Government in the Long Run: Infrastructure

In Budget Politics, Democratic Governance, Economic Planning, Economics, High-Speed Rail, Industrial Policy, Mass Transit, Political Ideology, Politics, Politics of Policy, Progressivism, Public Policy, Public Sector, Public Works, Social Democracy on May 7, 2011 at 5:06 pm

Introduction:

If there is a common malaise of our time, it’s short-term thinking in an era when long-term problems loom ever larger. Whether it’s in health care, where Congress has decide that the only way for it to deal with the need to restrain doctors and hospital costs is to outsource it to an independent agency, or in climate change, where the Senate is flatly unwilling to pass even a moderate cap-and-trade bill (even though cap-and-trade was the free marketer’s solution to climate change), or in dealing with the long-term budget deficit, where the right wing won’t even countenance eliminating loopholes and the Democratic Party won’t tax enough to end the deficit or spend enough to create a strong recovery. At the same time, the electorate has not even been approached in a way that might lead them to consider long-term consequences of their votes.

Today, I’m going to focus on one particular issue that has become emblematic of our long-term problems – our nation’s infrastructure.

Rebuilding State Capacity:

Our national state of despair about our infrastructure tends to focus on big things – bridges that collapse, levees that fail, railroads we can’t build, and broadband communications we pioneered we’ve fallen behind the result of the world on. The reality is more prosaic; it’s sewer pipes and electricity lines and sidewalks across the country.

The major reason why our nation’s infrastructure, big and small, has been given a D by the American Society of Civil Engineers isn’t technical – it’s Congress. Since the 1930s, different government agencies have bemoaned the ways in which the Congressional appropriations process distorts infrastructure spending – from the infamous “Bridge to Nowhere” as emblem of political “pork,” to the over-representation of rural interests, to the role that contractors and other industry groups play in diverting money to roads and highways and away from mass transit.

Beyond and above these factors, there’s the simple fact that Congress operates by habit and custom, which makes bold new projects scary and controversial. It takes something fundamentally destabilizing – the Civil War, the Great Depression, Sputnik – to jolt Congress out of its routine and enable the kinds of investment in human and physical capital that’s needed for long-term progress.

The obvious, and yet extremely difficult solution is to free infrastructure from the normal appropriations process:

Separate Capital Budget from General Budget:

There never was any logic behind the idea that a government with the power to tax and coin money should budget itself like a regular family that can’t, but even if we granted that premise, it’s still the case that regular families don’t balance their capital budgets yearly. We take out mortgages to buy houses, and loans to go through college or start small businesses – and the objective is different, rather to keep interest payments within acceptable boundaries in relation to our family income. For the government, the parallel is that the general budget for regular expenditures should balance (over the business cycle being the most economically sensible way, such that the government doesn’t reinforce bubbles or recessions), while the capital budget should aim to keep the level of interest on capital borrowing constant as a proportion to GDP, so that you leverage the growth of an expanding economy.

A separate capital budget has many potential administrative advantages: it’s freed from the regular appropriations procedures and can operate on a longer-term basis, but there’s also the flexibility to do things that the general budget can’t, such as leveraging the capital budget through the Federal Reserve, and re-lending to state and local governments through Build America Bonds.

Longer-Term Budget Cycles:

Extending the budget cycle is one of those no-brainer ideas that good government advocates call for every few years. Not only does it allow the government to plan out further than the current year, but it also frees up Congress to deal with serious policy measures on off-years that would otherwise be drowned out by the perennial budget fights.

However, the same logic especially applies to the capital budget. Especially for infrastructure development and other long-term projects, the longer out the Federal government can plan, the better. Long-term planning on capital projects allows any institution to consider fluctuations of interest rates, appreciation or depreciation of the underlying investment, and allows you to compare the cost of the project to any potential revenue streams over the investment’s lifetime.

Most importantly, long-term capital planning allows an institution to tackle major projects over time, allowing the cost to be maintained at a feasible yearly level. New Deal agencies like the PWA developed a series of 5, 10, and 30 year proposals for the development of American infrastructure, from hydro-electric power to highways to housing. Those plans would help to guide future administrations in the development of America’s infrastructure, but we haven’t really done this kind of long-term budgetary planning since.

Contingent and Advance Appropriations:

A further barrier to long-term infrastructure investment is the distortions that the Congressional appropriations process creates. People are most familiar with famous “pork” projects like the Bridge to Nowhere or massive cost overruns like Boston’s Big Dig, but in reality these kinds of legal graft are basically marginal to the real problem, which is that Congress tends to be a creature of habits and gradual efforts. While gradualism is a fine strategy in some areas, it’s poison for infrastructure: major projects are forestalled for lack of funding, the pace of construction is slowed down by the rate of funding (which means you end up having to spend more on rehabilitation and repair), and resources are diluted across the largest number of districts in order to get passage, and fighting over resources leads to dog-in-the-manger squabbling between regions. As John Larson describes in Internal Improvement, this is a problem that goes back to the very first Congresses, which retarded American economic development until the wartime dominance of the nationalist Republican Party in the 1860s.

One potential way out of this structural problem is for Congress to retain overall capacity to steer policy, while decentralizing the nuts and bolts decisions about spending – such as is the case with military base closures. Funding infrastructure through contingent appropriations, which allow the relevant agency the power to spend money above the appropriated level by a set amount for specific purposes, or through advance appropriations, which allow an agency to front-load or back-load spending as necessary, would go a long way to accomplishing this task.

In this fashion, we can empower the government to carry out innovative, large-scale projects without being undermined by Congressional cold feet years later, or putting Congress in the position of having to constantly adjudicate disputes over local funding.

Transform GSA Back into Federal Works Agency:

One of the last acts that Herbert Hoover ever undertook as a political figure was an act of revenge; the Hoover Commission eliminated the Federal Works Agency as an independent agency that unified all public works under one roof and replaced it with the General Services Administration – an agency tasked with little else than the management of public facilities.

The Federal Works Agency had been a truly amazing institution, empowered to employ the unemployed directly as well as let traditional contracts and loan money to states and local government. During its short lifespan, it built an enormous amount of “national defense public works” – housing, schools, child care centers, hospitals, and other amenities for defense industry workers, and along with the WPA and PWA that merged into it, built military airports, strategic highways, access roads, bridges, dock facilities, railroads, warehouses, military bases, and funded the public construction of the Yorktown and Enterprise aircraft carriers along with “16 destroyers, 4 heavy destroyers, 4 submarines, 2 gunboats and 130 combat aircraft.”

It was the housing and social services for defense workers that raised Hoover’s ire – the FWA’s public works in booming defense plant towns were well-liked and high-quality, and might lead people to clamor for public housing. In its first year of operation, the FWA had constructed 44,000 homes for soldiers’ dependents and defense workers – the FWA could provide the state capacity to build the 800,000 public housing units and the 1.5 million publicly-constructed private housing units called for by Senator Robert Wagner of New York. Eliminating the FWA meant that the Federal government lost the carefully built-up capacity to plan, design, and execute public works itself, and has since relied on grants to state departments of public works to do the heavy lifting.

As we’ve seen in the case of high-speed rail, relying solely on state government has major drawbacks; likewise, we saw with the stimulus that waiting for “shovel-ready” projects is a bad idea. Having a Federal agency that can develop a “shelf” of projects, that can provide state and local entities with model plans and expertise, and that can actually oversee and manage a workforce on its own is critical to undertaking long-range infrastructure.

Rebuilding Infrastructure:

So once we have the capacity to do large-scale, long term public investment, we still have the issue of what kinds of investments we need to make and how to finance them.

Ultimately, I would argue that we have to work with but also beyond the budget cycle in planning two levels of infrastructure investment – rehabilitation and new investment.

  • National Rehabilitation Project: According to the American Society of Civil Engineers, we need about $2.2 trillion in repairs, replacements, and improvements to get our infrastructure up to scratch. $2.2 trillion is a lot of money, but if we can spread the cost over say, 50 years, through more flexible central bank policy, that comes to $40 billion a year in payments. And keep in mind, the Federal Reserve loaned out $9 trillion to fix the banking sector – we can certainly do better for the foundation of America’s productive economy.
  • New Economy Initiative: The National Rehabilitation Project, while a worthy venture, will only get us back to where we should have been all along with our existing infrastructure – it doesn’t really envision the new major infrastructure projects that the U.S needs, things like public broad-band wireless networks, high-speed passenger and freight rail, significant alternative energy production. $40 billion a year for ten years would provide the necessary seed capital for building the economy of the future.

Conclusion:

One of the perverse consequences of short-term thinking is that it drives us to forgo the necessary in favor of the easiest path – we don’t want to raise taxes or lift the debt ceiling, so let’s forgo reconstruction money for hurricanes – and to elevate what are in reality minor obstacles into major barriers. $80 billion a year works out to 3.7% of the Federal budget or .5% of GDP. If we can’t afford those kind of payments for an economy that works and can grow, we should just close up shop.

 

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  2. […] is something we can learn from these scandals and the cheating scandals listed above: looking for short-term “silver bullets” and the Lone Rangers who supposedly have them chambered doesn’t make sense […]

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