CHAPTER 4 CHAPTER 4The standard Keynesian prescription for an economy suffering from low demand, as the United States now clearly is, is to ratchet up infrastructure spending. The government can borrow at very low rates and build highways and bridges, improve ports, clean up waterways, repair dams, extend commuter railways—in short, undertake a whole raft of public projects that enhance productivity, create jobs, and stimulate spending. Throughout the nineteenth and twentieth centuries, improvements in public infrastructure—from public investment in canals and railways and the opening of silted and tree-clogged western rivers, to the Eisenhower national highway program and the Internet—triggered long episodes of economic growth.
As I argued in the Prologue to Part II, power shifts between public and private sectors are a constant of American history, always in response to specific pressing problems. Success in solving them inevitably builds up an opposite set of issues that eventually trigger a power shift in the opposite direction.
The bipartisan stimulus programs enacted at the end of the Bush administration and the beginning of the Obama administration were clearly successful, if too small to trigger more than a slow recovery. The performance of the US economy, weak as it has been, has been far better than that of the European nations that embraced austerity as the solution to a recession. Ideally, the initial stimulus, which was substantially made up of tax cuts and subsidies for state and local spending in order to generate an immediate income jolt, should have been followed up by a major longer-term infrastructure program, but austerity sentiments within the United States were too strong for that to happen. As we emerge from the recession, however, it is clear that the long period of reduced government activity and very low taxes has left American infrastructure in a bedraggled state. If nothing else, the manufacturing and energy-based revival will require much better roads, bridges, water treatment plants, and other facilities through much of the country.
Chart 4.1 on the next page suggests the extent of the gap. A growing, mobile population, like that of the United States, obviously needs to expand its investment in infrastructure roughly in accord with its inflation-adjusted economic output. As the chart shows, we now spend half as much on public infrastructure relative to the size of the economy as we did fifty years ago, and there is a pressing need to shift priorities.
The most complete assessment of infrastructure deficits is the quadrennial “Report Card” on the nation’s infrastructure produced by the American Society of Civil Engineers’ (ASCE). It is a serious exercise: a standing committee of senior engineers spends a year working with association staff to organize and update each Report Card, and then they analyze current spending and estimate the shortfall from what is required to bring basic infrastructure to a “good” condition. The 2009 Report Card estimated the total spending requirement over a five-year period as $2.2 trillion, including all current expenditure, which is about $1.1 trillion, suggesting about a $1.1 trillion gap. The 2013 Report Card, released just as this book was going to press, raised the gap estimate to $1.6 trillion. Most of the examples here are drawn from the 2009 report.
CHART 4.1: Public Infrastructure $ as % GDP, 1956–2007
The United States has an estimated 85,000 dams, with only about a tenth of them inspected and maintained by the Army Corps of Engineers and other federal authorities. Inspection and maintenance of the rest are at best haphazard. Some states have laws that specifically exempt certain dams from inspection; Alabama doesn’t inspect dams at all; and in Texas, each dam inspector is responsible for more than 1,000 dams.
Some 15,000 dams of all kind are classified as “high hazard,” a category that is based on the potential consequences of a dam’s failure, rather than on the quality and integrity of the dam. Because of population changes and development patterns, the number of high hazard dams has been rising steadily for a long time, while the rate of dam repair has been essentially flat. The consequence is that the number of high hazard dams rated as deficient or dangerous is now well over 2,000; without a substantial increase in the inspection and repair of high hazard dams, that number will grow indefinitely.2
Major levees are complex, often very expensive systems that include pumps, drainage systems, tunnels, and other flood-control devices. The failure of the levees in New Orleans during Hurricane Katrina led to damages of more than $16 billion, while failed river levees in the Midwest led to more than a half billion dollars’ worth of damage in 2008. The damage suffered by New York City during Hurricane Sandy was probably twice that in New Orleans, not because of levee failure, but because of the lack of serious flood and water surge protections in the first place.
Katrina raised national consciousness of flood protection—as well it might, since 43 percent of the US population lives in a county with a levee—and Sandy has raised this consciousness at least an octave or two higher. Few people in flood country are likely to understand that a “100-year flood” has a 26 percent chance of occurring during the life of a 30-year mortgage. There is no full inventory of the state of the nation’s levees; such a degree of inattention suggests that it’s not likely to be good.
A partial inventory by the US Army Corps of Engineers suggested that 9 percent of federal levees were likely to fail in a flood event. Many levees are very old, and a large percentage of them were built for crop protection in areas that have long since become densely populated, and therefore need a much higher protection grade. Federal taxpayers have a real interest, since by virtue of a 1968 law the federal government picks up most of the cost of flood insurance payouts. Given the real possibility that we are entering an era of more frequent and more violent storms, serious flood control measures will be much cheaper than paying for more disasters.3
The modern environmental movement is sometimes dated from the publication in 1962 of Rachel Carson’s Silent Spring, which became almost the movement’s anthem. The deeper forces are demographic. Over the last half of the twentieth century, the American population grew by two and a half times, per capita water usage increased by 20 percent, and total personal water usage tripled. Maintaining good drinking water and decent rivers and streams became an important national priority.
A wave of federal legislation duly followed throughout the 1970s, under both Democratic and Republican presidents—the Clean Air and National Environmental Policy Acts of 1970 (among other things, creating the Environmental Protection Agency, or EPA); the Clean Water and Marine Protection, Research, and Sanctuaries Acts of 1972; the Endangered Species Act of 1973, the Safe Drinking Water Act of 1974, a rewrite of water pollution laws that became known as the Clean Water Act of 1977, and the “Superfund” legislation of 1980, which provided for cleanup of toxic waste sites.
There was a wave of new construction throughout the 1970s and 1980s. In the 1960s, New York City had probably the most comprehensive big-city water treatment program, but after his election as New York senator in 1964, Robert F. Kennedy brought pressure on the city to upgrade nearly all of its plants at great expense. Mayors and water authority directors throughout the country presided over a vast buildout of new plants during this time.
Water delivery and waste water treatment systems are long-lived. Underground mains and pipelines have useful lives of up to ninety years, holding tanks and pumps can be in service for up to fifty years, other equipment for thirty years. Once the basic system is in place, especially in locations with a growing population, public pressure tends to bias investments toward extending systems at the expense of maintenance. Systems built in the 1960s and 1970s are aging. At a time of persistent drought through much of the country, public drinking water systems are estimated to leak away up to 20 percent of their product. Funding availability is also much tighter. A signal of how far sentiment has swung came in 2005, when federal legislation exempted the shale gas and oil industry from complying with the Safe Drinking Water Act.
The required investment in drinking water systems and waste water treatment, over and above current expenditure, is estimated by both the EPA, and separately by the nonpartisan Congressional Budget Office (CBO) to be $20–$30 billion a year. Congress created a revolving loan fund to assist state and municipal water system upgrades, but the funds available are only a tenth of the amount required. This is a problem that only gets worse with time.4
Much the same story applies to toxic waste sites. The original Superfund legislation that appropriated $1.5 billion annually for site cleanups expired in 1995. Congress continued to contribute to the fund at a somewhat higher level for several more years, but appropriations were cut in the 2000s, and the rate of cleanups completed has dropped with them, from an average of seventy per year in the 1990s to about twenty-five per year in the 2000s, and just twenty-two in 2011. Beyond their health and aesthetic benefits, toxic waste cleanups are good for local economies, since cleaned sites are typically returned to the tax roles.5
Rust Bowl manufacturing was heavily dependent on barge transportation on America’s inland waterways, a heritage from the heroic nineteenth-century period of rapid Midwestern economic development. When steamboat designers achieved mastery over the region’s swift, shallow rivers, they enabled the creation of a tightly integrated riverine farming, manufacturing, and trading economy, built around cities such as Cincinnati, Chicago, Cleveland, Louisville, St. Louis, and Pittsburgh, that created the American pattern of very large-scale, highly mechanized process manufacturing in oil, iron, and steel, as well as grains and meat.
Barge transport is ideal for low value-to-weight commodities like coal and coke, iron ore, crude oil, salt, cement, and other industrial supplies. A single barge can transport the equivalent of 870 truckloads; by a long margin, it is the cheapest form of shipping for non-just-in-time goods. The coming resurgence of manufacturing in the United States will not be an exclusively Midwestern phenomenon, but it will be heavily concentrated in the old industrial states in order to take advantage of inexpensive natural gas. Companies like Nucor and Dow will make heavy use of the inland waterways.
The “system” of inland waterways is a network of navigable rivers and interconnecting industrial canals that, given the long depression of Midwestern heavy manufacturing, has been quietly deteriorating for a generation or more. Major ports include Duluth on Lake Superior, Pittsburgh, St. Louis, Chicago, Detroit, Toledo, and Gary, among others. Interconnecting canals short-cut river connections by using locks to overcome elevation obstacles. About one out of eight locks on today’s waterways were built in the nineteenth century, and about half of them are more than sixty years old. Once barges get to their destination, moreover, the efficient movement of goods depends on the local port infrastructure—the wharves, the warehouses, the rail loading yards, the container ports, the highway connections. There is no inventory of such facilities, but all the indicia of age and falling maintenance spending suggests that they are in a sad state.
Compared to drinking water and water treatment facilities, the inland waterways and port facilities are not extraordinarily expensive to restore to fitness. One credible estimate is that somewhat less than $2 billion of additional annual modernization and maintenance spending might be adequate. Currently a fuel excise tax on system users funds about half of all expenditures, with the rest dependent on congressional appropriation. Given the palpable economic benefits of well-directed investment, and the importance of the system to a Midwestern manufacturing recovery, an advisory committee of interested business leaders might be the best forum for working out needs and investment plans financed primarily by user assessments.6
The National Highway System (NHS) comprises the interstates, plus almost all (~85 percent) of urban expressways, principal arterials, and other major feeders. It is one of the few infrastructure areas that does not present a totally bleak picture. The NHS comprises only about 4 percent of the total US route mileage, but 44 percent of vehicle miles traveled use the NHS. “Federal-aid-highways” comprise the broader class of roads that are eligible for federal assistance. The quality of the roads has been improving steadily for some time: from 2000 through 2009, for example, vehicle miles traveled on NHS roads rated as “good” rose from 48 percent to 57 percent, nearly a 20 percent increase. NHS bridges have been improving too. “Structurally deficient” bridges—not necessarily dangerous, but requiring significant rehabilitation to stay in service—have dropped from 6 percent to 5.2 percent over that same period, with a comparable drop in bridges classified as “functionally obsolete”—where nothing is structurally wrong, but they are no longer suited to traffic demands.
Traffic congestion has been worsening, however, especially with growth in truck traffic outstripping automobile traffic, and it will be further exacerbated as the manufacturing revival takes shape. Consensus estimates are that merely staying abreast of traffic increases, with minimal congestion improvements, would require an additional $10–$15 billion a year for the foreseeable future. Adding the capacity required to reduce congestion would take much more. In their 2010 “Conditions and Performance” report to the Congress, however, the federal transportation agencies modeled, without recommending, an alternative approach that funded much of the new investment with combinations of congestion pricing and gasoline tax increases. Leaving aside the revenue effects, the investment requirement dropped by 30 percent because of the reduction in vehicle miles traveled, and delivered superior results in reducing congestion delays and the percentage of driving on “rough” surfaces.7
Mass transit presents a somewhat different picture. Mileage traveled by mass transit increased by more than 20 percent between 2000 and 2009, and fleet sizes have been expanding at about the same rate. The condition of railcars is considered adequate, and has been stable, while the condition of buses is at the low end of adequate. But there are major deficiencies in the assets that the public does not see, especially in the rail transit sector, relating to switches, signals, power equipment, elevated structures, and the like. Funding for mass transit has been squeezed of late, although it is of great value in reducing congestion. The estimated asset value of the US local mass transit systems is close to $700 billion; about 12 percent of that is past its useful life and should be replaced, in addition to about $40 billion (original cost) substandard non-vehicle assets. Since original costs are a poor guide to actual replacement costs, bringing all plants up to standard would cost in excess of $100 billion, which would necessarily be staged over a number of years. Continuing to build out mass transit to reduce the pressures of local congestion would cost much more. The average commuters in high-congestion cities like Los Angeles and Atlanta spend the equivalent of days each year stuck nonproductively in their cars on a freeway.8
Since the deregulation of American freight railroads in 1981, they have been one of America’s business success stories—and one of Warren Buffett’s favorite industries. The freight rail system comprises some 140,000 miles, virtually all of it managed and maintained by the railroads. Railroads are one of the most efficient of the major transportation industries, moving a ton of freight 469 miles per gallon of fuel consumption. Since deregulation, volumes have roughly doubled, rates per ton-mile have fallen substantially, and profits have been solid. Freight rail employees are among the best-paid of industrial workers: in 2011, they averaged $73,000 a year before benefits; at the same time, for a number of years, the railroads have invested at least $20 billion a year in maintenance and capital spending, and channel 17 percent of their revenues into capital spending, compared to only 3 percent in the average American company.
“Intermodal” shipping—railroad transshipping of containerized truck freight—exemplifies the productivity gains. It is a third the cost per ton-mile of truck freight, faster, safer, and with far fewer noxious emissions. The growth in freight loadings has raised concerns about the adequacies of the current network. But in contrast to highway traffic, railroads have considerable ability to improve productivity per mile of railroad. Just increasing average freight speeds produces an equivalent increase in capacity, as do longer trains and larger cars, electronic controls to permit closer train spacing, passing lanes at critical junctures to obviate slow-freight bottlenecks, and much more. Smarter railroads may supplant the requirement for more miles of road for the foreseeable future.9
The position of the passenger rails could not be more different. While the jury is still out on the economic viability of long-distance rail travel, corridor services in the 500-mile range have been quite successful in attracting passengers and lowering the need for costly and fuel-inefficient short-haul air travel. The Northeast Corridor between Boston and Washington, D.C., may be the star of the system, but the passenger rail corridors linking Milwaukee to Chicago and Sacramento to San Francisco and to San Jose are also heavily used. The public benefit of shifting high-volume passenger service from automobiles and short-haul airplanes to railroads, in terms of greenhouse emissions, fuel savings, and road and airport congestion, is demonstrable, but passenger receipts will not support capital improvements.
Passenger railroads have free right of access to roads owned by freight lines, but they must give the freight lines the right of way. Amtrak, the national passenger rail corporation, controls less than 700 miles of rail lines, mostly in the Northeast Corridor. A reasonable public investment program would aim to provide good quality Amtrak-controlled lines for all the main corridor lines, with complete separation of through and commuter train services. Dedicated high-quality rail lines (for example, in concrete beds) would allow the corridor services to cruise at an economically efficient, faster than 100-mph rate. Pursuing “bullet train” technologies, such as magnetic levitation (mag-lev), anywhere other than in completely greenfield sites may be an impossible dream. Just the modest investment program suggested here would carry a total price tag in the $100 billion range and would take a decade or more.10
The last major cog in the US transportation system is the airlines and air freight carriers, which are virtually all private entities. Public provision is limited primarily to airports and the federal air traffic control system. Airport financing comes from four primary sources—airport surplus cash flows; tax-exempt bonds issued by local municipalities or airport authorities; passenger facility fees paid by airlines; and government grants. The primary federal grant program is the Airport Improvement Program (AIP) which is sustained by a trust fund supported by excise taxes on tickets, baggage, fuel, and other airport activities. Grants are competitive, and funding is allocated according to priorities established annually by the Federal Aviation Administration (FAA). In fiscal year 2012, $3.3 billion in grants were awarded, most with local matching fund requirements.11
The largest federal commitment, however, is its “NextGen” replacement for the antiquated air traffic control (ATC) system. It is an estimated $40 billion project with an implementation schedule that stretches into the 2020s and includes at least twenty separate major initiatives, many of them of daunting complexity. Originally launched in 2004, it quickly foundered, partly because of the refusal of cooperation by the air traffic controllers during a prolonged contract dispute. After the Obama administration settled the dispute in 2010, the program was repurposed and rescheduled and, to the surprise of many, seems to be making solid progress. The goal is to replace radar-based guidance with ground-based satellite links that can track aircraft with far greater precision and allow optimization of flight paths in and out of airports. The prevalent descend-hold-descend pattern would be replaced by much shorter direct descents; flights could be more tightly grouped at both takeoff and landing; and the organization of tarmac sequencing would be much more efficient. If successful, the program should reduce delays, save fuel, and reduce emissions. As of early 2013, practically every critical system has been installed at some airports and in some airlines, to mostly positive reviews from the industry and analysts. The cross-party congressional commitments seem to be such that the program should be relatively immune to the ongoing political and fiscal disputes in Washington. While there are sure to be stumbles ahead as the full panoply of capabilities are rolled out, there are grounds for cautious optimism. Since the vendors are primarily American, a successful implementation should also lead to substantial export contracts as well.12
Because the ASCE Report Card focuses on traditional infrastructure, it ignores the sad state of the broadband and mobile communications networks in the United States. A 2010 ranking by Cisco Systems on national Internet quality placed the United States fifteenth, tied with Slovenia. Even Italy and Portugal now have faster and more accessible broadband than the United States. A number of experts believe that the US problem is less related to capital availability than to the preferential position of the (mostly technically brain dead) cable and telephone companies. Much like the old AT&T, without effective competition these companies can sit on their franchises and collect high rents for poor services. If AT&T had not been broken up, and the telephone exchanges put on an open-access basis, the Internet might have been strangled in its cradle. While the public may believe that the Internet is mostly about fast movie downloads, there are good data relating a country’s standing as an industrial innovator to the quality of its broadband systems.13
The link between economic growth and infrastructure development has also been confirmed in a detailed analysis by economists at the Organization for Economic Co-operation and Development (OECD). Across a wide range of countries, infrastructure investment had a strong relationship to subsequent growth. (The effect was not invariable; the data also turn up negative regressions in specific sectors in specific countries, suggesting likely over-investment.14)
The prospect of wringing very many, if any, new spending programs out of the Republicans in Congress during the second Obama term seems slight, which is a pity. Infrastructure spending financed by borrowing has a long and honorable history in the United States, from Thomas Jefferson, through Henry Clay and Abraham Lincoln, interrupted for a time by Andrew Jackson’s veto of Clay’s internal improvement program. Once the Republicans gained power in 1860 and the Southern contingent departed the government, they quickly passed the 1862 Pacific Railway Act, which contrary to legend was completed more or less as promised and very close to the original schedule.
Depending on how fast the recovery takes hold, political trends suggest that the complexion of the Congress should shift sufficiently to allow much greater policy latitude, almost certainly after 2016. Despite the horror stories of “Bridges to Nowhere,” infrastructure investment is usually productivity enhancing. Better trains, wider roads, faster connections, decent water, clean streams and air—all these improvements pay for themselves in terms of time saved, fuel not wasted, costs avoided, and overall quality of life. Standard financial practice is to borrow for capital projects, amortize the cost, and pay off the debt over the life of the project. The icing on the cake, according to economists associated with the New America Foundation,* is that a program on the scale would create some 5.5 million new jobs. As with new manufacturing jobs, the multiplier effects of heavy construction tend to be large.15
The greatest inefficiencies in public infrastructure investing stem from “earmarking,” the process of aligning budget distributions to accord with the influence of powerful legislators. Both parties in the Congress have been attempting to end the practice, with mixed success. Military base closure commissions have had some success in buffering technical decisions from political influence. Several economists, including Laura Tyson, former chairman of President Clinton’s Council of Economic Advisors, have proposed the creation of a National Infrastructure Bank; in Tyson’s proposal it would have $25 billion in capital that it could leverage to increase its lending capacity.16 With a board of directors of unquestioned expertise and integrity, such an institution could play a major role in establishing infrastructure spending priorities, and take the lead in developing innovative public-private partnerships in new infrastructure ventures, especially relating to financing mechanisms for revenue-producing projects.
One fascinating example involves two nearly identical Ohio River bridges now under construction: one is being built as a conventional public procurement, while the other, which originates in a state that allows government projects to be undertaken by public-private partnerships (PPP), is being built by a private entity that will also manage the finished bridge. The same construction company is involved in both bridges and is a partner in the PPP bridge. Predictably, perhaps, it has been much more cost-conscious in the construction and has also recommended and implemented a series of design changes to make the bridge cheaper to maintain. This seems an idea that deserves to spread.17 (But cautiously; such arrangements were not uncommon in early America. The Pennsylvania Railroad was born from one such successful project, and so was the Union Pacific; however, there were probably just as many PPP projects in which the private partner went bust and left the government to deal with the debacle.)
It will be critical to resurrect the Build America Bonds (BABs) program. They were authorized by the 2008 stimulus legislation, but Republicans have blocked reauthorization since the program entails new federal spending. BABs are taxable bonds issuable by state and local governments to fund infrastructure development. The issuing jurisdiction pays its normal tax-exempt rate, topped up by a 35 percent federal subsidy in order to broaden the market for the bonds. Pension funds, endowments, IRAs, and many other investment entities that are not taxable do not normally invest in tax-exempt paper, but they have been eager buyers of the BABs. The president’s 2013 budget includes reauthorization, but with the subsidy falling to 28 percent in two stages.
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* A wealth of papers on an infrastructure-led recovery is available on its website, http://www.newamerica.net.
