Testimony on infrastructure spending

May 8, 2008

I am testifying this morning before a joint hearing of the House Committee on the Budget and the Committee on Transportation and Infrastructure. To view the hearing click here.

The testimony defines infrastructure as including transportation, utilities, and some other public facilities. The United States currently invests more than $400 billion per year in infrastructure defined this way, and about $60 billion of that amountmostly for highways and other transportation networksis financed by the federal government each year.

The testimony makes the following key points, among others:

  • Growing delays in air travel and surface transportation, bottlenecks in transmitting electricity, and inadequate school facilities all suggest that some targeted additional infrastructure spending could be economically justifiable.
  • Federal spending on infrastructure is dominated by transportation. Although capital spending on transportation infrastructure already exceeds $100 billion annually, studies from the Federal Highway Administration, the Federal Aviation Administration, and elsewhere suggest that it would cost roughly $20 billion more per year to keep transportation services at current levels. Those studies also suggest that substantially more than $20 billion in additional capital spending per year on transportation -- and perhaps as much as $80 billion per year or so -- would be justified on economic grounds if well targeted (because such spending would generate benefits whose value would exceed its cost).
  • In some other types of infrastructure outside transportation, such as systems for wasterwater and drinking water, additional spending is needed to maintain current services or allow modest improvements.
  • Although the economic rationale for some additional infrastructure spending is strong, the economic returns on specific projects vary widely. Carefully ranking and funding projects to implement those with the highest net benefits would yield a disproportionate share of the total possible benefits at a fraction of the total spending that is potentially economically justifiable. A related point is that the aggregate estimates do not justify increases of those amounts in infrastructure spending unless such spending is carefully targeted to economically efficient projects. Otherwise, the spending would not generate the same benefits as the estimates suggestand indeed it could produce costs that exceed the benefits.
  • The estimates of infrastructure spending that are needed to maintain current performance or that could generate larger economic benefits than costs, furthermore, can be substantially affected by how existing infrastructure is priced.
    • The estimates for highways, for example, assume no expansion in the use of congestion pricingthat is, tolls that are higher during peak times and lower during off-peak times.
    • The Federal Highway Administration, though, estimates that widespread implementation of congestion pricing would reduce the investment needed to maintain the highway system by $20 billion annually.
  • Studies suggesting the need for or benefits of additional infrastructure spending do not provide policy guidance about how such spending should be financed. The "benefits principle" suggests that federal taxpayers are often the least efficient source of financial support for an infrastructure investment -- after the direct beneficiaries of the investment and local or state taxpayers. Even when federal support for a given type of infrastructure is justified in principle, implementation problems might make it undesirable in practice. The GAO, for example, found that states offset roughly half of the increases in federal highway grants between 1982 and 2002 by reducing their own spending, and that the rate of substitution increased during the 1980s.
  • Although many advocates of additional federal infrastructure spending seem interested in complex and sometimes opaque structures through which to channel such federal support, the fundamental question is how much support the federal government will provide and the efficiency with which such support is provided. On the latter point, the federal government could substantially increase the efficiency with which it subsidizes debt financing of state and local spending.
    • For example, state and local tax-exempt bonds will cost the federal government an average of $31.2 billion per year between 2007 and 2011. Yet in 2006 and 2007, observed yield spreads suggest that any bonds purchased by taxpayers in a marginal tax bracket above 21 percent cost the federal government more in forgone tax revenues than they save state and local governments in reduced interest cost.
    • A more efficient approach could involve tax-credit bonds, which allow bond purchasers to receive credits against federal income tax liability (rather than excluding interest payments from federal income taxation).
    • To illustrate, assume that the inefficiency associated with current tax-exempt financing is between 10 percent and 20 percent, so that 80 percent to 90 percent of the federal tax expenditures actually translates into lower borrowing costs for states and localities. Then, if the outstanding stock of tax-exempt debt during the 20072011 period instead took the form of tax-credit bonds designed to deliver the same amount of federal subsidy, the federal government would save between $3 billion and $6 billion per year.
  • The federal government can also encourage the use of asset management to maximize the benefit from existing and future infrastructure. Asset management relies on monitoring the condition of equipment and the performance of systems and analyzing the discounted costs of different investment and maintenance strategies.
    • As one example, the federal government reduce total investment and operating costs by changing the way it acquires, manages, and disposes of property -- a topic explored in a box in the testimony.
  • The testimony also discusses capital budgeting, a topic that is the subject of a separate report being published by CBO today. A short summary is available here.