There is Still No Way to Fund Sustainable Infrastructure in America

Last February I wrote that America was too under-taxed to finance the transition to more sustainable infrastructure. At that time I commented that:

In addition to being under-taxed, until the Great Recession of 2008-2010, Americans were consuming more and saving less. The percentage of disposable income saved by Americans dropped steadily from about 10% during the mid 1960s to the 1980s to less than 4% in the 1990s. At several times in the early 21st century the American savings rate fell to zero and below. Coupled with low taxes, we saw a financial picture of a society binging at the mall instead of saving and investing in the future... The Great Recession and the stimulus packages that followed resulted in increased rates of individual saving and a growth in public investment in green infrastructure. For many people, the shock of losing half of their retirement savings resulted in increased thrift and savings.

Last week, we saw President Obama propose the creation of a federal bank to fund local infrastructure projects. The initial program would invest $50 billion dollars in transportation infrastructure. The proposal was short on details, and so it is difficult to understand how this bank would work. For example, we don't know if there would be enough subsidies to encourage local governments to borrow from the bank instead of the municipal bond market. It was hard to figure out if the federal infrastructure bank would use the municipal bond market as a way of leveraging federal and private funding and increasing overall capital expenditures or just how it would relate to this traditional form of finance.

Regardless of these issues, and as expected, Republicans opposed the initiative immediately. House Republican Whip Eric Cantor went into instant attack mode, and according to ABC news, argued that:

Reports from across the country show that dollars intended for infrastructure improvement in the President's first stimulus are being wasted, so how will his latest be any different?... Additionally, federal infrastructure projects are typically slow to commence on the ground, meaning that this new effort will do little in the immediate future to kick start the economy.

Cantor is like Woody Allen's two elderly women in the Catskills who complain that "the food here is lousy and the portions are too small." (See Annie Hall.) According to Cantor, the money earmarked for infrastructure in the stimulus has been wasted, has been so slow to be put into place and no new jobs have been created. Come on Eric, one baloney argument at a time. Either the money has been spent needlessly and wasted, or it has been too slow to be spent and has had no impact. It can't be both. It is true that capital projects take a while to put into place, and as a result, they are not particularly good at stimulating immediate job growth. It's also true that a lot of stimulus money is still in the pipeline, but most of the stimulus money spent in the program's first year went to state and local governments who used it to avoid laying office cops, fire fighters and teachers. It didn't create anything new, but allowed us to preserve what we've got.

Infrastructure spending may not be the best way to quickly boost the economy, but it is an essential function of government that has been financially starved since the start of the Reagan revolution in 1981. Many types of infrastructure are financed through public-private partnerships, and government planning, policy and subsidies are typical. The long lead time of some infrastructure projects and their relative invisibility can make them a low priority for elected leaders, although the failure to restore infrastructure can have catastrophic consequences. Sometimes bridges collapse, and sometimes gas lines explode. Some infrastructure failures cause inconvenience rather than disaster -- such as the Long Island Railroad's switching station fire in late August that delayed and canceled commuter trains for several days.

Anyone traveling America's highways, our nonexistent high-speed rails, our deteriorating bridges, ramshackle airports and underfunded mass transit facilities, knows that we are not keeping up with investment needs. There are exceptions such as New York's multi-decade and multibillion dollar third water tunnel project, and less successful efforts like Boston's "big dig." But we seem to do better at public-private partnerships when we are building billion dollar sports complexes like Yankee Stadium, Citi Field or the new Meadowlands stadium for the Giants (roll out the blue lights) and Jets (turn on the green lasers). The problem with the sports facilities is that they do not have the same degree of positive economic impact that we get when we build a new bridge, train or water treatment facility.

The economic crisis in America's infrastructure is no closer to being addressed today than it was last winter or at the end of the last century. The key is dedicated and adequate financing. When we began the interstate highway system in the 1950s, we funded both capital and maintenance through a tax on gasoline. Unfortunately that tax was set in absolute pennies per gallon rather than as a percentage of the price of gasoline. For the most part, that formula has remained, and the highway trust fund has not kept pace with the nation's highway capital or maintenance needs.

The anti-tax mantra of the past three decades has made it impossible to develop long-term mechanisms to fund America's infrastructure. A system of user fees must be developed and must be made part of routine policy making. Cable TV and cell phone companies have managed to develop a new set of user fees that allow them to replace and upgrade communications infrastructure while pocketing billions. Roads and other public goods cannot be privatized to that degree, but some type of routine finance methods must be developed for essential infrastructure. Water fees, and in some localities, waste management fees have been added to local property taxes and provide a regular revenue stream for those essential services. While no one wants to pay taxes, no one wants a pothole-laden highway system, or an expensive, unreliable, energy-inefficient system for transporting goods to market.

The key is adequate and predictable infrastructure finance. As long as federal infrastructure funding is dependent on the political circus that now dominates Washington, we will never see the 21st-century equivalent of the interstate highway system. Somehow, we need to convince the public and our business leadership that the business of America remains business, and we must get on with constructing the transportation, education, communication and energy infrastructure needed to compete in the 21st-century global economy. That will require investment, savings, deferred gratification, and yes -- a more active and effective government.