January 5, 2017
by Charles Marohn
“There is now a consensus that the United States should substantially raise its level of infrastructure investment.” — Larry Summers in the Washington Post
“The most important thing we need is sharply increased public investment in everything from energy to transportation to wastewater treatment.” — Paul Krugman in the New York Times
Your road have potholes? Commute congested? Know a guy up the street that is underemployed? Want to make the country greener? Macro economists have the perfect response to all of this: infrastructure spending. Lots of it.
Spending on infrastructure is seen as the consequence-free way to boost the economy. It’s the rare thing a pickup-driving blue-collar worker and a tree-hugging PhD candidate can both agree on: America would be better off if we spent a lot more on infrastructure. Just look around! Is there anything more obvious? Economists even have nifty equations with fifty year projections that prove it. Who could be against that?
Sadly, those applying equations from the top of America’s economic ivory towers misunderstand the impact of infrastructure spending on cities, towns and neighborhoods. Whether or not a policy of borrowing money to build infrastructure really works at the national level — and there are really smart people who question whether it does — it’s not without consequence for local governments.
Here’s five things we wish macro economists understood.
1. FOR LOCAL GOVERNMENTS, INFRASTRUCTURE IS A LIABILITY, NOT AN ASSET.
General accounting practices count infrastructure as an asset on public balance sheets. This means the more money the federal government spends building infrastructure, the richer local governments become. On paper.
In the real world, all of those miles of road and pipe represent future obligations, stuff the city is now tasked with maintaining. The asset, where there is one, is the tax base supported by the infrastructure. When this is actually accounted for, the results are alarming.
A 20:1 ratio of private investment to public investment is stable (where private wealth in a city exceeds the cost of infrastructure by 20 times). Anything less than 10:1 starts to become fragile, yet it is common for cities to have more public infrastructure investment than actual private wealth, a completely untenable situation.
Why? Because we’ve built way too much infrastructure.
2. CITIES CAN’T JUST HAVE GROWTH; THEY NEED PRODUCTIVE GROWTH.
Macroeconomic theories focus on growth as an end unto itself. At the national level, economic growth solves a lot of problems that economists worry about, from unemployment to debt service. Due to the large influence federal spending has on local infrastructure decisions, this narrative of growth has become the dominant one at the local level as well.
Yet, this mindset makes little practical sense for cities, which have far more fiscal constraints than the federal government. As new infrastructure is built and the liabilities start to grow, there needs to be a capturable increase in local wealth sufficient enough to meet those obligations. In other words, the growth must be productive; it must make the community wealthier in real, measurable terms. This is not optional.
If the federal government experiences growth by taking on a dollar of liability, there are options for the national economy to deal with that shortfall. If a local government does the same thing, there must be a local mechanism to take care of that liability in perpetuity or things will go bad. Despite this, federal infrastructure investments never take into account local financial productivity.
3. LOCAL GOVERNMENTS CANNOT BE SATISFIED WITH A PURELY SOCIAL ROI
Economics is a social science that often concerns itself with the well-being of people and things like environmental impacts, social justice and quality of life. These are admirable pursuits that can benefit from economic thinking and the work of economists. There are very good reasons for macro economists to study, quantify and pursue policies aligned with social objectives.
It is also perfectly acceptable for local governments to pursue similar aims. The difference is that local governments face hard financial constraints that the federal government does not. As we say at Strong Towns, financial solvency is a prerequisite for long term prosperity for local governments..
This means that cities have to #DoTheMath.
Projects must pencil out, today and into the future. If something is done at a loss for a purely social aim, that’s perfectly acceptable so long as everyone understands that the ongoing revenue must be accounted for from somewhere else. Financial solvency is a prerequisite for local governments in a way that it never will be for the federal government.
4. SAVED TIME IS NOT THE SAME AS MONEY FOR A CITY
Embedded in standard federal benefit/cost analyses for transportation projects — and related propaganda from organizations like the American Society for Civil Engineers — are equations that translate time spent in traffic and wear-and-tear on a vehicle into dollars. When a congested highway adds another lane and thus (theoretically) reduces the travel time for drivers as well as wear on their vehicle, that saves drivers money. When economists consider tens of thousands, sometimes hundreds of thousands, of vehicles on a stretch of road on any given day, the accumulated savings for even minor transportation improvements are overwhelming.
If a project will improve an individual commute by 60 seconds, and there are 40,000 cars per day that travel that route, then the project will save 40,000 minutes of time each day. In a year, the savings is 243,000 hours and, if the project is expected to last 50 years, then the total savings will be 14.6 million hours. If we assume a person’s time is worth $25 per hour, then we’ve just saved $365 million dollars. By this math, it’s really that easy to save tons of money.
Economic models that assume humans are rational, utility-maximizing beings calculate that saving people time will result in their being more productive. In reality, saving someone 60 seconds on their commute is more likely to provide a minute of additional sleep than 1/60th an hour of additional wage income. Either way, nobody is paying to maintain a road with saved time. These theoretical models are ridiculous in the real world and should not be part of any local project determination.
5. CITIES CAN’T EASILY WALK AWAY FROM PROMISES
When they ultimately do, people suffer.The decline and ultimate bankruptcy of Detroit demonstrated what happens to non-elites when cities are forced to walk away from their promises. People with few options suffer the worst. In the words of Detroit native, author and reporter Charlie LeDuff, “Get the money together or the kids don’t have a future.“
It seems that everyone has a narrative for Detroit. Those from the radical right across to the fringe left can describe the failure of Detroit in the ideological prism they feel most comfortable with. It’s greedy corporations. It’s greedy unions. It’s corrupt politicians. It’s those people. Whatever your narrow perspective is, Detroit is there to affirm it.
Here’s our view:
Detroit, once one of the most wealthy and prosperous cities in the entire world, got started on this transportation infrastructure craze a couple decades ahead of everyone else. They grew and grew, taking on enormous liabilities along with lots of unproductive development.
To keep it all going as the mathematically guaranteed decline set in, they were forced to do increasingly risky and desperate things. Detroit became so financially fragile that they couldn’t survive corrupt politicians and bad decisions the way a more resilient place could.
Detroit started a couple of decades ahead of everyone else and they arrived at the final destination a couple of decades ahead of everyone else.
And their people suffer for it.
If macro economists care about actual people as much as they care about theoretical people, they will realize that prolific federal infrastructure spending hurts people by making cities poorer in the long run.
There are plenty of ways to experience growth at the macro level that don’t include, as a byproduct, bankrupting our cities, towns and neighborhoods. Before we spend a trillion or more on additional infrastructure, we need to stop and think about what we are actually doing.
Reprinted with kind permission of StrongTowns.org, a national nonprofit membership organization. The mission of Strong Towns is to support a model of development that allows America’s cities, towns and neighborhoods to become financially strong and resilient.