Thursday, December 11th, 2008

Infrastructure Stimulus

There’s been much written about the proposed Obama infrastructure stimulus plan. In the short term, pumping some extra money into the infrastructure pipeline looks like a good idea. With national VMT in decline, states are getting less in transportation funds from gas taxes than they expect. Increasing federal funds is a good way to make sure we don’t take a dip, and can even ramp up construction incrementally. We can also start chipping away at the backlog of transit projects.

The biggest opportunity probably comes from the capacity gap opened up by the decline in private sector construction. What do I mean by that? Simply, the ecosystem that supports major construction projects is only so big. There are only so many contractors with so much bonding power, so much asphalt and concrete capacity, so much quarry capacity, so many engineers, etc. While some of this can be expanded with extra shifts or additional manpower, the fact is, massively increasing the ability of a state or country to output projects requires a major fixed cost investment that acts with a lag. It’s like a widget factory. You can add a third shift or try to squeeze out efficiency gains, but at some point the only way to increase output materially is to build a bigger widget factory.

The nation’s ability to output major construction projects is split between the private and public sector. In the last couple of years, demand has exceeded supply, the result of which manifested itself in construction inflation that outpaced the overall inflation rate. Today, with private sector construction in a slump, there’s extra capacity available for the public sector. The key is not to try to “oversubscribe” the available capacity and end up just boosting prices again and pumping more profits into the pockets of the supply base without adding to the output materially.

Of course, one constraint on our ability to do this is whether or not there are projects locked and loaded that can be started immediately with funds. I suspect there aren’t nearly as many of those as have been touted, at least not when federal regs are taken into account. Indiana leased its toll road for billions, but it is going to take a few years for all those projects to work their way through the system. A project where the ROW has not been acquired, the environmental work not done, etc. can’t be started even if you have the money and the capacity.

If we as a nation are going to make a commitment to increased infrastructure spending over the long haul, which we probably need to do to support our increasing population, to maintain/refresh our aging physical plant, and to adapt to changes in living styles, technology, and social priorities, then we need to do a few things today to enable us to really boost the overall capacity of the country to product output.

One is to provide some degree of predictability over the long term from a public policy perspective so that private industry feels confident in expanding capacity. If there’s only a one time infusion of cash, it isn’t likely anyone is going to try to satisfy that demand by building the proverbial new plant. Instead, businesses will adjust via the price mechanism. So providing some reasonable predictability to an increased level of spending over a long enough time horizon to enable people to believe they are going to recover their capital expenditures is important.

The other is to revisit the mandates we put on civic construction projects. NEPA and other federal regulations were implemented for very good reasons, reasons we shouldn’t dismiss. While it is easy to get jealous of, say, China’s ability to just crank out projects, I for one am glad we’re a country where things like property rights and the environment matter, and where the public gets a say. Still, there’s a difference between designing a system to minimize the number of innocent people who get convicted and minimizing the number of guilty who go free. Today, the system is designed to try to throw as many roadblocks as possible in the way of bad projects. The problem is, people who back bad projects are able to game the system and play a war of attrition to ultimately get a lot of them through anyway. But that mechanism also puts a huge amount of roadblocks, and even can ultimately kill, a lot of good projects too.

It takes a decade or so to pull off a major road or transit project in this country. With even small amounts of inflation, this will double or more the price tag of the project between the time it is started, and the time construction starts. For example, the head of the Cincinnati MPO bemoaned the fact that delays from federal red tape were going to add another billion dollars to the cost of the Brent Spence Bridge replacement. Will that billion dollars in cost end up adding a billion dollars in value to the output? I don’t think so. On the other hand, when projects like the replacement for the I-35W bridge in Minneapolis are fast tracked, they can get done start to finish in a year or two. And it appears to be a quality project.

There’s got to be a happy medium in here somewhere. There’s got to be a way to tune the dials so that we as a country can still keep in the analysis that gets us what we want in terms of protecting our values, without imposing a huge financial penalty that incrementally gets us little or nothing.

Why is this important? Well, we need to pay for this increased infrastructure building somehow. There are a couple of ways to do that. One is to raise taxes or tolls. The other is to get more efficient by reducing the cost. Spending on infrastructure tends to be viewed in terms of dollars. But money is an input not an output. There is an embedded assumption that the output per dollar is constant, but it doesn’t have to be. If by speeding up, say, major transit projects by 3-5 years whacks the cost by 50%, that’s a huge increase in potential output with no increase in spending. How about that? Free money.

This is clearly an area where great analysis is required and is not a no-brainer. But I hope it is something that the Obama administration takes a hard look at as a creative funding mechanism.

15 Comments
Topics: Public Policy, Transportation

15 Responses to “Infrastructure Stimulus”

  1. Ahow says:

    This Infrastructure Stimulus package is a terrible idea. Since it is late, I’ll just through a couple of things out there:

    1) Raw material prices: Remember when ethanol was the fuel savior, but all it did was drive prices through the roof? Same thing will happen when these projects start: the price of materials, energy, and labor will go up, up, up.

    2) Construction Industry Stimulus: What does this realistically do for the economy as a whole? Nothing really. It is solely stimulating the construction industry and maybe one level deep from there (see energy, labor, and materials above). Not only that, but the stimulus only hits the large specialty firms, not the mom and pops.

    3) Delayed gratification: When has this country ever been good at this? Never. And if you think these projects will turn around and wrap up in a year or two, you obviously haven’t seen the federal government at work lately, have you?

    Lastly, let us revisit history. If my great grandparents heard me say this, they would roll over in their graves: FDR buried this country. His public works projects did not pull this country out of the Great Depression. A country that needed to produce airplanes, ships, and tanks ended the Depression. Obama is on track to bury this country even more.

    I just had to get all of that off my Libertarian chest. Thank you for the opportunity.

  2. Dave Reid says:

    I don’t know here in Milwaukee I’ve seen contractor after contractor speak about how they’ve cut their employee rolls 2/3 to 3/4. Yea very dramatic cuts. It seems to me a variety of public works projects could get a large amount of people back employed AND build the infrastructure we need for the future. That said I don’t want to see all this money poured into freeways.

  3. Crocodileguy says:

    Biden is a major transit advocate. Given Obama’s past as a community organizer, I can’t fathom his neglecting equitable infrastructure planning.

  4. thundermutt says:

    If I had to guess, I’d guess that a chunk of this package will flow through HUD into Community Development Block Grants (CDBG) for housing and neighborhood revitalization. But the cynic in me figures a bunch of it will also go to earmarks for Democratic representatives and their lobbyist friends.

  5. Anonymous says:

    “the ecosystem that supports major construction projects is only so big. There are only so many contractors with so much bonding power, so much asphalt and concrete capacity, so much quarry capacity, so many engineers, etc.”

    ecosystem?

  6. thundermutt says:

    Short for “economic system”.

    (Not really, but the MythBusters would have to call it “plausible”.)

  7. Anonymous says:

    I’ve seen transit groups doing some intense lobbying because they’ve been told that it’s not going to be block grants or specific projects. Instead, states will get lump sums to divvy up how they want. At least that’s what some people are hearing.

  8. thundermutt says:

    It would be amazingly shortsighted (and out of character for a former community organizer) to ignore vacant/abandoned housing as an infrastructure issue. (See the current comments by The Urbanophile on Skyscraper City.)

  9. CoryWilson says:

    I am quite concerned about Obama's infrastructure investment. First, let me go on record as saying I fully support the reconstruction/modernization of our severly and downright embarrassing infrastructure. If, and that is a very big if, we are to maintain economic supremecy, we must be a nation with the best infrastructure. Unfortunately, that is not the case right now. So, what next? I agree with the Urbanophile that there needs to be a "happy median" where we can get projects done and done timely, without all of the red tape that goes into these projects (Cumberland, IN is now on year 10 awaiting their US 40 Streetscape, of which the Town bonded 5 years ago and now has a serious funding gap). Further, I don't think that Obama's "stimulous" should end at just infrastructure (and by infrastucture, I include nearly everything from mass transit to roads to wind power to high-speed internet), but local governments also could use a very healthy infusion of cash. Here in IN we are seeing some serious revenue shortages with the recent property tax caps & less than expected tax revenue. The city of Muncie recently had to start shuting down every day at lunch because they couldn't afford to remain open and still pay people. The same is true where I work…where we are staring at a $3 million shortfall over the next two years (and my community benefits from a Casino). Local government is in desperate need too and we shouldn't forget that!

  10. Anonymous says:

    “Local government is in desperate need too and we shouldn’t forget that!”

    No offense but many local governments are in that position because of decisions they’ve made over the years. Leaders who didn’t tackle legacy costs and didn’t watch the news reports to see the gathering financial storm clouds are now looking for a bailout when they should have been better prepared.

  11. CoryWilson says:

    Anon 12:20. Not knowing where you are, maybe there is some truth to what you state, but here where I work, that is absolutely not the case. With Indiana’s property tax cap, less than expected revenue, challenges to property tax bills by commercial/industrial properties resulting in even less revenue, that is not the case in Anderson/Madison County! We are going to have to start shutting down some of the oldest bridges and closing the roads because there is no money to fund repairs/replacement. Our insurance is going up again, and no raises again! This City/County has been raveged by plant closings that have since been demolished resulting in barely any property tax revenue and the job losses have decimated any revenue from COIT. It is VERY BAD here.

  12. thundermutt says:

    Anderson/Madison County hitched its wagon firmly to GM in the last century, and the prevailing UAW wage in the area prevented newer, younger companies from establishing operations there. The deaths of Remy and Guide have led directly to near-death of the city and county.

    Maybe when they accept being an “exurb” of Indianapolis and join the metro (as have all the other surrounding county seats), they will start growing tax base again.

    Or they can just sit around drinkin’ and tellin’ stories of glory days…(apologies to The Boss).

  13. Anonymous says:

    Ahow- the federal government at work is bad lately because because right-wingers have been in charge. Their plan all along was to run government so poorly that people become convinced that it can do no good so that when advocates for national healthcare and daycare and other important beneficial social programs come along, the widespread support is not there.

    Government CAN be run very well if the right people are put in charge. That will never happen as long as GOPpers and libertarians have power.

  14. Anonymous says:

    To all those opposed to infrastructure spending- do you not drive, fly, take the train, use the sewer system or internet?

    Or do you just put your head in the sand and convince yourself that this country does not have a decaying infrastructure program.

    All of the fast growing emerging markets are ramping up infrastructure spending significantly, and since the right wingers support turning overhauling the American economy into that of a third world nation, wouldn’t they support increased infrastructure spending then?

  15. Ahow says:

    Anon 4:03, that is quite conspiracy theory of you. You think that half the politicians in this country (all the GOP) are all jumping on the same train to drive this country into the ground, just to shake faith in the Federal Government? I would highly doubt it.

    Regardless of what the GOP is doing, I don’t think you know quite what the Libertarians are doing for the country, otherwise you certainly wouldn’t lump them in with the Republicans or Democrats.

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