More on Infrastructure Spending in the ‘American Jobs Act’

by Veronique de Rugy

As Andrew highlighted this morning, the president is asking for some $50 billion additional infrastructure spending (grants and guaranteed loans, transportation infrastructure investments, on highway and rail projects, high-speed rail projects, Amtrak, and such).

In this new paper, my colleague Matt Mitchell and I lay out the arguments against infrastructure spending as a way to stimulate the economy.

Our argument boils down to three main points: First, despite the claims of stimulus proponents, the evidence is not at all clear that more stimulus would be helpful right now. Second, even if one adheres to the idea that more government spending can jolt the economy, spending — particularly infrastructure spending — cannot be implemented in the way Keynesians say it ought to be. This greatly undermines its stimulative effect. Third, while no one disputes the value of good infrastructure, this type of spending typically suffers from massive cost overruns, waste, fraud, and abuse. This makes it a particularly bad vehicle for stimulus, no matter what its merits otherwise.

But here are some striking facts about government run public work projects. The most comprehensive study of cost overruns examines 20 nations spanning five continents. The authors find that:

  • In 9 out of 10 transportation infrastructure projects, costs are underestimated.
  • For rail projects, actual costs are on average 45%higher than estimated costs.
  • For fixed-link projects (tunnels and bridges), actual costs are on average 34% higher than estimated costs
  • For road projects, actual costs are on average 20%higher than estimated costs.
  • For all project types, actual costs are on average 28% higher than estimated costs
  • These same cost overruns exist in all public work projects

Remember the Capitol Hill Visitor Center? This ambitious three-floor underground facility, originally scheduled to open at the end of 2005, was delayed until 2008. The price tag leaped from an estimate of $265 million in 2000 to a final cost of $621 million.

How can we explain these cost overruns? They authors explain:

These cost underestimation cannot be explained by error and seems to be best explained by strategic misrepresentation, i.e., lying.

What is the most common misrepresentation (lie)? In the case of rail projects a study of 208 projects in 14 nations on five continents shows that:#more#

  • 9 out of 10 rail projects overestimate the actual traffic.
  • 84 percent of rail-passenger forecasts are wrong by more than 20 percent.
  • For rail, passenger traffic average 51.4 percent less than estimated traffic. 

This means that there is a systematic tendency to overestimate rail revenues. Remember that when the president explains how much demand there is for these new rail projects he wants to pay for.

For roads, actual vehicle traffic is on average 9.5 percent higher than forecasted traffic and 50 percent of road traffic forecasts are wrong by more than 20 percent. In this case, there is a systematic tendency to underestimate the financial and congestion costs of roads.   

The worst part may be that the political process rewards the misrepresentation about the costs and benefits of a project. This 2009 study shows that the political process is more likely to give funding to managers who underestimate the costs and overestimate the benefits. In other words, it is not the best projects that get implemented but the ones that look the best on paper. That’s what economist Bent Flyvbjerg called the survival of the unfittest.

Is it really what our country needs right now?

And of course, that’s on top of the billion in infrastructure increase that already took place in the last decade:

How can we have so much spending and yet such crumbling infrastructure?

Here is my paper with Matt.

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