility. Conservative lawmakers seem to have lost the ability to distinguish between investments that generate tangible economic returns to society and spending that fuels present consumption.

This outbreak of economic illiteracy in Washington isn’t the only snag. Unless a bridge collapses or a train derails, the media doesn’t pay much attention, either. Let’s face it: Infrastructure bores political reporters, who would rather cover Hillary Clinton’s emails or Donald Trump’s latest insults.

Part of the problem may be the word itself, a clunky, Latinate mouthful only an engineer could love. Can’t we come up with something sexier than “infrastructure”?

Channeling Adam Smith, we could speak instead of “public goods” undersupplied by private markets. Economists also refer to roads, bridges, ports, and water systems as the nation’s “physical capital.” In the republic’s early days, the Whigs urged public support for “internal improvements” like canals and turnpikes. In a similar vein, President Obama calls for “nation-building at home.”

The deterioration of our country’s infrastructure has long been glaringly obvious, but U.S. political leaders have failed to reverse it.

My own preference is “public works,” which evokes the great dam, rail, and highway projects that opened vast swaths of our country to economic development. Whatever you call it, what we are talking about is the backbone of our market economy. Thanks to decades of chronic underinvestment, that backbone has grown old and weak, no longer capable of supporting a dynamic, expanding economy. Saddled with run-down and insufficient infrastructure, Americans are losing time, mobility, energy, productivity and competitiveness. A 2014 U.S. Treasury Department report catalogues such losses:

The costs of underinvestment in infrastructure are massive. Drivers in the United States annually spend 5.5 billion hours in traffic resulting in costs of $120 billion in fuel and lost time. U.S. businesses pay $27 billion in additional freight costs because of the poor conditions of roads and other surface transportation infrastructure. The electric grid’s low resilience leads to weather–related outages that cost the U.S. economy between $18 billion and $33 billion each year, on average. Due to continuing deterioration of water systems throughout the United States, each year there are approximately 240,000 water main breaks resulting in property damage and expensive service interruptions and repairs.

Beyond these costs of neglect and deferred maintenance, however, lies a political problem: The breakdown of consensus behind vigorous national leadership on public works.

During the Cold War, a Republican President and Democratic Congress joined hands to launch the interstate highway system. That project has long been completed, yet there’s been no systematic attempt to rethink the federal government’s role in building public works. Sticking with business as usual seems the easier course, since it doesn’t threaten to interrupt the flow of resources from Washington to the states.

Thus, GOP congressional leaders congratulated themselves mightily after passing a modest, $305 billion, five-year highway bill extension in December. Hailed as a return to “regular order,” this utterly conventional bill at best perpetuates a status quo that has relegated the United States to twelfth place in international rankings of infrastructure quality.

The challenge goes well beyond pouring more money into repair and maintenance of existing public facilities. These are chiefly state and local responsibilities, and have traditionally been funded by municipal debt. Washington should focus instead on innovative ways to provide and pay for the new, technologically sophisticated infrastructure Americans need to compete in a global, knowledge economy—a wish list that includes high-speed intercity rail; metro transit and rapid bus lines; intelligent highways; satellite navigation for airline routes; a smart power grid that can accommodate wind and solar power; and updated drinking and wastewater systems, among others. Making this vision for infrastructure a reality will require a radical rethinking of Washington’s role in building public works.

Some of our biggest infrastructure challenges are mainly private responsibilities. For instance, utilities will have to take the lead in building a smart, two-way power grid that encourages more efficient electricity use, accommodates rising volumes of solar and wind power, and is more resilient against natural and man-made disasters. We also need to sustain robust private investment in broadband to support innovations like driverless cars and the coming “Internet of Things,” and to move America from 4G to 5G wireless networks. Critical upgrades to eliminate chokepoints in the nation’s 145,000-mile freight rail network also will be funded mainly by private companies.

Yet government can facilitate private initiative by lowering regulatory barriers to investment (and, in the case of mobile broadband, by freeing spectrum). National investments in energy R&D, especially for storing power generated by intermittent sources like wind and solar, can hasten grid modernization. But as a general rule, it makes little sense for governments to divert revenues from public goods undersupplied by markets—like roads and bridges, drinking and wastewater systems, or modern school buildings—to infrastructure that private companies can profitably build and maintain. Governments do have a legitimate interest in making sure all citizens have access to the grid and the Internet, but it can best achieve such goals by creating incentives for private actors to deliver universal service.

Whether we’re talking about public or private infrastructure, Washington’s most important job isn’t to build anything. It’s to think strategically about our economic needs, set national priorities, and create strong incentives for states, local governments, and private investors to collaborate in doing the work. The federal role should be to catalyze investment in high-value public works on a scale sufficient to spur more indigenous innovation and put America back on a high-growth trajectory.

Specifically, here are four ways to bring national infrastructure policy into the twenty-first century.

First, Congress should use dynamic scoring to assess the true fiscal impact of spending on public works.

Conventional budgeting in Washington fails to capture the impact of infrastructure spending on the overall size of the U.S. economy. It ignores spillover effects—for example, when spending by workers hired to build a new road or transit system creates local demand that leads to additional job creation—as well as long-term gains in productivity as more and better infrastructure enables us to more efficiently move ideas, people, and products.

Reviewing a slew of post-recession studies, my colleagues at the Progressive Policy Institute (PPI) found irrefutable evidence that infrastructure spending has a large, positive “multiplier” effect on the economy. Every dollar spent on transportation infrastructure, for example, generated an increase in economic growth between $1.5 and $2.

Another recent study by PPI chief economic strategist Michael Mandel and Douglas Holtz-Eakin, former head of the Congressional Budget Office (CBO), estimated conservatively that every dollar of additional infrastructure spending adds 80 cents to national output (assuming there is slack in the economy, as there is today). Spillover gains from new projects could offset as much as a third of the projects’ costs.

The authors urge CBO to score infrastructure spending “dynamically,” taking these growth and productivity effects into account when calculating its overall impact on the nation’s finances. In effect, dynamic scoring of infrastructure would be a step toward a federal capital budget that separates investments in future growth from consumption spending.

The distinction is crucial, even if it eludes today’s rabidly anti-government conservatives. As any business knows, when credit is cheap it makes sense to borrow to expand production and use some of the increased revenue it generates to repay your loans. (Conversely, some liberals need to be reminded of what any family knows: Borrowing to consume more than you earn is a fool’s errand that will land you in bankruptcy.)

With real interest rates near zero, Washington should borrow now to enlarge the nation’s future productive capacities. Here U.S. progressives can draw inspiration from Canada’s Liberal Party leader, Justin Trudeau, who last year won a sweeping victory pledging (among other things) to borrow to pay for a big bump in infrastructure investment.

Second, open America’s infrastructure market to private capital.

A new approach to public works, however, cannot rely exclusively on public spending, whether it’s funded by taxes or borrowing. Closing the nation’s enormous infrastructure investment gap—estimated at about $150 billion a year—also will require creative ways to tap private capital.

It’s already happening on a modest scale. Public-private partnerships (PPPs) are beginning to crop up around the country, building toll roads in Virginia and Texas and a tunnel in Miami; renovating the Gary, Indiana airport; and contributing to Denver’s commuter and light rail FasTracks project alongside state and federal funding.

For some progressives, PPP is a loaded term that connotes privatization. Jonathan Trutt, executive director of the West Coast Infrastructure Exchange (WCX), speaks instead of “performance-based infrastructure” procurement. This approach “keeps assets in public ownership and consolidates responsibility for the key phases of a project’s full lifecycle—design, construction, and maintenance—into a performance-based contract with a private partner,” a WCX document explains. In this way, public authorities retain the “political risk” of assuring that projects serve the public interest, even as they share economic risks with private investors.

To attract private capital, a partnership must produce a dedicated stream of revenue, either from user fees—say, from water bills or bridge tolls—or from government. The latter could take the form of “availability” payments, or contracts for operating and maintaining infrastructure assets. “The private sector, union pensions and public employee retirement funds are all strongly interested in partnering with state and local government to finance public infrastructure,” says Trutt.

Such collaborations can save taxpayers money. The Miami tunnel, for example, wound up costing 50 percent less than the state had originally projected. Crucially, however, PPPs do more than leverage private dollars; they inject greater market discipline into both the selection and management of new projects. According to the Treasury report:

PPP contracts allow governments to introduce private sector capital, management and technical expertise into the project. When a PPP transfers economic risks to the private sector that it can manage more cost effectively, it creates value for taxpayers by lowering long-term project costs, improving the quality of services, or both.

In reality, though, private investment in public works remains minuscule. For example, it accounted for only about $200 million of the $81 billion spent on highway and street construction in 2013. Most PPPs have been concentrated in a handful of states, and 17 states don’t permit them at all.

There are some modest steps Congress could take immediately to open infrastructure markets to private capital. One is to support a White House proposal to allow state and local governments to issue more tax-exempt “private activity bonds” on behalf of private developers of all kinds of infrastructure projects. To encourage more foreign investors, including pension and sovereign wealth funds, lawmakers should also reform an existing law that slaps a 35 percent tax on their U.S. capital gains.

What Washington really needs, though, is a new institution that shifts the federal government’s role toward priority-setting and innovative financing for public works. This could be a new National Infrastructure Bank or a financing facility like the $50 billion American Infrastructure Fund proposed by Colorado Senator Michael Bennet and Maryland Representative John Delaney, both Democrats.

In either case, what’s envisioned is a self-financing, government-owned corporation that concentrates project finance expertise; uses loans and credit enhancements to leverage state, local, and private investment; and insulates project selection from the pork-barrel and logrolling culture of Capitol Hill. The Bennet-Delaney proposal requires that 25 percent of the Fund’s lending go to public-private partnerships.

Unfortunately, such proposals have languished in Congress despite White House backing. That’s chiefly because hard-core conservatives detest the idea of a bank, which for them conjures up Solyndra-like failures or another Export-Import Bank-like vehicle for doling out “corporate welfare.” (Solyndra was a big bust, but the Department of Energy program that loaned money to the solar power company subsequently made dozens of sound loans to clean energy ventures. Congress killed it anyway.)

Third, get serious about devolution.

It’s easy to despair over the breakdown in problem solving in Washington, but the picture gets brighter as you look around the country. Some states are raising taxes to finance infrastructure improvements, and creative metro leaders are forging new regional and public-private partnerships to repair and modernize infrastructure. In Chicago, for example, Mayor Rahm Emanuel set up a local infrastructure bank and has orchestrated major projects on rebuilding dilapidated subway stations, replacing leaking water pipes, connecting schools to broadband, and using loans to build a new Riverwalk.

Inspired by innovative financing models in Canada, California, Oregon, and Washington have formed the West Coast Infrastructure Exchange, the first regional center for project finance expertise in the United States. The Exchange intends to pool public resources and bundle small projects to create more attractive investment opportunities for private partners. Its aim is to catalyze $1 trillion in performance-based infrastructure projects over the next three decades.

Leadership on America’s infrastructure crisis seems to be passing from Washington to the states and, even more, to the big metro centers.

What’s happening, in short, is that leadership on tackling America’s infrastructure crisis seems to be passing from Washington to the states and, even more, to the nation’s big metro centers. This development could be seen as a heartening display of the adaptive genius of U.S. federalism. Yet states and localities still need a competent federal partner, both to set national priorities and to buttress their limited fiscal capacities and finance expertise.

As previously noted, however, federal infrastructure spending has been declining steadily. Washington’s investment in roads and highways, for instance, fell 40 percent between 2005 and 2012, leading to a 20 percent decline in state and local spending.

Congress has refused to raise the federal gas tax or even adjust it to inflation—it’s still stuck where it was in 1993, at 18.4 cents a gallon. That, along with dwindling revenues as people drive less and buy more fuel-efficient cars, has led to chronic shortfalls in the $50 billion Highway Trust Fund. The gas tax brings in only around $34 billion each year, forcing Congress to resort to budgetary gimmicks to plug the resulting gap.

Editorial writers love to excoriate politicians for lacking the guts to raise the federal gas tax, but it must be said that here members of Congress are faithfully reflecting their constituents’ antipathy to further hikes. The question pundits ought to be asking is whether the federal highway program still serves a compelling national purpose. The Trust Fund was created in 1956 to build the interstate highways. That mission was accomplished long ago, yet Washington continues to collect gas tax revenues from the states, which it then sends back in the form of formula grants with lots of strings attached. These grants increasingly fund a multiplicity of programs, from highways to transit to bike paths.

In fact, the federal highway program has become a morass of complexity and bureaucratic micro-prescription. A Rand Corporation study summed up its flaws:

Although programs proliferated to create balanced attention to many competing interests, the current mix of programs constitutes “stovepipes” that stymie innovation and prevent rational, integrated, comprehensive planning. That is, although a region may need a mix of maintenance, public transit, and highway investments, these federal programs are funded separately using different formulas, and decision-making is dominated by cleverly navigating the funding structures rather than adhering to logical regional or metropolitan plans. The proliferation of programs and the stovepiping make it difficult to fashion investments that clearly meet any federal transportation goals, let alone increasing national economic performance.

State and local governments, which already pay for about three-fourths of total highway and mass transit spending, aren’t waiting for Washington to reform itself. Last year, eight states raised their gas taxes to meet urgent transportation needs. These included such deeply red states as Georgia, Idaho, Utah, and South Dakota, which suggests that if gas tax hikes are a third rail in Washington, they are politically feasible closer to the ground. Some states issued bonds to finance projects or, like Michigan and Georgia, raised vehicle registration fees on cars, vans, and trucks. Meanwhile, Oregon is experimenting with a radically different approach—a Road Use Charge that would tax actual miles traveled, rather than gallons of gasoline consumed.

It’s past time for progressives to acknowledge that the federal gas tax and the Trust Fund are anachronisms. Repealing the federal tax would give the states (and cities) more fiscal space to raise the revenues they need to maintain and improve their transport systems. It would also free them from federal mandates and give them a stronger incentive to spend wisely, since they will be spending their own money.

Fiscal devolution also would liberate Washington to take a more strategic, less programmatic approach toward public works. Acting through a well-capitalized bank or financing facility rather than formula grants, the federal government would identify projects of truly national significance and broker innovative partnerships to build and manage them. And by depoliticizing project selection, such an institution could help restore public confidence in Washington’s ability to use taxpayers’ money to promote the nation’s interests rather than special interests.

The gas tax is the wrong vehicle for achieving nation’s climate goals. A nationwide carbon tax or cap and trade system would have much bigger impact on carbon emissions. Plus, devolving the tax wouldn’t kill it. Many states might keep tax at current levels to meet requirements of Clean Power Plan and raise more revenue for infrastructure.

Fourth, speed regulatory review of public works projects.  

Even as the nation’s needs grow more acute, it takes longer and longer to win government approval to build new infrastructure. Getting permits can take a decade or longer. Delays in starting construction add significantly to a project’s cost, by about five percent a year, according to the U.S. Transportation Department. Nor or all the costs of delay economic.

Lengthy approvals expose Americans to the safety hazards of unsafe bridges and roads, as well as leaks and flooding from ancient pipes and obsolete wastewater systems. Ironically, protracted environmental reviews harm the environment by slowing down the replacement of technologically primitive and inefficient infrastructure. “Transmission lines in America waste 6 percent of the electricity they transmit—the equivalent of 200 average-size coal-burning power plants,” says Philip Howard in a Common Good report.

Why is infrastructure so entangled in red tape? A major problem is multiple and overlapping jurisdictions, as projects must get permits from a welter of agencies at different layers of government. In addition, environmental reviews in this country routinely get mired in litigation. And public hearings and meetings grind on endlessly as regulators attempt to hear from and accommodate every conceivable interest or “stakeholder” that might be affected by a project.

In a well-functioning democracy, however, not every interested party can be or should be mollified; at some point the will of the majority should prevail. As the report notes:

Input from stakeholders and the public usually improves a project. But striving for consensus is futile, causes delays, and skews decisions toward the squeaky wheel instead of the public good. New infrastructure is unavoidably controversial. There is always an impact, and always a group that is affected more than others.

Crucially, Howard contends, there’s a vacuum of political authority at the top. In our balkanized bureaucracies, no agency or official has the power to settle disagreements among agencies, telescope the regulatory gauntlet or otherwise make the ultimate decision to move projects forward.

To streamline approvals, Common Good proposes that environmental reviews be limited to two years. Other advanced countries—notably Germany and Canada—likewise compress reviews without compromising environmental protection records that are at least as good as ours. Reducing approval time from eight to two years would reduce the costs of power projects by 30 percent, while also reaping efficiency and environmental gains, according to the report.

It also recommends that one agency have overriding authority to issue permits, and that a top EPA or White House official be put in charge of determining the proper scope of environmental review for any given project.

These sensible changes would enable the United States to dramatically pick up the pace of building modern, technologically advanced infrastructure. Approving public works projects with all deliberate speed would save costs and yield environmental benefits, while also helping America catch up with overseas competitors who have been investing heavily in infrastructure while ours has decayed.

Less tangible, but perhaps as important, would be the psychological lift we’d get from fixing a deeply flawed regulatory process. It would help dispel the “can’t do” pall that hangs over Washington today, and boost public confidence in the federal government’s ability to take purposeful action against urgent national problems. And, as a practical matter, taxpayers will be more likely to support more spending on public works if they believe they’ll derive concrete benefits from them soon, not far off in the hazy future.

These four steps—treating infrastructure spending as economic investment; mobilizing private capital for public purposes; devolving responsibilities and resources from Washington; and, putting deadlines on regulatory review—could reinvigorate today’s tired and desultory debate over infrastructure. Best of all, they would signal a new national resolve to rebuilding America’s economic strength and dynamism from the ground up.

Read more about GovernanceInfrastructure

Will Marshall is the president of the Progressive Policy Institute.

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