Tuesday, September 13, 2016

If You Build It . . .

Among Bernie Sanders’s many proposals during his presidential run was a plan for Washington to spend $1 trillion on public infrastructure. Progressives love such proposals. Just tax the rich enough, they say, and we can build superfast trains, new roads, revamped airports, and other things that (purportedly) will bring widespread prosperity and greater equality from California to Montana to Maine. President Barack Obama has done his best to further this vision. He began his first term pumping $48.1 billion into infrastructure spending, via the 2009 American Recovery and Reinvestment Act (otherwise known as the stimulus package), and is ending his second term with a proposal to spend $73 billion more on infrastructure.

The progressive romance with infrastructure spending is based on three beliefs. First is that it supercharges economic growth. As President Obama put it in his 2015 State of the Union address: “Twenty-first century businesses need twenty-first century infrastructure.” Further, by putting people to work building needed things, infrastructure spending is an ideal government tool for fighting unemployment during recessions. Infrastructure should also be a national responsibility, progressives believe, led by Washington and financed by federal tax revenues.

None of this is right. While infrastructure investment is often needed when cities or regions are already expanding, too often it goes to declining areas that don’t require it and winds up having little long-term economic benefit. As for fighting recessions, which require rapid response, it’s dauntingly hard in today’s regulatory environment to get infrastructure projects under way quickly and wisely. Centralized federal tax funding of these projects makes inefficiencies and waste even likelier, as Washington, driven by political calculations, gives the green light to bridges to nowhere, ill-considered high-speed rail projects, and other boondoggles. America needs an infrastructure renaissance, but we won’t get it by the federal government simply writing big checks. A far better model would be for infrastructure to be managed by independent but focused local public and private entities and funded primarily by user fees, not federal tax dollars.

Building infrastructure is no surefire way to stimulate economic growth, as Japan’s example shows. After decades of strong economic expansion, Japan experienced a massive asset bubble in the late 1980s, with the Nikkei 225 reaching 38,500 in December 1989. The next year, the bubble burst and the index began falling precipitously, dipping below 15,000 by August 1992 and never recovering—indeed, by 2001, it had dropped below 10,000. Even today, the index is only slightly above 17,000. Japan’s dismal stock-market performance has been matched by little or no economic growth. Per-capita GDP, in constant U.S. dollars, was no higher in 2009 than in 1991, according to OECD data. The Japanese economy picked up slightly this year, but it’s fair to say that Japan has lost a quarter-century of growth.

To help fight this economic sluggishness, Japan has invested enormously in infrastructure, building scores of bridges, tunnels, highways, and trains, as well as new airports—some barely used. The New York Times reported that, between 1991 and late 2008, the country spent $6.3 trillion on “construction-related public investment”—a staggering sum. This vast outlay has undoubtedly produced engineering marvels: in 1998, for instance, Japan completed the Akashi Kaiky¯o Bridge, the longest suspension bridge in the world; just this year, the country began providing bullet-train service between Tokyo and the northern island of Hokkaido. The World Competitiveness Report ranks Japan’s infrastructure as seventh-best in the world and its train infrastructure as the best. But while these trillions in spending may have kept some people working, no one can look at the Japanese numbers and conclude that the money has ramped up the growth rate. Moreover, the largesse is part of the reason that the nation now labors under a crushing public debt, worth 230 percent of GDP. Japan is less, not more, dynamic after its infrastructure bonanza.

Infrastructure spending is a form of investment: just as building a new factory can boost productivity, laying down a new highway or opening a new airport runway can, at least in principle, generate future economic returns. But the relevant question is: How do those future returns compare with the costs? Just because infrastructure is a form of capital doesn’t mean that spending a lot on it is always smart. When a firm estimates the rate of return for a new factory, it can calculate the expected net profits and compare those with the expense. The analog for, say, new or improved roads is to estimate the benefits to users from reduced travel times, add the likely modest spillover benefits to nonusers, and then subtract the spending needed to construct and maintain the infrastructure. The results can differ significantly across projects. A well-known 1988 Congressional Budget Office survey found that spending to maintain current highways in good shape produces returns of 30 percent to 40 percent—but that new highway construction in rural areas showed a much lower return. A clever study that used firm inventories estimated that the rate of return to new highways was sizable during the 1970s but sank below 5 percent during the 1980s and 1990s.

Returns can vary substantially for other forms of infrastructure, too. One study found that adding a new runway to New York’s hectic LaGuardia Airport would generate considerable value, but adding one to San Antonio’s less frantic international airport would bring little benefit. Busy airports are likely to be worth improving; others, less busy, may not be. California’s huge investment in high-speed rail was justified by a 2014 cost-benefit analysis that Parsons Brinckerhoff, the firm building the rail system, had prepared. The report predicted that total benefits from the project would range from $66 billion to $80 billion over several decades. That number looked reasonable when the projected price tag for the project was $35 billion, but the budget has already swollen to $68 billion—and is still expanding. In 2009, I calculated a rough cost-benefit calculation for a (fictional) high-speed rail link between Houston and Dallas and found that costs outweighed benefits by an order of magnitude. The returns to high-speed rail tend to be limited because air travel will still be faster and driving a lot cheaper. Outside the East Coast, meantime, train travelers would typically still have to rent a car once they arrived at their destination. President Obama’s grand vision of “walking only a few steps to public transportation, and ending up just blocks from your destination” is at odds with reality in car-centered America. Has the president never been to Houston?

The existence of plausible transportation alternatives and the law of diminishing returns have also tended to reduce the benefits of infrastructure investment over the past two centuries. The opening of the Erie Canal in 1821 brought enormous value because the inland transportation options at the time were dismal. In the early nineteenth century, it cost as much to ship goods 30 miles over land as to send them across the entire Atlantic Ocean. Yet the very existence of canals, as much of a breakthrough as they represented, reduced the benefits of the later rail system, as Nobel economist Robert Fogel has shown. The returns for new transportation infrastructure in places with terrible roads, such as much of Africa and India, will be much higher than in the United States, which already enjoys an impressive, if under-maintained, array of mobility options.

What about the economic value of the shorter commuting times that new infrastructure can bring? Between 2009 and 2014, the Texas Transportation Institute estimates that the annual cost to Americans from traffic rose from $147 billion to $160 billion and that hours wasted in traffic increased from 6.3 billion hours to 6.9 billion hours, despite the surge in federal transportation funding. The time wasted has been particularly egregious in America’s more successful metropolitan areas, like San Jose, where delays per auto commuter jumped from 56 hours in 2009 to 67 hours in 2014. Yet it’s hard to see how substantially reducing time lost to traffic congestion will turbocharge the economy. Imagine that America gets its act together and cuts traffic time sufficiently to save $80 billion—a pretty miraculous improvement. That would still represent less than one-half of 1 percent of America’s $18 trillion GDP.

by Edward L. Glaeser, City Journal | Read more:
Image:George Washington Bridge, The Museum of the City of New York /Art Resource, NY