If you make a habit of watching political chat shows, this scene is probably familiar: a famous economist (eyes closed, head shaking) making an impassioned plea for a federal revamp of America’s crumbling infrastructure.
If you make a habit of watching political chat shows, this scene is probably familiar: a famous economist (eyes closed, head shaking) making an impassioned plea for a federal revamp of America’s crumbling infrastructure. It’s hard to disagree—just look at the lead-tainted water in Flint, Michigan, and roads and bridges in poor repair all over the country. But if you want to understand why America isn’t spending on infrastructure, don’t start with Washington.
The majority of infrastructure projects are selected and financed at the state and local level. Even favorite target, New York’s LaGuardia Airport, belongs to the local port authority. In 2014, state and local governments spent $320 billion on transportation and water infrastructure, compared to just $96 billion by the US federal government. Even during the federal infrastructure glory days of the 1950s, state and local spending was several multiples largerthan federal spending. The gap widened in the 1980s when local governments ramped up their spending and federal spending stagnated.
A massive infrastructure upgrade from the federal government is great in theory. It gives people jobs and makes us safer and more productive in the future. But, in practice, high-level bureaucrats have a mixed record picking projects that provide economic value, with studies varying widely on how effective federal infrastructure spending actually is. Some studies estimatefederal infrastructure spending costs more than the benefit produced, while others claimit generates $2 of economic activity for every $1 spent. The differences often come down to measurement and how the money was used. Well-targeted federal infrastructure spending can pay off, but most projects aren’t always the free lunch they’re made out to be.
Leaving more spending to local governments isn’t necessarily a bad idea. They are arguably better informed about what projects are most pressing and potentially valuable. And while local politics are certainly prone to corruption (see George Washington bridge closing) and incompetence (Flint) local bureaucrats should have a better handle on area needs and are more accountable to voters.
But states haven’t increased spending on infrastructure in the last decade; it’s even declined slightly. Despite record low interest rates, debt issuance remains down since the recession, and most new debt is going to pay old obligations, according to Standard & Poor’s. Acquiring new debt often means higher taxes, and local governments would prefer to cut taxes rather than pay for long-term infrastructure projects.
The problem is worse in states and municipalities that have shrinking economies coupled with high fixed expenses like pensions and health care. That type of situation leaves places like upstate New York, Illinois, and Michigan little financial bandwidth to take on major projects that may require higher taxes.
Fixing roads and bridges is useful and can provide a temporary boost, but it’s not sufficient to revive these local economies or maintain infrastructure in the future. America is becoming more unequal, not just between high and low earners, but between struggling and thriving pockets of the economy. Ultimately, poor infrastructure isn’t the most pressing issue facing most American cities, it’s a lack of opportunity and quality education. Considering that, you can’t totally fault local politicians for promising lower taxes, to the detriment of infrastructure, when their constituents are living paycheck to paycheck. Struggling local economies are what sparked a race to the bottom with lower taxes and fewer services.
Ending this vicious cycle will require a significant role from the federal government, but it will take more than a new bridge project handpicked by a bureaucrat. A better use of federal money is to fix the rot at its source. How remains an open question. It could be tax breaks to help states put their pensions on firmer financial footing, as economists Josh Rauh and Robert Novy-Marx have proposed. Doing so would create more fiscal space to spend on other services. The federal government could also fund tax breaks and other incentives that strengthen the links between local universities (a source of innovation and talent) with businesses to spur start-ups and do more training for locals who’ve lost their jobs. By reviving local economies, you create a stable tax base to finance infrastructure. If we want more than short-term job creation, repairing America’s infrastructure problem will require ingenuity at the local level, where things broke down in the first place.