Federal Infrastructure: Often Low Value

February 3, 2015
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President Obama’s budget would raise taxes to fund a $478 billion infrastructure spending plan for highways, transit, and other items. The budget (on page 26) cites an International Monetary Fund study that “highlights the importance of choosing high-efficiency infrastructure projects based on rigorous benefit-cost analysis.”

Unfortunately, that is not the type of “choosing” that the federal government usually does, based on more than a century of experience. As one historical example, here is what I found out about the choosing of federal dam projects in the wake of the 1902 Reclamation Act:

To secure support from the western states, the 1902 legislation required that 51 percent of the revenue from federal land sales in each state be spent on Reclamation projects within that state. However, there wasn’t necessarily a relationship between land-sale revenues and the locations of the best projects. This requirement “seriously compromised the ability of government engineers to select projects objectively.”

After the Reclamation Act passed, the Republican Party saw political advantage in quickly proposing a large number of projects in as many states as possible. This rush to launch projects for political reasons reduced efficiency. By 1907 Reclamation had requested and received congressional approval for 24 projects, with every western state receiving at least one. “Most of the projects were begun in great haste with little attention paid to economics, climate, soil, production, transportation, and markets.”

Much of the federal government’s history with infrastructure is one of pork barrel spending, environmental harm, fudged cost-benefit analyses, and cost overruns. Of course, there are mistakes and waste in state, local, and private infrastructure as well, but federal spending is usually worse for basic structural reasons. Those structural reasons—such as parochial politics and lack of oversight—are likely worse now than in 1902.

The upshot is that if we do not absolutely need federal involvement in certain infrastructure, we should avoid it, and that includes most of current federal infrastructure spending. If particular states—such as Sen. Bob Corker’s Tennessee—think that they need more highway spending, they can raise their own gas taxes to fund it. There is no advantage in kicking funding up to the federal level, as Corker and the president want to do.

Interestingly, while the president’s budget cited one IMF study, a different IMF studyundermines the president’s case for more government spending. The 2014 study by Andrew M. Warner takes a statistical look at episodes of government infrastructure spending booms across 124 countries. It found that “there is little evidence of long term positive impacts” to the economy.

He says his findings argue:

against the importance of long term productivity effects, as these are triggered by the completed investments (which take several years) and not by the mere spending on the investments. In fact a slump in growth rather than a boom has followed many public capital drives of the past. Case studies indicate that public investment drives tend eventually to be financed by borrowing and have been plagued by poor analytics at the time investment projects were chosen, incentive problems and interest-group-infested investment choices.

Langer’s study looks at low- and middle-income countries, while the United States is a high-income country. Nonetheless, Langer’s observations about why government infrastructure spending often does not spur long-term growth applies here as well, such as the government’s distorted incentives and the fact that government benefit estimates are often too high, a problem he calls “the iron law of public investment.”

Kudos to the Wall Street Journal’s Mark Magnier for his piece on the Langer study.

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