Infrastructure plan generates more heat than light
06/03/19 Filed in: Spending
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If there is anything that thrills politicians on both sides of the aisle, it’s the joy of spending other people’s money for supposedly worthy purposes and being able to claim credit for it. Hence the periodic suggestions, since the start of the Trump administration, that although the two sides disagreed about healthcare, securing the border, global warming, etc. they still might strike a deal on rebuilding the nation’s deteriorating infrastructure. The art of now: Trump needs to make a deal on infrastructure immediately, John Tures, observer.com, 4/5/17.
•A major section of Atlanta’s I-85 collapses in a fire. A California dam threatens to burst. Bad drinking water in Eastern Kentucky could turn the area into the next Flint, Mich.
•These are hardly isolated incidents. The American Society of Civil Engineers (ASCE) just gave the United States a “D+” for meeting infrastructure needs for 2017. This isn’t a new problem; the United States had a grade of “C” back in 1988.
•Democrats may want to forego their opposition to Trump’s financing plan [more on that later], if he’ll accept a higher infrastructure rescue package. *** Trump got elected on the promise of making big deals. He should make this one.
Two years on, there is still no infrastructure deal. What’s the holdup? Turns out that serious differences exist about what such a deal should look like, what it would cost and how it would be paid for.
A. What projects?– Infrastructure is a general term, which refers to facilities or networks that tie a country, region, system or organization together. Merriam-Webster
Some infrastructure has traditionally been funded and owned by government units, such as roads, bridges, tunnels, airports, and air traffic control systems. Other infrastructure is privately funded and owned (but most likely subject to government regulation and/or supported by government subsidies), such as railroads, pipelines, and electric power assets. And these are just a few of the possibilities; a complete list of all investments that could potentially fit in the infrastructure category would be far longer.
Small wonder, therefore, that an initial hurdle in putting together an infrastructure plan is establishing what sort of projects or commitments should be included. The Republican and Democratic wish lists doubtless overlap in some cases, but there is plenty of disagreement about the details. You call that infrastructure, Wall Street Journal, 1/3/19.
Take a gander at the “jobs and infrastructure” proposal that Senate Democrats floated last March. At $1 trillion it’s a blueprint of Trumpian proportions. But if you’re envisioning the next Hoover Dam, think again. It’s more akin to the Barack Obama-Nancy Pelosi “stimulus” of 2009, in being larded with every Democratic interest group’s favorite pork and income-redistribution scheme:
A few examples: $25 billion for “resiliency programs” to prepare for global warming - $40 billion in “direct federal funding to connect all of America to affordable high speed internet, - $25 billion for mass-transit grants “to build or expand subway, light rail, commuter rail, streetcar and bus rapid transit” – tax credit of “up to $1 per gallon” for production of “clean transportation fuel” – tax credit of up to 2.3 cents per kilowatt-hour for “clean electricity” production.
B. How much? – We won’t quibble about details of the ASCE’s assessment of the nation’s infrastructure (D+ in 2017), but it seems reasonable to suspect that engineers may – like the current president – have a bias for building things. Other observers have suggested that US infrastructure is actually in decent shape. What’s really wrong with US infrastructure? Michael Sargent, heritage.org, 2/7/18.
•Most of us can readily think of a pothole-laden street nearby, or recall a bad experience at a crowded airport. But widespread “crumbling”? The fact is, the nation’s major infrastructure - the most vital assets that span states and regions - is in satisfactory condition.
•[The] number and share of bridges deemed “structurally deficient” (not unsafe, but in need of elevated maintenance) has declined by more than half over the last 25 years and now represents just 9 percent of the nation’s total. *** A full 93 percent of the miles driven on the National Highway System is on pavement that is in fair or better condition.
Note that Federal, state and local governments already spend substantial amounts for infrastructure. Take surface transportation facilities, which are primarily funded by federal and state fuel taxes. Federal charges to the highway and mass transit accounts of the highway trust fund will total some $56 billion in 2019, representing about one-quarter of total government expenditures in this area.
Federal fuel tax rates haven’t been raised since 1993. The economic value of the taxes collected has declined by 40% since then, and is increasingly inadequate to cover the federal expenditures being authorized. Accordingly, it has proven necessary to appropriate funds from general revenues ($143.6 billion since 2008) and there is growing angst about the need for more assured funding sources. The highway trust fund explained, pgpf.org, 6/27/18.
Since 2008, the trust fund has spent $103 billion more than it has collected; spending in 2018 alone is expected to exceed revenues by $9 billion. The Congressional Budget Office (CBO) estimates that the Mass Transit Account will be exhausted in 2021, while the Highway Account will be exhausted in 2022.
Assuming a chronic shortfall in spending on viable (economically and politically) infrastructure, the next question is whether the existing levels of funding could be spent more wisely or efficiently. In some cases, project costs could be reduced by businesslike management; in other cases, bottlenecks could be eliminated without putting up taxpayer funds at all.
#PERMITTING DELAYS – Review and approval of major infrastructure projects have been known to take a decade or more due to seeming endless battles over environmental aspects, etc., thereby adding billions of dollars to public and private sector costs. This can be true even if the necessary investments would be made by private sector firms, i.e., no taxpayer funds are required. See this account from the archives: An update on the Keystone Pipeline, 2/25/13.
At last report, this pipeline had still not been completed despite unstinting support from the Trump administration. Keystone XL pipeline construction to start in 2019, cbsnews.com, 9/24/18.
Continuing efforts that began under the Obama administration, the Trump administration) is working to address the permitting delays problem. The prospects for success aren’t entirely clear, however, as there is just so much the executive branch can do to combat delays resulting from court challenges. BP2020, p. 10, 3/11/19 (download PDF).
The administration is working to speed up decisions on major infrastructure projects with the goal of reducing review time to an average of two years. These efforts have already resulted in $1 billion in cost savings through avoided permitting delays. The public can now track agency performance online at https:/www.permits.performance.gov.
Comment: Although the current status (completed, in process or canceled) of the various projects displayed on the “permitting dashboard” is shown, there doesn’t seem to be any notation of when the review began such as would be needed to track permitting time.
#BUREAUCRATIC OVERLAP – All too often, the current funding system – for highways, airport and inland waterways alike - inserts the federal government into local infrastructure decisions. The feds collect taxes on users and redistribute them to the states or project sponsors, in the process “stuffing the funds with costly mandates and diverting resources to pet projects.” What’s really wrong with US infrastructure?, op. cit.
One would think better results could be obtained by reducing the number of projects in which the federal government is involved, but perhaps contributing more generously to the projects supported. Including more federally supported projects in a supplementary infrastructure plan would have the opposite effect.
#LABOR COST – In some states and/or local jurisdictions, infrastructure projects (potentially including federally-owned facilities) are subjected to project labor agreement (PLA) requirements that effectively raise project costs by about 15% and shut non-labor contractors out of the bidding. Let’s welcome all Americans to rebuild America’s infrastructure, Ben Brubeck, Washington Examiner, 4/1/19.
A May 2017 study by the Beacon Hill Institute in Massachusetts found that PLAs raised the base construction cost of Ohio schools by 13 percent—$23 per square foot in 2016 prices—relative to non-PLA projects. Studies on the effect of PLA mandates on California, New Jersey, New York, Connecticut, and Massachusetts school construction all reached similar conclusions — PLAs increase the cost of construction between 12 and 18 percent.
About half of the states currently ban PLA requirements, and they haven’t typically applied on major projects so the overall cost penalty has been relatively small.
Thanks in large part due to successful legal challenges and advocacy efforts by the construction industry led by Associated Builders and Contractors, from fiscal year 2009 to 2018, just $1.25 billion out of nearly $83 billion worth of large-scale construction projects were subject to PLAs and none have occurred under the Trump administration.
Nevertheless, the general public should welcome this opportunity to cut costs on infrastructure projects in the applicable cases without sacrificing quality.
#EMBRACE COMPETITION – Here’s an idea that could materially reduce the cost of shipping cargo between US ports without spending a dime – repeal the Jones Act, which reserves this business for ships built in the US and flying the US flag.
According to an OECD study, the US could realize economic benefits of $64 billion as a result. Cargo shipping costs between US ports would be reduced, producing a notable benefit for Puerto Rico. And elimination of a captive market for US vessels would give US ship builders more incentive to cut prices and potentially boost demand for their products. Jones Act repeal would boost US economy, globaltrademag.com, 5/27/19.
#SALE/LEASEBACKS – From the outset, the president and his supporters were envisioning a creative financing approach in which governments would put up seed money and operators would have incentives to put in or raise the rest of the investment. The basic tool would be sale/leaseback (SLB) arrangements, whereunder the assets would be on the operator’s books.
SLB arrangements would minimize initial deficits (possibly even shrinking deficits if existing assets were sold) versus a straight government funding approach. They would reduce tax revenues in later years, however, due to the recognition of tax-deductible depreciation for private sector investors. And said investors would have an incentive to operate projects in a businesslike manner, which is something that government managers lack. Infrastructure, it’s time for a bipartisan deal, Steve Hanke, cato.org, 11/17/18.
Several states, e.g., Arizona (as Mr. Hanke describes) and Indiana (Keeping the Republic, Mitch Daniels, 2011) have benefitted from the use of SLB arrangements. If other states and municipalities followed suit, they might be able to swing their infrastructure programs without federal grants. It’s also possible that the federal government could get into SLBs for its own projects. Certainly, it would make sense to explore the possibilities instead of rejecting SLBs because “we never used them before.”
#SUMMING UP – The foregoing discussion suggests that (A) the urgency of spending more money on infrastructure has been overstated; (B) a good deal of government money is being spent on infrastructure already; and (C) there are a number of ways to get “more bang for the buck” from infrastructure projects.
All these factors tend to refute the idea of a readily definable backlog of “shovel-ready” infrastructure projects from which all concerned could benefit. And while arguments for a massive economic stimulus bill carried some weight in 2009 (although SAFE advocated restraint), pitches for a second installment, including citation of an International Monetary Fund study, were rejected after the economy recovered to a slow-growth mode. A recurring theme in the president’s budget, 2/16/15.
Public infrastructure investment promotes economic growth by boosting aggregate demand in the short run and improving economic efficiency in the long run. While infrastructure needs to be financed, the IMF study presents statistical evidence that—under the right conditions—the combination of short- and long-term economic gains from infrastructure investment can offset much of its cost. When many workers are unemployed, infrastructure investment increases total employment, as opposed to bidding workers away from other sectors, thus increasing aggregate demand.
In the current US economy, the case for a big infrastructure push with federal spending as the propellant seems even weaker. Trump’s “infrastructure” plan versus Obama’s “stimulus,” What’s the difference? Larry Elder, realclearppolitics.com, 5/9/19.
Rightly or wrongly, however, political leaders of both parties kept talking about a big infrastructure deal as though it might actually happen.
C. Negotiations - The president referenced the possibility of an infrastructure deal in his State of the Union address this year, albeit with no specifics as to types of projects, cost, financing, etc. Call for unity in SOTU: don’t hold your breath, Part C, 2/11/19.
On April 30, a delegation of congressional Democrats led by Sen. Chuck Schumer and Rep. Nancy Pelosi met with the president at the White House. The supposed upshot was that the two sides had agreed on a “big and bold” infrastructure plan, albeit still without specifics as to what the plan would include or how it would be paid for. Democrats, Trump agree to aim for $2 trillion infrastructure package, Rebecca Ballhaus & Natalie Andrews, Wall Street Journal, 4/30/19.
The chief goals of Congressional Democrats at the meeting were apparently to (1) establish that the federal government would bear a larger than usual share of total project cost, e.g., closer to 80% than 20%, and (2) get the president committed to federal tax increases. Ibid.
Democrats pressed Mr. Trump repeatedly on what types of revenue generation he would support, Sen. Dick Durbin (D., Ill.) said, and the president declined to give specifics and instead invited the lawmakers to come back for a second meeting. Sen. Debbie Stabenow (D., Mich.) said Mr. Trump opposed changing the tax code. “We left the hard part to be discussed later,” said Mr. Durbin.
Congressional Republican leaders who had not been present were quoted that they didn’t expect a deal to be passed. Ibid.
No Republicans were invited to Tuesday’s meeting, and House Minority Leader Kevin McCarthy (R., Calif.) told reporters after Democrats outlined their wishes for an infrastructure deal on Monday that he didn’t expect a deal to happen. Senate Majority Leader Mitch McConnell (R., Ky.) said changing the tax code to pay for an infrastructure bill was a “nonstarter.”
A second White House meeting took place three weeks later. In the wake of then Special Counsel Robert Mueller's public statement about the investigation he had headed and Speaker Pelosi’s quoted remark about the president engaging in a “coverup,” the president seemed to have lost interest in discussing infrastructure. The meeting was over almost as soon as it began. Trump storms out of White House meeting on infrastructure, David Martosko et al., Daily Mail, 5/22/19.
Nancy Pelosi escalated a war of words with Donald Trump Wednesday, accusing him of committing 'impeachable offenses' and dismissing his storming out of a morning White House infrastructure summit three minutes into it as a 'poor baby' moment. The House Speaker mocked his conduct on a day of drama as 'very strange,' shortly after the president blew up a meeting with Democratic leadership scheduled to discuss how to fund $2 trillion of infrastructure investment by berating her and Chuck Schumer then holding a Rose Garden press conference to attack them more.
Such political theater is corrosive, and neither side distinguished themselves. But realistically, a grand bargain on infrastructure was probably a nonstarter in the first place – and it’s certainly not something that should be rushed into without carefully weighing the pros and cons. Sidelining the issue until after the 2020 elections suits us fine.
#Why did the infrastructure deal fall through? Here’s my theory, which seems as good as any. The “liberals” would do nothing rather than something that could be perceived as coming from this president. – SAFE member (DE)