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US infrastructure: forward-thinking or just surviving another day?

July 8, 2015

Originally published in Aspenia Online of the Aspen Institute Italia

A day after a train crash killed eight people in Pennsylvania in mid-May, the US House of Representatives, displaying at best extremely poor timing, voted to cut funding for Amtrak (the National Railroad Passenger Corporation) by about $300 million. For its part, the Highway Trust Fund, supporting primarily the construction of roads and bridges, will become insolvent by the end of July unless Congress finds a way to inject it with money. While it is possible that Republicans and Democrats come together on some sort of temporary fix that kicks the can down the road, an agreement that is sustainable for the long term appears for now to be out of reach. These are just two examples of how out of step federal politics and policies are with the reality of crumbling infrastructure in the United States. In the latest report available, dating to 2013, the American Society of Civil Engineers (ASCE), which regularly assesses the quality of US infrastructure, gave it a barely passing D+ grade on average, across fields ranging from sewers to ports to schools.

“I’m always a little skeptical of these kinds of ratings because these guys have a vested interest in building things, so the more they cry wolf, perhaps the more funding will be forthcoming,” says Bruce Allen, Professor Emeritus of Business Economics and Public Policy, Regional Science, and Transportation at the Wharton School of Business of the University of Pennsylvania. “That being said, it’s pretty obvious to me and to many casual observers – because of potholes, closed bridges, crowded highways and airports – that the state of transportation infrastructure at least is quite poor.”

Washington’s seeming indifference to such disrepair is all the more puzzling if one considers that, with the US economy having returned to growth, the budget deficit on the retreat, and a liquidity glut across the world that has institutional investors in particular chasing higher yields, there’s never been a better time for an infrastructure push. Though costly, infrastructure investment can produce multifold returns if done well. “The short run effect is on employment both direct and indirect, and induced,” says Allen, pointing to the increased hiring of workers in construction and connected industries, like concrete and steel, and to the overall economic activity generated by these now-employed workers’ enhanced spending capacity. “The long run effect is to improve competitiveness in industry,” Allen adds. As he explains, a country with outdated ports and airports, congested highways and rundown railroads, suffers from supply-chain disruptions and must contend with a higher cost of doing business, as goods take more time, and money, to be shipped from origin to destination. “We have real transportation bottlenecks,” says Richard Little, an Infrastructure Policy consultant. “We have troubles moving freights because much of that rail capacity is busy moving oil, which could move quicker via pipelines, but those are tied up in very long bureaucratic processes. We need ports that can handle the big containers ships that will come after the Panama Canal expansion is completed and we need the roads and the rails to move goods out of those ports and into the economy.”

There are, of course, gains to be had by individuals too, as improved infrastructure increases mobility allowing people to spend less time traveling and more time in productive activities both professional and leisurely. It should be evident that everybody benefits from having a smoothly-operated infrastructure system.

A few states across the country are ahead of the curve, namely Florida, California and Texas. They each have their own fast rail (though not necessarily high speed like some European and Japanese trains) projects, paid for with a mix of public and private funds, and are moving forward with investment in highways and other social infrastructure. But even in these cases, the approach by local authorities is far from being focused on the big-picture. “It’s more like, I think we can get funding for project X, so let’s go for it,” says Allen. “It may not be the best project, but we ultimately want to do it, so let’s do it while the opportunity presents itself.” According to the Wharton Professor, the same lack of foresight is also thwarting a serious infrastructure plan at the federal level. “Instead of a long-term approach to funding transportation, they’ve taken an 11th hour approach that keeps the funding ebbing along until the next time when the money is about to run out when they have to stop gap fund again,” he says. “It’s just a patchwork.”

Both at the federal and state level the biggest stumbling block is finding revenue streams that are simultaneously economically sensible and politically palatable. American voters say they want better infrastructure but they tend to oppose any and all related tax increases. “Politicians have been telling people for decades that they shouldn’t be giving their money to the government because it wastes it,” says Little. “And they’ve been so effective that now nobody wants to.” The Federal gas tax of 18.4 cents per gallon, which supports the Highway Trust Fund, is unchanged since 1993 and proposals to raise it, including some under discussion now, normally provoke the ire of Republicans. Therefore, some states have recently taken things in their own hands: Georgia, Maryland, Rhode Island, Nebraska and Vermont all raised their version of the gas tax on July 1st, though California lowered its. In Washington in the meantime there is talk of using a so-called repatriation tax holiday, incentivizing corporations to move foreign profits back to the US to be taxed at a lower rate than normal, to close the gap of the Highway Trust Fund. Even in the best-case scenario, this is seen as a one-off intervention that doesn’t solve the problem in the long-term.

Additionally, Americans are driving less and less (data from the Department of Transportation as analyzed by Advisor Perspectives, a specialized financial advisors publication, show that total miles traveled in the US adjusted for population growth have declined approximately 7% from an all-time high in 2005) while cars have become far more fuel-efficient, meaning that, the more time passes, the less effective a gas tax increase becomes. “A vehicle mile charge is the way to go,” says Allen. “In the future, all cars will be smart: we will know where they are at any given point in time and we can then charge them for their consumption of the road service and treat roadway service like we treat telephone service or electric service – you use it, you pay for it.” Though this could be called a “user fee”, more akin to a toll, American motorists might still view it as a tax and, in any case, they seem to despise tolls just as much. “The biggest challenge is getting the populace to understand that the benefits deriving from improved infrastructure will not appear like manna, costing nothing,” says Allen.

This problem remains even when one looks at other more creative ways of funding investment in this sector, more reliant on the participation of the private sector, the so-called Public-Private Partnerships (PPPs). Today, these come in all sorts of packages and have become quite complex but, in short, they are a way of getting the private partner to do the bulk of the construction and maintenance work on an infrastructure project with the government compensating it by, for example, handing over toll revenues or ensuring it receives some sort of fixed repayment. Though PPPs can, in certain instances, be a more effective and cheaper way to fund infrastructure investment, they too require that either the final users or the taxpayers, or a mix of both, pay for the service they receive, since the private sector is in it to make a profit. “It’s great to have a private entity build your infrastructure for you but how they get paid is a question that always gets swept aside in the political debate,” says Little.

In the end, it’s fair to say that if the US wants to truly rejoin the race for first-rate infrastructure that in recent years has instead been led by countries of the likes of China, the overall terms of the conversation, and the attitude of stakeholders big and small, will have to change. It will need to shift from today’s narrow focus on how to survive another day to a more comprehensive and forward-looking strategy that ensures the participation of, and benefits for, all.

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