Thursday, December 11th, 2008
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.