Infrastructure Spending Can Pay for Itself

by Reihan Salam

As I read Robert Barro in the FT, I thought of the following passage in the context of infrastructure spending:

 

In the aftermath of the debt ceiling agreement there will be calls for further stimulus for America’s economy. This would be a grave mistake. In the financial turmoil of 2008, bail-outs by the US and other governments were unfortunate, but necessary. However, the subsequent $800bn American stimulus package was largely a waste of money that sharply enlarged the fiscal hole now facing our economy.

President Barack Obama’s administration has consistently overestimated the benefits of stimulus, by using an unrealistically high spending multiplier. According to this Keynesian logic, government expenditure is more than a free lunch. This idea, if correct, would be more brilliant than the creation of triple A paper out of garbage. In any event, the elimination of the temporary spending is now contractionary and, more importantly, the resulting expansion of public debt eventually requires higher taxes, retarding growth.

My own (modest) view is that one needn’t adhere to Keynesian logic to believe that large-scale infrastructure spending would make a great deal of sense right now, particularly if we rolled back prevailing wage laws, insisted on true fixed-price contracts, 

Building America’s Future has released its proposal to sharply increase infrastructure spending over the next decade. There are many red flags in the report, e.g., the heavy emphasis on the virtues of high-speed passenger rail. Yet the report makes a number of convincing points, particularly on the wisdom of embracing congestion charges and truck tolling. 

Barro is concerned about an expansion of public debt that requires higher taxes, and with good reason. But an expansion of public debt that is channeled to the creation of profitable infrastructure, i.e., infrastructure that is better than self-financing, doesn’t suffer from the same pitfalls. 

That, of course, is a high bar to clear, particularly since we need to devote a great deal of infrastructure spending to maintaining the quality of existing assets. Right now, however, we don’t do a very good job of monetizing these assets. One can imagine a scenario in which trucks are subject to tolls while passenger vehicles are not. From the report:

Countries such as Germany, Switzerland, and Austria have implemented truck tolling programs that force trucks to pay user fees for the heavier wear and tear they impose on highways. Truck tolls have had proven impacts on transport efficiency: They have reduced traffic on tolled highways, lowered rates of truck emissions, and encouraged shippers to avoid dispatching half-empty trucks.

To toll trucks, we might use something like the Skymeter technology that Felix Salmon has celebrated in the past:

The idea behind Skymeter is that they use what they call financial-grade GPS: devices in your car which are much more accurate than the GPS devices found in navigation devices or cellphones. They can tell where you are to within a few centimeters, and once you can do that, all manner of possibilities open up in terms of charging not just to get into a city center, but rather to charge by the mile or by the minute on specific streets. Raise prices where congestion is worst, keep them low where it isn’t a problem, and solve lots of other problems at the same time — like easy charging for parking (you just park your car on the side of the road and pay for however long it’s parked there) and for pay-by-the-mile insurance. Or transform the economics of something like Zipcar, which currently just charges by the hour even when charging by a combination of hours and miles would make more economic sense.

Trucking companies would, I suspect, happily accept targeted tolls in exchange for roads of markedly higher quality. Varying prices would help manage the flow of heavy vehicles on to secondary roads, which would help extend their useful life at a given level of maintenance expenditure. 

The more controversial step, of course, is using a Skymeter-like tool to implement a vehicle-miles traveled tax. The following is from a CBO report by Joseph Kile:

Economic efficiency is promoted when highway users are charged according to the marginal (or incremental) costs of their use, including external costs that are imposed on society. A combination of a fuel tax and a mileage-based tax (a VMT tax) that accounts for the type and weight of a vehicle and the location and time of its use could provide incentives for reducing the full range of driving’s social costs and could generate funds for federal spending on highways. 

The external costs of highway use vary widely depending on the characteristics of a vehicle and where it is driven. Some external costs are associated directly with the use of motor fuel, such as the costs of local air pollution from trucks, climate change, and dependence on foreign oil. Those costs are estimated to average more than 30 cents per gallon for passenger vehicles and more than 70 cents per gallon for trucks (see Figure 7). Other external costs are related to the miles traveled by vehicles, such as the costs of road congestion, pavement damage, and accidents. Although the external costs imposed on society by trucks are greater than those imposed by passenger vehicles on a per-mile basis, the much higher volume of passenger vehicle travel means that those vehicles also contribute substantially to external costs from vehicle-miles traveled (see Figure 8). Specifically, passenger vehicles account for more than 90 percent of vehicle-miles traveled, with passenger vehicles in urban areas alone accounting for more than 60 percent. 

A straightforward VMT has the potential to punish rural drivers, just as a fuel tax would. Drawing on the Skymeter technology, however, we could vary the charge depending on the level of congestion. Kile writes:

If VMT taxes were intended to maximize or even significantly improve the efficiency of highway use, they would need to vary greatly by vehicle type, by time and place of travel, or both. For example, because pavement damage increases sharply with vehicle weight but decreases with the number of axles on a vehicle, the portion of VMT taxes assessed to maintain pavement could be small or nonexistent for passenger vehicles but substantial for heavy-duty trucks, particularly those with high weight per axle. Similarly, every vehicle would be assessed more to travel on crowded urban roads during peak hours than in off-peak hours or to travel on less congested roads at any time. The rates charged for peak-hour travel would be set in keeping with specific local or regional conditions, including the duration and severity of daily congestion, rather than on the basis of national averages. [Emphasis added]

Concerns about privacy will make many drivers reluctant to embrace something like a VMT, which is why I’d prefer to see an arrangement under which the VMT is mandatory for trucks but optional for passenger vehicles, the owners of which could instead choose to pay a vehicle license fee based on the weight and other characteristics of the vehicle, e.g., fuel economy. The license fee would be pegged to an amount considerably higher than the average amount of VMT. 

Kile offers another approach:

Although only 4 percent of the nation’s fleet is made up of trucks (excluding light duty trucks), they account for roughly 25 percent of all costs that highway users impose on others, including almost all of the costs associated with pavement damage.

At a minimum, we need to target trucks.

And this brief discussion of VMTs and congestion charges doesn’t even scratch the surface of how we might use competitive pricing to improve our aiports, ports, and other transportation facilities. Smart infrastructure investment can pay dividends that are more than metaphorical. 

When I hear people reference the idea of a “national infrastructure bank,” I’m instinctively very wary as it smacks of yet another off-balance-sheet vehicle. I would only embrace the idea if it entailed distributing loans at low interest rates, along the lines of the European Investment Bank. A “bank” that disbursed money for nothing is not, in my view, an acceptable solution.