How to Improve the Stimulus Bill

There has been much discomfort in the transportation community about the amount of funding for transportation infrastructure in the stimulus, or economic recovery, bill reported out of the House Appropriations Committee a week ago Of course, we do not yet know what the final bill will contain for transportation or even the degree to which the House language is reflective of what the new President and his Administration desire, but this first significant legislative action on economic stimulus is an opportunity to remind ourselves of our goals and purposes.

I am not an economist, but it seems to me that the purpose of a stimulus bill is to stimulate the economy and, more specifically, to stimulate job creation. That is why there has been a focus on "shovel-ready" projects and why the House bill contained "use it or lose it" language. Nonetheless, as the Congressional Budget Office noted, there is some delay (often, fairly significant delays) before transportation authorizations are turned into outlays, that is, before they become money actually spent and invested in the economy. Indeed, even though every recent surface transportation authorization bill has been primarily justified on the basis of job creation, no one really knows how many jobs are created by transportation bills or how quickly. My limited exposure to this issue during my service at the U.S. Department of Transportation left me skeptical that there was very much authenticity in, or analytical rigor to, the estimates of "X number of jobs are created for $1 billion of spending" in this sector.

Nonetheless, while we may not know for certain how many jobs are created, or how quickly, by surface transportation spending, clearly these investments make fiscal sense in the current economic environment. With that in mind, let's continue to remember that job creation is the purpose of the transportation spending in this stimulus bill. The transportation sections of a stimulus bill are not designed to correct the serious shortfalls that we have had in infrastructure investment in this country for many years or to correct the fact that much of the surface transportation money that has been authorized by Congress in recent bills has not always been spent wisely.

Our goals should remain constant: however much money for transportation is contained in the final stimulus or economic recovery bill, those funds should be spent on "good" projects. That means projects that are likely to bring the greatest economic returns in the shortest time. Most often, these will be projects designed to restore transportation facilities and networks to states of good repair and to enhance the operational efficiency and productivity of existing systems.

Moreover, the principles of transparency, tracking, and accountability that are in the House stimulus bill should be retained in the final legislative language.

This discussion reminds us that we need significant long-term change in federal surface transportation programs. That is unlikely to happen in a stimulus bill, but we should be certain that the stimulus bill does not set this effort back. There was -- and, I suppose, there remains -- a risk that the attention on the total level of transportation funding in a stimulus bill would divert us from this purpose and would "swallow-up" the debate over national transportation goals and over the need to establish performance-driven and accountable surface transportation policies.

We need to articulate these national transportation goals, to redefine the federal role in transportation, to assure funding mechanisms that advance performance and accountability, to "get the prices right" in transportation (as the Eddington Report advocated for the U.K)., and to reform fundamentally federal surface transportation programs. These challenges will only be met in the surface transportation authorization bill yet before us, and these challenges will remain, no matter the level of transportation funding in the final stimulus bill.

-Emil Frankel

Transportation in a Stimulus Package, Part Two

Debate about an economic stimulus package continues to dominate the news. Obama recently called for a plan that will save or create 2.5 million jobs by January of 2011. It is unclear how large this package would be and how it would be spent, but he has indicated that a substantial portion of it would go towards rebuilding transportation infrastructure. Some people disagree about whether transportation should be part of a stimulus, while others disagree about what types of projects should be funded if transportation is part of a stimulus. These questions are best illuminated with data, so let’s get into the figures.

The Federal Highway Administration’s most recent 2008 estimate is that $1.25 billion in highway capital investment supports (not creates) 34,779 one-year jobs. As other scholars and government agencies have pointed out though, these figures must be treated with caution. There are several important caveats to transportation spending, among them: 1) federal deficits to fund spending can “crowd out” private investment, causing job losses in other economic sectors (Ronald Utt at the Heritage Foundation articulates this point); 2) the FHWA cautions that only short-term resurfacing and preservation projects spend funds quickly in the first year and thus have a timely impact; 3) unless there is excess unemployment, job demand for construction will merely be met by shifting workers from other sectors.

In short, it is very difficult to be certain about how many jobs will be created from increased transportation spending in the short term. Nevertheless, it might be a good time to invest in transportation. For instance, data from the Bureau of Labor Statistics indicates that there have been significant job losses in the construction industry in the past year (although there is significant variation between states/regions), meaning that highway construction jobs might bring people back to work without substitution. With regards to the immediacy of transportation spending, our system is in such a poor state of repair that now is an opportune time to focus on fixing what we have, which fits nicely with a fast stimulus. Perhaps the most important caveat, however, is the fundamental proposition that government spending in one sector inherently stifles growth in other sectors. This is a classic economic question, and we will leave it to more sophisticated economists. For two contrasting opinions compare the views of Brian Riedl and Paul Krugman. Riedl, of the Heritage Foundation, argues that stimulus fails because “every dollar Congress ‘injects’ into the economy must first be taxed or borrowed out of the economy. No new spending power is created.” Krugman, a New York Times columnist and Nobel prize winning economist, makes the case in a series of columns that increased government spending, on infrastructure instead of rebate checks, can play a decisive and vital role in restarting a stalled economy.

While the short-term impact of transportation spending is perhaps unclear, it is more broadly accepted that government investment in areas like infrastructure and education can pay greater dividends in the long-run. These investments increase productivity by improving human and physical capital – and the private sector generally under-invests in these public areas because it cannot fully capture the gains.

It seems increasingly inevitable that transportation will be part of a stimulus package. Although we may lack a perfect understanding of the exact benefits of transportation spending in the short-run, there is some understanding about the most valuable transportation investments overall, like system preservation. An effective stimulus package should focus on the most valuable and timely transportation investments, and this need not conflict with a broader view on promoting long-term prosperity.

-Daniel Lewis

How Infrastructure Fits Into An Economic Stimulus

As the economy worsens, transportation is being linked more directly to economic stimulus packages. Congress and the new administration have indicated a desire to include infrastructure spending as a component of an economic stimulus, and transportation is almost always mentioned as a substantial element of that infrastructure. Now there is also strong support among Democrats for a larger bailout of American Automakers, with President-elect Obama tying such a proposal to cleaner, more energy-efficient vehicles and President Bush insisting upon free trade as a prerequisite.

With complicated issues such as these, it is important to separate goals and actions because they are often confused. There are two goals that seem to be on everyone’s minds – short and long-term economic growth. But these are two different timeframes that necessitate different actions.

For example, a bailout of the auto companies is an action that is likely to be more effective in the short-term. Letting the auto companies fail would cause tremendous short-term hardship for many individuals, with ripples potentially felt across the economic spectrum. However, in the long-term a bailout would have the unintended consequence of rewarding, or at least not allowing the market to punish, an inability to effectively compete in the marketplace. This could mean the stifling of innovation and entrepreneurship, while encouraging entrenched corporate interests, and this could be economically damaging if extended to additional sectors.

By contrast, spending on transportation infrastructure is more likely to have minimal short-term benefits, but many long-term benefits. Assuming that the infrastructure spending is tied to potential benefits in some way, rather than just sent to states with no strings attached, it can have a marked impact on economic competitiveness. However, it can often be years before this impact can be seen, and at least a few months in most cases before people can even be put to work. In the short-term, there are better ways to protect people from an economic downturn.

This leads to the observation that some combination of short and long-term strategies is necessary. This will mean borrowing the best components of the two proposals discussed above so as to maximize the strength of each. The auto bailout, with its potentially dangerous long-term consequences, should be limited to a bailout of the workers and retirees who will be in real trouble as a result of their companies failing. These individuals should not be forced to endure hardship because of the missteps of management. The bankrupt companies can then either retool or be replaced by eager competitors. This would also be a place where the feds could play a role by providing seed money, or rewards, for developing the most fuel-efficient vehicles. Instead of picking winners, the government could instead encourage faster innovation on a level playing field. Such a strategy should be put forward with all due haste.

The stimulus package, on the other hand, should be carefully considered to ensure that it actually will accomplish something. People can be put to work digging a hole and filling it, but this will not create long-term economic growth. Funds to be spent on infrastructure should be tied to performance measures that evaluate whether their proposed use is likely to enhance economic growth in the long-term. Then the federal government should track these funds to find out whether they actually accomplished what they predicted.

-Joshua Schank