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Commentary: How would Washington pay for transportation improvements?

This article first appeared in the St. Louis Beacon, Sept. 9, 2010 - On Labor Day, President Barack Obama unveiled a $50 billion plan that he said would create more jobs and energize a lackluster economy. It will do neither.

The president's plan continues his 2008 campaign promise to increase federal spending on the nation's infrastructure. That plan ranged from increased spending on roads and bridges to expanding Internet access to developing alternative fuels. Although the White House has not abandoned its preference for an industrial policy in which the government picks winners and losers, the latest version concentrates on trains, planes and automobiles.

While road projects often receive bipartisan support -- everybody loves to take a little piece of pork back to the local congressional district. This time it's different. Underwriting another government program that claims to create jobs in this super-charged political environment is a non-starter.

The U.S. is facing severe structural imbalances in government finances. Reaction to the fiscal crisis and following recession has bloated the country's debt to Grecian proportions. Until the government provides a credible program to reduce the debt -- whether by reduced spending or increased taxation -- more government spending without a credible repayment plan is politically and economically foolish.

Could a transportation improvement plan be financed? Here are a few suggestions, none of which will be popular.

  • Tax vehicles according to the damage they inflict on roadways. The heavier the vehicle, the larger the road tax. Multi-axle trucks would pay more in road taxes than single axle trucks; Escalades more than Mini Coopers.
  • Impose congestion taxes to encourage multi-passenger use of cars and reduce wear and tear on roadways. Use of toll roads and bridges, with reduced fees for multi-passenger vehicles, also would create the incentive to economize on auto use. These also would help fund maintenance on these structures.
  • Raise gas taxes. In inflation adjusted terms, today's federal gas taxes are unchanged over the past 25 years. We've responded by driving more, thus accelerating the deterioration of the highways and bridges. The higher tax would cause drivers to internalize the negative externalities associated with driving too much, such as pollution, congestion and road damage.

Would there be immediate benefits from the president's plan? Aside from short-term job creation, the evidence on the longer-term benefit of such projects is ambiguous. Yes, building a new public roadway reduces the cost to doing business. Business may even increase investment, the so-called "crowding in" phenomenon.
The problem is that estimates of the return on such investments vary wildly. In the late 1980s, a Chicago Fed economist produced estimates suggesting that each dollar spent on public infrastructure returned several times that in economic activity. The Congressional Budget Office even reported that the return on a dollar of federal money spent to maintain the highway system might be as high as 30 percent.

While these results created support for transportation industry and government officials who campaigned for increased federal spending, further analysis showed the results to be flawed. One problem is that they did not deal with marginal changes. Building a new highway system does have a significant economic impact. With that system in place, maintaining it simply does not deliver the same economic benefit.

Some economists argue that state-level projects are more economically viable than those administered from Washington. One reason is that local control removes a layer of bureaucratic inefficiency that infrastructure projects often suffer from. It also reduces the political maneuvering by members of Congress trying to divvy up federal funding through earmarks and pork-barrel deals.

In these trying times, any project that proposes to increase jobs is popular. However attractive they may seem, an objective cost-benefit calculus that looks further ahead than the November elections, whether in 2010 or 2012, must guide public policy. Let's start rebuilding our infrastructure by eliminating existing distortions and inefficiencies in how funds are allocated to public projects.

R.W. Hafer is the distinguished research professor and chair in the Department of Economics and Finance at Southern Illinois University Edwardsville and a research fellow at the Show-Me Institute.

This article originally appeared in the St. Louis Beacon.

Rik Hafer is a distinguished research professor in the Department of Economics and Finance at Southern Illinois University Edwardsville and a scholar at the Show-Me Institute.

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