"All Aboard the Infrastructure Boondoggle" is the headline on a piece in this morning's Wall Street Journal by Michael Boskin, former chairman of the George H.W. Bush's Council of Economic Advisers.
Here in a nutshell is the argument of the piece:
No matter who wins the presidency, a huge pot of additional money earmarked for infrastructure, on top of the recently passed $305 billion five-year highway bill, is sure to unleash a mad scramble in Congress to secure funds for the home turf. The logrolling and pork will get ugly without far tighter cost-benefit tests and oversight.
Some economist are "again peddling the idea that billions of dollars in infrastructure spending will lift the U.S. economy out of the doldrums," and both candidates have outdone themselves promising infrastructure spending. Yes, we need good roads and bridges. But Boskin has some warnings:
I support the federal government funding all public infrastructure projects that pass rigorous national cost-benefit tests. But here’s the rub. Most federal infrastructure spending is done by sending funds to state and local governments. For highway programs, the ratio is usually 80% federal, 20% state and local. But that means every local district has an incentive to press the federal authorities to fund projects with poor national returns. We all remember Alaska’s infamous “bridge to nowhere.”
In other words, if a local government is putting up only 20% of the funds, it needs the benefits to its own citizens to be only 21% of the total national cost. Yet every state and every locality has potential infrastructure needs that it would like the rest of the country to pay for. That leads to the misallocation of federal funds and infrastructure projects that benefit the few at the cost of the many.
Boskin notes that politicians have all sorts of clever ways to hide the costs from the taxpayer. They underestimate the cost of the project (one way is not to factor in interest payments), for example. The politicians claim that the projects will provide an immediate boost to the economy, which is not true because most of these projects take a long time.
And there is this:
[T]axpayers generally don’t notice all the fiscal cross-hauling, sending their money to Washington to be sent back in leaky buckets to local jurisdictions. Since we all reside in a state and locality, it’s an inefficient negative sum game with complex cross-subsidies. If these local projects are so good, why aren’t citizens willing to finance the projects locally?
. . .
The late University of Michigan economist and Clinton Federal Reserve Board appointee, Ned Gramlich, the leading expert on the subject, concluded in a 1994 paper for the Journal of Economic Literature that attempting to stimulate the economy through federal matching funds for infrastructure projects gives state and local officials “a powerful incentive to wait and see if they can get a federal grant, rather than just going ahead with their own project.”
Boskin suggests spending the $305 billion allocated to the highway bill before embarking on new infrastructure spending. But the temptation to spend more immediately will be great. No matter who is elected. The itch to spend is bipartisan.