Problems with a Front-Loaded Infrastructure Package

» The projects funded will be mostly roads-based. How about a series of grants to public service agencies instead to keep up operations?

Even as the nation’s GDP expands, job losses continue to mount; the stimulus earlier this year wasn’t large enough to offset the mammoth effects of the recession. Faced with the possibility of devastating losses in the 2010 mid-term Congressional elections, Democrats have no choice but to focus next year on job creation.

Nancy Pelosi had it right when she argued thatThe debate between deficit reduction and job creation is not a real choice, because we’ll never have deficit reduction unless we have job creation.” Indeed, the U.S. government must push for measures that will increase overall employment, both for the health of the Democratic Party and that of the federal budget.

As a result, some members of Congress are looking to a second stimulus in the form of major spending on infrastructure as the right solution, since construction efforts are some of the most employment-heavy investments possible. Senator Richard Durbin (D-IL) has proposed a $150 billion “front-loaded” infrastructure stimulus for early next year that would move forward some of the $450 billion proposed by the House for transportation spending over the next six years. In other words, the U.S. government would invest $150 billion in one year, versus $75 billion planned. That is, assuming most of the money will be headed towards transportation.

At the moment, the government lacks the money to finance the bill and would have to rely on further deficit spending to produce the cash. This makes the plan unlikely, since the Obama Administration is currently attempting to cut department allocations across the board, not increase them. If the government wanted to find a new source of revenues, an increase in the gas tax is a possibility, though the idea has been repeatedly dismissed by both Congress and the White House. Another possibly more politically feasible option is a small tax on stock transactions being proposed by Oregon Democratic Representative Peter DeFazio. If implemented, that source could provide up to $150 billion in money annually.

But even if the funds were reserved for transportation, the front-loading of spending is problematic. If $150 billion of the bill is spent next year alone, investments in each of the other five years will diminish to an average of only $60 billion. This means that investments in the transportation bill will automatically privilege projects that are ready for construction now, rather than those that may be buildable two to five years from today.

For transit advocates, this is a huge problem. Agencies do have capital projects in which they’d like to invest, but few major expansions are ready for construction next year. On the other hand, states have a huge surplus of easier-to-plan road work they’re ready to get done. This means that a $150 billion immediate investment in transportation would probably mean a lot of new highways — and not much new transit. A bill with investments pushed toward the end of the six-year spectrum would actually be best for public transportation, especially if the government encouraged municipalities to begin planning big projects now, with construction ready in a few years.

Of course, “back-loading” infrastructure spending isn’t really an option because it wouldn’t result in the job-producing effects desired by Democrats desperately holding on to their congressional majorities.

But there’s an alternative: promoting spending on operations needs of state and local agencies that are currently suffering from huge decreases in tax revenues as a result of the recession. The University of California’s recent layoffs and tuition increases were the most obvious sign that the public sector has been unable to maintain its spending at stable levels. The difficulties many transit agencies have had keeping service at continuous levels is a similar manifestation of the same problem. As a result, one option is for the federal government to spend money on operations rather than capital expenditures. If the U.S. government wants to spend $150 billion to create jobs, the money could go out to hire more bus and train drivers and keep those who are currently employed from being laid off.

On the other hand, if a front-loaded infrastructure stimulus means much more spending on roads and little on transit, it would be good for the jobs market but terrible for transportation.

14 Comments | Leave a Reply »
  • eldondre

    why can’t the x dollars be made available for y years for projects that meet certain criteria?

  • Congress doesn’t want to get into the business of subsidizing operations and maintenance because states, counties and cities would then simply cut their own subsidies to plug holes elsewhere in their own budgets. Result: Congresscritters either take the popularity hit for service cuts down the road or, they keep funding recurring expenses forever. Unsurprisingly, they’d much rather put federal dollars toward new construction, preferably something they can attach their name to for all eternity. Expecting that to change any time soon is unrealistic.

    Still, that does not mean a front-loaded stimulus would be a bad idea. First, a stimulus is by definition an emergency make-work effort. The longer the economy is in the doldrums, the harder it will be to get anything at all funded in the future. Japan lost an entire decade to stagflation.

    Second, there’s no shortage of transportation infrastructure that’s in urgent need of repair. If stimulus funds are targeted at fixing potholes, replacing of bridges, seismic retrofits etc., all to sustain rather than expand existing road capacity, that’s hardly a waste of money.

    Third, there are also plenty of other types of infrastructure that are even less sexy but still absolutely essential, e.g. sewers and sewage treatment plants, water recycling plants and purple pipe distribution infrastructure, steam pipes, levee upgrades and maintenance, seismic retrofits of old residential buildings, fire breaks and brush clearing in national forests, mine tailings that are leaching heavy metals into streams, coal ash ponds etc. etc. etc. The list is very long because there is such a huge maintenance backlog all across the board and all across the country.

    Fourth, there actually are plenty of rail transportation projects that can bypass lengthy environmental review, e.g. replacing rolling stock, priority grade separations, upgrade to constant tension catenary in the NYC-DC portion of the NEC etc.

    Even better: instruct FRA to select a proven, off-the-shelf PTC implementation national standard and give it sufficient funds to implement it by the 2015 deadline set by HR2095(110th). ERTMS comes to mind. Yes, it’ll cost billions and a lot of that would go to foreign companies. However, the alternative is spending a whole lot more to get a patchwork of not-quite-compatible “solutions” that can do a whole lot less a whole lot later.

  • Japan lost an entire decade to stagflation.

    No, Japan lost an entire decade to deflation. Inflation was negative during Japan’s post-bubble stagnation.

  • Sean

    It’s a shame that the FIRST stimulus didn’t have more money for infrastructure. But supposedly, in order to get 60 votes, the Senate had to reduce the size of the bill and put in a lot of tax cuts, which have been proven repeatedly to be NON-stimulative.

    Obama should have scrapped TARP and put that into infrastructure investment.

    As for funding, this really is not that difficult of a problem. Scrap Bush’s tax cuts and reduce the bloated military budget.

  • Sean, tax cuts are stimulative, when they’re hidden in your monthly paycheck. They’re somewhat less stimulative than domestic government spending, with a multiplier of about 1 versus 1.5, but they’re effective. It’s lump checks that people tend to save.

  • Norman Brown

    Rafael, there are proposals to tie Federal Operating Aid to a requirement that local entities cannot both receive the Federal Operating Aid and cut their operations budgets. Plus, many systems already pay for capital out of operating budgets. Mass transit budgets nationwide are in meltdown with service cuts and layoffs becoming more common even on the bigger systems, particularly but not limited to Chicago. Federal Operating Aid is already allowed for bus systems of less than 100 buses. There is a double whammy to the present funding crisis, the loss of service and fare increases hit poor job-seekers very hard and the direct economic loss to the families and neighborhood economies of the laid off transit workers. Federal funding of transit operations should be part of the next stimulus bill and and next transportation bill, and the sooner the better. Tri-State Transportation Campaign had an excellent piece on this strategy, please take a look at http://blog.tstc.org/2009/11/18/for-creating-jobs-transit-operating-aid-is-best-bet/.

  • Larry Hanley

    Transit service should be expanding rapidly because it is key to slowing global warming, cutting our dependence on fogeign oil, simulating the economy and preserving mobility. Instead it is spiraling downward.

    Service is being cut throughout California, in Chicago, Cleveland, Detroit (25%), St Louis, (pick a city).

    The way out if we are to have a Main Street Jobs bill is to provide resources to re-tool auto plants to build buses and trains. Next we need to provide transit systems funds, with strict maintenance of effort provisions to prevent local fund shifting, to OPERATE the service, at least in the start up years.

    It is silly to build infrastructure when the people who operate it are being laid off. We need Eisenhower II but this time for transit.

  • He-Man

    Wait: Fund transit by taxing stock transactions? Because we want all these people whose retirements were screwed to pay up when they or their pension funds adjust to a less risky portfolio? No way. That forces those people and people who kept understandable markets working to pay for the stimulus. It also creates a tax that does not encourage use of transit.

    If we’re going to tax something, tax what is doing the *damage*: tax gas, tax heavier vehicles, stop subsidizing roads and air travel more than transit, and make developers pay for extending roads and sewers. We’ll get a lot more than $150 million if we do that; and, the taxation will also encourage people to use transit.

  • Wad

    Larry Hanley wrote:

    The way out if we are to have a Main Street Jobs bill is to provide resources to re-tool auto plants to build buses and trains.

    Absolutely not.

    A viable bus manufacturing industry already exists, although the U.S. squandered its expertise in this field to Canada and Europe. These companies already comply with Buy America regulations that force them to build at least 60% of buses in the U.S.

    These provisions, in turn, help to restrict competition to already established coach builders.

    The longer-term problem is what to do with the factory workers once the “bus and train” bubble pops. Unlike, say, automobiles, where there are several different markets that help create secular demand, transit vehicles are highly durable vehicles with very few buyers. Buses must last at least 12 years; trains are commonly operated for 30-50 years. That’s too long of a cycle to commit to a stimulative transit vehicle manufacturing sector.

  • If they could take say 20 billon from this 150 billon idea and use that to fund the 10 Great high speed rail lines across the county and use the 30 billon for light rail, subway and streetcar projects along with bus that would be a good start.

  • The way out if we are to have a Main Street Jobs bill is to provide resources to re-tool auto plants to build buses and trains.

    It won’t work. Unlike with cars, most of the cost of transit is not the equipment, but the operations and maintenance. Trains and buses are very cheap compared to how many people ride them.

    For example, replacing the entire New York City Transit train fleet would cost about $10 billion, and buy rolling stock that depreciates over 40 years. Replacing the entire bus fleet would cost $2.5 billion, depreciating over 15 years. But the subway and buses take about 4.5 million cars off the road, which would cost $65 billion, depreciating over 10 years. It’s this factor-of-16 difference in cost per year that ensures Toyota and GM employ hundreds of thousands of workers each, whereas Bombardier Transportation employs 30,000.

  • I still can’t believe they only gave $8 Billion for HSR in the original stimulus package, that doesn’t even cover the cost of one train tunnel under the Hudson River. Well time to give thanks for what we got. Though seriously giving $700 Billion to Wall Street while allowing transit to get cut is very ironic. I mean how are people suppose to keep their jobs if they cant’ get to them? O that’s right they are suppose to trade in their clunker for a new car.

    Seriously though if they make a new front-loaded transportation bill they should at least give 25% of the 150 Billion directly to transit so $37.5 Billion, split it $20 Billion to HSR and $17.5 Billion to local transit projects. They should also do 5% of the bill or another $7.5 Billion to TIGER type grants. Then give the rest to roads to make it get enough votes. I mean I wish there could be even more for transit oriented stuff but I just don’t see it happening especially in light of the problems with passage of the health care bill.

  • Allen

    “we’ll never have deficit reduction unless we have job creation.”

    Never if you throw out something obvious like spending less money. But who expects intelligence when it comes to politiics.

  • EngineerScotty

    >>“we’ll never have deficit reduction unless we have job creation.”

    >Never if you throw out something obvious like spending less money. But who expects intelligence when it comes to politiics.

    While there are lots of things that I would be happy to spend less money on, it always amazes me that many people will readily accept the premise that “cutting taxes will result in more revenue”, but have a hard time with the premise that “increasing spending can reduce the deficit”.

    Both supply-side and demand-side actions can work to achieve seemingly contrary goals, depending on the situation. If you have a situation like in the 1970s, where a combination of high taxes and high inflation was making any sort of economic activity unattractive, then cutting taxes (and other fiscal and monetary policy changes) can and did have the affect of raising revenue.

    Today, though, and in the 1930s, we have a situation where spending money can actually result in more tax revenues than is spent, as the money spent filters through the economy and is taxed at various points, and the increased economic activity spurs more activity generating even more revenue.

    Bottom line: Economic stimuli, when targeted well, is not the equivalent of the government burning money in a big pile. But it can be detrimental to the interests of certain elites, who do well in a recession (deflation is good for those who have lots of money), as well as those who have made the political calculation that their party will benefit from a recession that continues past next November.

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