The Agenda

On the President’s Transportation Proposal

My Economics 21 colleagues have just published Jess Sharp’s thoughts on the president’s transportation proposal. After praising the emphasis on performance-based metrics and improving the air transportation system, Sharp goes on to raise a number of potential problems, the most important of which might be the following:

If Congress had the money to pay for a transportation bill without adding to the deficit, they would have done it more than a year ago before the most recent highway-funding bill expired. Congress has never needed prompting from a President to spend money on roads and bridges back in their districts. The very strong political incentive to bring home the bacon that has been a mover of transportation bills in the past has not been enough to overcome America’s serious aversion to deficit spending in 2010. Recognizing the near impossibility of funding a serious infrastructure bill last year, the Administration asked Congress for an 18-month delay of the bill, and said a gas tax increase was out of the question. It’s not clear whether the Administration has a serious plan for breaking the funding logjam.

Sharp also highlights the idea of a national infrastructure bank, an idea that’s garnered praise from Steven Pearlstein in the Washington Post:

For several decades, policymakers have tossed around the idea of a National Infrastructure Bank to provide loans and matching grants for highway and transit projects, a new air traffic control system, high-speed rail, clean-energy generation and smart electric grids, and an expansion of state college and university systems. Over the years, this idea has won bipartisan support from business groups, labor unions, governors and big-city mayors. And with interest rates at record lows, construction costs down 25 percent and so many construction workers unemployed, there is no better time to launch such an effort.

As Yonah Freemark has argued, however, there’s a problem with the concept of a national infrastructure bank. In a long and thoughtful overview of the president’s proposal, Yonah made a number of points, some of which parallel points raised in Sharp’s piece, e.g., the public doesn’t have much appetite for new spending, the proposal aims to achieve the same goals as a new transportation bill without resolving the all-important funding question, etc. And then he turns to the national infrastructure bank:

Mr. Obama, mimicking what has become standard industry commentary, suggested again that a national infrastructure bank be created to fund transportation projects. It’s a problematic concept from a variety of perspectives, including the fact that unless it is used purely on projects that make money in the long term (generally not rail or transit), it isn’t actually a new funding source, it’s just a different way of distributing existing money. [Emphasis added.]

In an earlier post, Yonah elaborated on this theme:

In his fiscal year 2011 budget, President Obama suggested appropriating $4 billion to establish the new infrastructure bank, with the assumption that the new agency would distribute grants to qualified projects and have its coffers refilled every year or so depending on need. Of course, what’s envisioned there is no bank at all, since it wouldn’t be generating revenue in return for its investments: it would be draining Washington’s coffers even more, with no clear explanation for why it is necessary. What’s the point of establishing another federal agency to dole out grants for infrastructure, when the Departments of Transportation, Housing and Urban Development, and Energy already do that all the time?

An alternative approach, a national infrastructure bank modeled on the low-interest loans offered by the European Investment Bank, has its own downsides:

 

But the EIB and BAB models, as interesting as they are, do not actually increase the amount of money being spent on transportation in the long-term — they simply transfer more of the current spending load into debt. Is that a good idea when governments are already so squeezed by limited budgets? How can we be sure that we’ll be in an adequate financial situation to pay back these debts in the future? Spending now through loans inherently means less spending in the future: If Los Angeles compresses thirty years of transit spending into ten, what happens during the other twenty? Nothing at all, unless another separate revenue source is established.

So none of the the infrastructure bank proposals put forth thus far will actually aid in reversing the current lack of adequate financing for transportation.

I recommend reading the entire post. Yonah tentatively endorses an approach modeled on France’s Caisse des Dépôts, an approach that seems unlikely to work well in an American context.

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