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

Transportation "Theater"

A recent article in The Atlantic about airport security argued that most of the measures put in place after September 11 to prevent more attacks are almost entirely for show, what the author dubs “security theater.” Not only is it still possible to sneak dangerous items through security, or components of dangerous items, it is easy to produce fake boarding documents and avoid the government's “no fly” list in the purchasing of tickets and screening of passengers. The most important safety improvements have been the strengthening of cockpit doors and the new awareness of passengers that they should take action if hijacked. The huge resources being poured into airport security and screening are thus doing little to actually further security and stop clever terrorists. Obviously this is troubling by itself, but it also holds lessons throughout the transportation industry in terms of theatrical solutions trumping real fixes.

As we have argued repeatedly on this blog, putting more resources into transportation infrastructure may be important, but it is not sufficient to ensure the system actually improves. There are important difference between band-aid solutions and fundamental restructurings. For example, fighting traffic congestion by adding more lanes attacks the symptom but not the problem. Congestion results from too many people wanting to use too little capacity at the same time. The optimal solution involves not only expanding capacity and alternative travel methods/routes, but pricing the existing capacity properly to ensure that people use it efficiently. This is really a fix it first philosophy – maximize what you currently have before building new stuff.

The ribbon cutting “theater” currently so popular in transportation ignores this strategy – and wastes valuable resources in the process. Similar to how current airport screening may be costing more than it’s worth, many transportation policies and programs give the impression of helping when they are really not long term solutions.

To fix transportation you must be able to assess the effectiveness of solutions. If we as a country keep spending more and more money on transportation but traffic congestion gets worse, emissions keep increasing, and the cost of business logistics rise, then clearly our policies are failing. The costs, priorities, and incentives built into current transportation policies are outdated. If the current way of doing things is allowed to persist for much longer, if theater trumps practicality, then transportation problems will only worsen. The time for transportation theater is over – there is not enough money to keep putting on a grandiose show. 

-Daniel Lewis

Airport Pricing at New York's Airports

Yesterday brought news that the US Department of Transportation is moving forward with a plan to auction off up to 10% of the takeoff and landing spots at New York’s three busiest airports: JFK, LaGuardia, and Newark. Essentially, the DOT intends to cap the number of flights at the airports to increase on-time operations (too many flights can lead to major backups when problems arise) and auction some of the slots (all of which are currently free) to ensure that they are used by the airlines that value them most. In response, there has been an immediate outcry from airlines, the Port Authority, and some politicians all claiming that the DOT is overstepping its authority and that the plan will raise fares at the airports. Other options like more runways and better air-traffic control technology exist to improve on-time operations, but proper pricing seems like an important and valuable part of any proposal. In fact, pricing may work better in the long term than these other options: you cannot increase capacity forever, and technology improvements will eventually yield ever-smaller gains.

To elaborate, it should be noted that while the New York airports are important because of the large market they serve, they are also deeply interconnected to a broader national air and ground transportation system. Improving the performance of these three airports is crucial because their backups cause roughly two-thirds of flight delays around the country. The DOT believes the auction plan will cut flight delays at LaGuardia by 40%, which will create positive impacts felt around the nation. (For a neat map of global plane traffic check this out.)

There are obvious complexities to properly pricing airports, especially involving equity issues like ensuring flights to small markets (a 747 flight to Los Angeles with hundreds of passengers on-board can pay more for a flight slot than a small plane headed for upstate New York), and a large cause of air-congestion is weather related, not due to capacity constraints. But at airports facing capacity-based congestion problems, the pricing of slots or of certain routes will likely yield benefits – especially if pursued in conjunction with an integrated ground transportation policy. For example, one way New York could ease congestion is by reducing the numerous flights to Boston and Washington, DC, via a better and faster train system to connect the cities.

There are major political problems to implementing pricing at airports, and it is unclear if the DOT plan will be implemented in the end. But the fact is that flight congestion and delay is a major problem that imposes high costs on passengers. Solutions are needed. Technology improvements, capacity additions, effective pricing, and a more integrated air and land transportation system are all important parts of a comprehensive answer. Yet each of those pieces also has some merit standing alone. Given that a comprehensive solution seems unlikely any time soon, the question becomes whether a partial solution is better than nothing at all.

-Daniel Lewis

Our Commentary on the Department of Transportation's Reform Proposal

In case you missed it, last week we released a commentary on the DOT's reform proposal. If you are interested in reading it, the document can be found here.

The Financial Crisis on ALL Streets

One of the biggest worries about the current financial crisis on Wall Street is that it will spill over and affect “Main Street”. Yet Main Street is not the only street we should be worrying about, ALL streets could be affected. In other words, this economic emergency will surely impact the next transportation bill in a variety of ways.

To begin with, the large increase in transportation spending that many in Congress are calling for may not be possible given the massive amounts of debt the government will soon take on if it finances a bailout. The current transportation revenue mechanism, the Highway Trust Fund, is already faltering, unable to raise enough money to keep up with authorized spending. Forget about increased spending, even spending at our present level in the future is impossible unless either new transportation fees are levied or money from the general fund is appropriated. Given that the general fund is already maxed out, something has got to give: either more national debt or higher transportation charges for users.

It is highly unlikely, but conceivable, that spending on transportation would decrease, but that would be a huge mistake. An efficient transportation system is fundamental to economic growth, and while underinvestment in infrastructure may not cause pain today, it surely will down the road. But, as we have mentioned in various other places, there are at least two things that can be done to improve transportation without increasing spending: more effectively invest what we already have, and better price the existing system to increase its efficiency.

We cannot expect to improve the transportation system simply by throwing more money at it; that was tried with the last transportation bill and it has failed. What is needed is smarter investment, investment that is prioritized on national goals and on performance outcomes. As obvious as that sounds, it would be a sea-change in how things are done today.

In addition to performance based investment, better pricing of the current system would improve efficiency overnight. For example, a free, bumper-to-bumper lane on the highway carries many fewer cars per hour than a priced lane that has free flowing cars.

These are simple ideas, but recent transportation bills have not addressed them directly. Perhaps the financial crisis will necessitate a back to basics approach in the next go-around, which would help the transportation system without costing a dime.

-Daniel Lewis

The Highway Trust Fund: Passing the ($8 Billion) Buck

Yesterday the House approved legislation transferring $8.017 billion from the general treasury into the near-bankrupt Highway Trust Fund.  President Bush is expected to sign it quickly and thus temporarily fix what could have been a crisis in highway funding nationwide.

Although Congress has justified the transfer based on the fact that interest was owed to the highway trust fund from years past, the reality is that we probably need to accept two things about this turn of events:  1) This solution is terrible and 2) This solution was better than the alternative.

The solution is terrible because it fundamentally destroys whatever was left of the user pay principle in highway funding.  Sure, the fuel tax is a poor substitute for a user fee as it fails to take into account key externalities.  But general fund revenue is way worse, as it leaves almost no connection between who pays and who benefits, thus worsening the continued perception among the driving public that roads are “free.”  Moreover, given the lack of any actual general fund surplus, this “transfer” is really just increasing the national debt at a precarious time.

The solution is better than the alternative because without it, states would have begun to receive less than anticipated highway funding, causing project delays across the country.  These delays would have a substantial economic consequence that is probably much worse than an increased debt or people paying for roads through their income taxes.

In the end this lesser of two evils stems from an inability amongst leadership of both Congress and the Executive to convince Americans that they should pay explicitly for their transportation infrastructure.  There is a reason why no increase in trust fund revenue has been proposed despite this long-anticipated shortfall – a complete lack of vision for transportation policy.  Rather than confront this problem, federal leadership has chosen to pass the buck for the past six years.  This buck-passing will keep going into the next administration for sure, but at some point it will become unsustainable.  We can only hope that perhaps then a new vision will be welcomed and spearheaded by the leaders we need so desperately to do so.

-Joshua Schank